-----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, ELOEq4fjbQlCgTvRAS6nHx70SxdXvliy0yZVy5p6BfltiBN15khBjYLAQH5bBEFA JSIXhBc0ycAZ93P5ubM4rg== 0000897101-99-001112.txt : 19991123 0000897101-99-001112.hdr.sgml : 19991123 ACCESSION NUMBER: 0000897101-99-001112 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENEX HARVEST STATES COOPERATIVES CENTRAL INDEX KEY: 0000823277 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FARM PRODUCT RAW MATERIALS [5150] IRS NUMBER: 410251095 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-17865 FILM NUMBER: 99762290 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-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K ----------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______. COMMISSION FILE NUMBER: 333-17865 ----------------- CENEX HARVEST STATES COOPERATIVES (Exact name of registrant as specified in its charter) MINNESOTA 41-0251095 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5500 CENEX DRIVE (651) 451-5151 INVER GROVE HEIGHTS, MINNESOTA 55077 (Registrant's Telephone number, (Address of principal executive office) including area code) ----------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: Not applicable State the aggregate market value of the voting stock held by non-affiliates of the registrant: The registrant has no voting stock outstanding. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: The registrant has no common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ INDEX
PAGE NO. ---- PART I. Item 1. Business The Company ............................................................. 1 Energy .................................................................. 2 Crop Inputs ............................................................. 3 Grain Merchandising ..................................................... 4 Oilseed Processing and Refining Defined Business Unit ................... 8 Wheat Milling Defined Business Unit ..................................... 12 Farm Marketing and Supply ............................................... 15 Services ................................................................ 16 Membership in the Company and Authorized Capital ........................ 17 Equity Participation Units .............................................. 22 Cautionary Statement .................................................... 26 Item 2. Properties .............................................................. 26 Item 3. Legal Proceedings ....................................................... 28 Item 4. Submission of Matters to a Vote of Security Holders ..................... 28 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ... 29 Item 6. Selected Financial Data Consolidated Company .................................................... 29 Oilseed Processing and Refining Defined Business Unit ................... 30 Wheat Milling Defined Business Unit ..................................... 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Consolidated Company .................................................... 32 Oilseed Processing and Refining Defined Business Unit ................... 39 Wheat Milling Defined Business Unit ..................................... 43 Item 7(a). Quantitative and Qualitative Disclosures about Market Risk .............. 47 Item 8. Financial Statements and Supplementary Data ............................. 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................................. 48 PART III. Item 10. Directors and Executive Officers of the Registrant Board of Directors ...................................................... 49 Executive Officers ...................................................... 54 Item 11. Executive Compensation .................................................. 57 Item 12. Security Ownership of Certain Beneficial Owners and Management .......... 62 Item 13. Certain Relationships and Related Transactions .......................... 64 PART IV. Item 14. Exhibits, Financial Statements and Reports Filed on Form 8-K ............ 65 SUPPLEMENTAL INFORMATION ........................................................... 66 SIGNATURES ......................................................................... 67
PART I. ITEM 1. BUSINESS THE COMPANY Pursuant to a Plan of Combination dated May 29, 1998 (the "Plan of Combination"), CENEX, Inc. ("Cenex") and Harvest States Cooperatives combined through merger on June 1, 1998 (the "Combination") and Harvest States Cooperatives became the surviving corporation. In accordance with the Plan of Combination, the Articles of Incorporation and By-Laws of Harvest States Cooperatives were restated and the name of Harvest States Cooperatives was changed to Cenex Harvest States Cooperatives ("Cenex Harvest States" or "the Company"). The Combination constituted a tax-free reorganization and has been accounted for as a pooling of interests. Subsequent to the Combination, the Company changed its fiscal year end to August 31, and filed a Form 10-Q Transition Report under Rule 15d-10(c) for the three-month period ended August 31, 1998. The Company is filing this form 10-K for its first fiscal year ended August 31, 1999. The Company's consolidated financial statements reflect the financial position and results of operations of the combined companies as if the merger had occurred on June 1, 1996. The consolidated statements of operations and cash flows for the years ended May 31, 1998 and 1997, reflect the results of operations and cash flows of Harvest States Cooperatives for the years then ended combined with the results of operations and cash flows of Cenex for the years ended September 30, 1997 and 1996, respectively. The consolidated balance sheet as of May 31, 1998 reflects the financial position of Harvest States Cooperatives on that date combined with the financial position of Cenex as of September 30, 1997. The consolidated results of operations of Cenex for the eight months ended May 31, 1998, have been excluded from the reported results of operations and, therefore, have been recorded as an adjustment to the Company's equities and cash flows in the consolidated statements of equities and comprehensive income and cash flows during the three months ended August 31, 1998. Each person serving as a director of Cenex or Harvest States at the time of the Combination became a director of Cenex Harvest States. At the 1999 annual meeting to be held in December 1999, the number of directors will decrease from 27 to 17. As a result of the Combination, each holder of common stock of Cenex became a member of Cenex Harvest States, to the extent eligible for membership, and all equity interests of Cenex were determined and exchanged for equal equity interests in Cenex Harvest States at its stated dollar amount on a dollar for dollar basis as more thoroughly set forth in the Plan of Combination, a copy of which was filed as part of the Company's Form 8-K dated June 10, 1998. In May 1999, the Company and Farmland Industries, Inc. (Farmland) announced their intention to work towards a combination of the two companies. On September 8, 1999 the Board of Directors approved a resolution recommending this combination to the Company's membership. A transaction agreement was signed as of September 23, 1999. Approval of the merger by the membership requires a two-thirds vote in favor of the merger from members of both Cenex Harvest States and Farmland Industries, Inc., respectively, who vote on this proposal. Votes must be cast by November 23, 1999. Assuming a favorable vote, the combination will take one of two forms. Farmland may merge into the Company, with the Company as the survivor, or both Farmland and the Company may merge into a new Ohio cooperative. Assuming a favorable vote for the combination, the two companies intend to consummate the combination on or before March 1, 2000. The Company is an agricultural cooperative organized for the mutual benefit of its members. Members of the Company are located primarily throughout the Midwest and Northwest regions of the United States. Primary businesses of the Company include petroleum refining and marketing, wholesale and retail agronomy product marketing, grain marketing, and wheat milling and soybean processing and refining. In addition, the Company offers a variety of agricultural services to its members. The Company has authorized three classes of membership: Individual Members ("Individual Members"), Cooperative Association Members ("Cooperative Association Members") and Defined 1 Members ("Defined Members"). Individual Members are producers of agricultural products who have done business with the Company during its last fiscal year and have consented to take patronage into account as contemplated by Section 1388 of the Internal Revenue Code. In the patronage consent filed with the Company, the producer agrees to include both the cash and non-cash portion of any patronage refund in taxable income for federal income tax purposes. Cooperative Association Members are associations of producers of agricultural products complying with certain federal requirements which have conducted a minimum amount of business with the Company as prescribed by the Board of Directors during its fiscal year and have consented to take patronage into account for tax purposes. Defined Members are persons otherwise eligible for membership who hold Equity Participation Units. Individual Members, Defined Members and Cooperative Association Members who sell grain to the Company, and Individual Members, Defined Members and Cooperative Association Members and consenting patrons who purchase goods and services from the Company are entitled to receive patronage refunds from the Company, which are declared on an annual basis. The Company may elect to add to the Unallocated Capital Reserve an amount not to exceed 10% of the distributable net income from patronage income, and may also elect to allocate non-member-sourced income to its Members and Non-Member Consenting Patrons in proportion to patronage. The Board of Directors created the Oilseed Processing and Refining Defined Business Unit for the purpose of purchasing soybeans and crude soybean oil and the processing and sale thereof into meal, flour, oil and various byproducts, effective at the close of business on May 31, 1997, to carry on the operations of the Processing and Refining Division. On that date there was allocated to the Oilseed Processing and Refining Defined Business Unit the assets and liabilities, including commitments, contingencies and obligations, appropriately belonging to the Division. The Board of Directors created the Wheat Milling Defined Business Unit for the purpose of purchasing wheat (including durum) and the processing and sale thereof into flour and various byproducts, effective at the close of business on May 31, 1997, to carry on the operations of the Milling Division. On that date there was allocated to the Wheat Milling Defined Business Unit the assets and liabilities, including commitments, contingencies and obligations, appropriately belonging to the Division. Effective August 1999, Grain Marketing operations, and the Wheat Milling and Oilseed Processing and Refining Defined Business Units have been combined into one operating division of Cenex Harvest States, called Aligned Grain, which will be led by Senior Vice President Mark Palmquist. Mike Bergeland, Executive Vice President Grain & Agri Services, will continue to lead Aligned Grain, Country Services and Farm Marketing & Supply. The Company's foods and packaging partnerships with Ventura Foods, LLC and Sparta Foods, Inc., have been organized into a separate Consumer Foods group, which will be led by Executive Vice President Jim Tibbetts and will focus on identifying further food processing and packaging opportunities that will help deliver value to consumers. The segment information for the Company is provided in Note 11 of the consolidated financial statements on pages F-20 and F-21. ENERGY The energy operations of the Company include a 46,000 barrel per day refinery in Laurel, Montana, which is wholly owned by the Company, and a 74.5% ownership interest in a 75,500 barrel per day refinery in McPherson, Kansas. The Company is not in the oil exploration business but rather purchases crude oil from both domestic and foreign sources. The Laurel, Montana refinery processes primarily heavy, high sulfur Canadian crude oil and produces approximately 44% gasoline, 32% diesel and other distillates and 24% asphalt and other residual products. Refined fuels are shipped west on the Yellowstone Pipeline to Montana terminals and to Spokane and Moses Lake, Washington; south on common carrier pipelines to Wyoming terminals and Denver, Colorado, and east on the Company's wholly owned pipeline to Glendive, Montana as well as to Minot and Fargo, North Dakota. Crude oil is delivered to Laurel on the wholly owned Front Range Pipeline. 2 The McPherson refinery operated by National Cooperative Refinery Association (NCRA), of which the Company owns 74.5%, receives its supply of crude oil via the Jayhawk pipeline, which is wholly owned by NCRA, and through the common carrier pipelines of Osage and Kaw. The Company holds ownership interests of 35% and 33%, respectively, in these two pipelines. Approximately 86% of the crude oil processed is domestic from Kansas, Oklahoma and Texas, and 14% is Venezuelan crude. The McPherson refinery produces approximately 57% gasoline, 34% distillates and 9% propane and other products. Refined fuels are shipped via NCRA's proprietary products pipeline to its terminal in Council Bluffs, Iowa and to other markets via Kaneb and Williams common carrier pipelines. Approximately 9% of refined products are loaded to transport trucks at the refinery. The production from these two refineries is marketed by Country Energy, LLC, a petroleum marketing joint venture with Farmland Industries, Inc. and sold to the Company's member cooperatives, where the product is sold to farmers, ranchers and the general public. In addition to distilled fuels, the Company also wholesales other auto and farm machinery products such as oil, grease, batteries and tires, as well as providing propane for heating fuel and grain drying. The Company also operates approximately 40 convenience stores where it retails its own brand of distilled fuels along with typical convenience products. Upon the purchase of crude oil, the Company has risks of carrying the inventory, including price changes and performance risk (including delivery, quality, quantity and shipment period). To reduce the price change risk associated with holding fixed price positions, the Company generally takes opposite and offsetting positions by entering into a commodity futures contract on a regulated mercantile exchange. While hedging activities reduce the risk of loss from changing market values of crude oil and distilled products, such activities also limit the gain potential which otherwise could result from changes in market prices. Because most of the Company's energy product market is located in rural areas, sales activity tends to follow the planting and harvest cycles. More fuel efficient equipment, reduced crop tillage, depressed prices for crops, warm winter weather, and government programs which encourage idle acres all have the effect of reducing demand for the Company's energy products. In addition, private energy companies compete with the Company. Effective September 1, 1999, NCRA and Farmland Industries formed a limited liability company, Cooperative Refining, LLC, to operate jointly the refining, pipeline and terminal assets of Farmland and NCRA. This includes NCRA's 75,500 barrel per day McPherson, Kansas refinery and Farmland's 95,000 barrel per day Coffeyville, Kansas refinery. NCRA has a 57.565% interest in the LLC and Farmland has a 42.435% interest. The refining, pipeline and terminal assets are owned by NCRA and Farmland Industries, but are operated by the LLC with the expenses of operation being reimbursed by the LLC to both members. Currently, energy operations has 259 full time employees. Of these employees, 125 are employed by the Company, and 134 are employed by Country Energy, LLC. CROP INPUTS The Company, through a joint venture established by Cenex with Land O'Lakes, Inc. (another regional cooperative headquartered in the St. Paul, Minnesota area) participates in the crop input business. The Company has a 50% ownership interest in the Cenex/Land O'Lakes Agronomy Company ("Agronomy"), which acts as a sales agent for the two companies. The agronomy company markets plant food (fertilizers) and crop protection products (herbicides and insecticides) on behalf of its two owners. Such products are sold to the member cooperatives of the Company on a wholesale basis, as well as marketed through approximately 220 company owned facilities on a retail basis to individual farmer-patrons. The Company distributes a complete line of fertilizers, including potash, nitrogen-based fertilizers and phosphate-based fertilizers. Approximately 80% of the fertilizer products sold by the Company through its agency arrangement are purchased from CF Industries, of which the Company owns 22%. 3 CF Industries is a large domestic fertilizer producer. The Company purchases crop protection products from several chemical companies, including Imperial, Inc., a wholly owned subsidiary of the Cenex/Land O'Lakes Agronomy Company. Many of the risk factors related to the energy operations also apply to the agronomy product operations. Spring and fall weather conditions, depressed grain prices, idle acreage and genetic engineering of crops which are more insect and disease resistant all effect the demand for agronomy products. Competition in most of the Company's trade area for such products is also intense. Supply and price of fertilizer ingredients fluctuates widely, which exposes the Company to risk on any fixed price commitment. In addition, increased domestic and foreign production of fertilizer expands supply and tends to depress the profitability of CF Industries, and reduces the patronage paid by CF Industries to the Company. On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada, Ltd. (the Entities), both companies owned 50/50 by the Company and Land O'Lakes, Inc., purchased approximately 310 agronomy facilities from Terra International, Inc., at a price of approximately $350.0 million. In conjunction with this purchase transaction, the Company invested $51.5 million in the Entities and issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd. Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes Agronomy Company, are without recourse to the Company. The Cenex/Land O'Lakes Agronomy Company currently has 727 full time employees, 48 part time employees and 407 seasonal employees. The Company does not have any employees in crop inputs operations. GRAIN MERCHANDISING INDUSTRY OVERVIEW Grain and oilseed merchandising involves the sale and distribution of grain and oilseeds from producer to processor, to be processed for human and animal consumption and other uses. These commodities are produced and consumed throughout the world. Increased worldwide demand is generated through population growth and, for certain regions, increased per capita food consumption supported by growing affluence. Demand for these commodities is satisfied by worldwide production, which is in part determined by prevailing prices. A significant portion of high production grains (wheat, corn and soybeans) grown domestically have been exported. United States production competes with production in numerous other countries to supply the worldwide demand for these grains. The ability of producers in particular countries to compete on a worldwide basis may be enhanced by governmental support and protection. Imports of grains into the U.S. consist mainly of wheat, oats and barley. The amounts imported have not had a material effect on grain merchandising. In the United States, grain merchandising involves the purchase of grain, sale for export or further domestic use and storage and transportation to export facilities or to users. Grain merchandising may be adversely affected by supply and demand relationships, both domestic and international. Supply is affected by weather conditions, disease, insect damage, acreage planted, government regulation and policies and commodity price levels. The business is also affected by transportation conditions, including rail, vessel, barge and truck. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, by population growth and increased or decreased per capita consumption of some products. The Freedom to Farm Act of 1996, enacted in April 1996, has had a profound effect on the production patterns within the United States. The flexibility of the program allows producers to grow crops, which provide the highest gross financial return. For example, this year the U.S. producer reacted 4 to Loan Deficiency Payments (LDP) for oilseeds in the year ended May 31, 1998 with an increase in acreage for all oilseeds for the year ended August 31, 1999. U.S. export subsidies, principally the Export Enhancement Program, continue to decline in importance and overall use. INTRODUCTION The Company buys grain through its Grain Marketing Division from Cooperative Association Members (typically a cooperative organization of local producers), directly from Individual Members (to a limited extent) and from third parties (such as grain dealers, non-Member producers, marketing associations or marketing pools, elevators and other grain merchandising companies) and through its Agri-Service Centers, which are country elevators owned by the Company. Grain purchased by Agri-Service Centers is usually sold to the Grain Marketing Division for resale. A small portion of grain is handled on a consignment basis. Grain is sold by the Company for future delivery at a specified location. Grain sold by a producer is typically trucked to a local elevator for sale. From local elevators, grain may be transported in a variety of ways to the purchaser. The Company arranges transportation to delivery locations using truck, rail and barge transportation. Grain intended for export may be shipped by rail to an export terminal or to a barge loading facility to be shipped by barge to an export terminal, where it is loaded on an ocean-going vessel. Grain intended for domestic use may be shipped by truck or rail to various locations throughout the United States. Because of its facilities, the Company has significant capacity to sell grain for export. PURCHASES. The number of bushels of grain purchased from Individual Members and Cooperative Association Members, the total grain purchased and the percentage relationship for the periods indicated are set forth below:
YEARS ENDED MAY 31, ------------------------------------------------ YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 ----------------- ------------------- -------------- -------------- -------------- (BUSHELS IN THOUSANDS) Member purchases ......... 785,999 172,180 720,421 757,705 959,167 Total purchases .......... 1,169,393 244,978 1,145,852 1,280,557 1,692,439 Percentage ............... 67.2% 70.3% 62.9% 59.2% 56.7%
Substantially all of the grain purchased by the Company is grown in the Midwest, Great Plains and Pacific Northwest. The Company also purchases grain grown in other parts of the United States and other countries. GRAINS HANDLED. The primary grains merchandised by the Company are corn, wheat and soybeans. The Company also merchandises barley, milo, sunflowers and oats as well as smaller quantities of canola, flax, rye, millet and others. The number of bushels of grain purchased by the Company for the periods indicated is set forth below:
YEARS ENDED MAY 31, ------------------------------------------ YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 ----------------- ------------------- ------------ ------------ ------------ (BUSHELS IN THOUSANDS) Wheat .............. 412,967 100,941 416,067 478,979 505,607 Corn ............... 406,616 86,911 347,494 425,851 777,631 Soybeans ........... 230,239 36,220 229,558 219,687 234,930 Barley ............. 54,548 13,180 66,085 61,839 75,226 Milo ............... 40,826 4,426 37,816 51,723 48,200 Sunflowers ......... 7,814 549 28,789 14,603 25,953 Oats ............... 6,354 1,246 9,008 22,487 20,008 All other .......... 10,029 1,505 11,035 5,388 4,884 ------- ------- ------- ------- ------- 1,169,393 244,978 1,145,852 1,280,557 1,692,439 ========= ======= ========= ========= =========
5 Sales of grain by the Company for the periods indicated are set forth below:
YEARS ENDED MAY 31 ----------------------------------------- YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 ----------------- ------------------- ------------- ------------- ------------- (DOLLARS IN MILLIONS) Wheat ............. $ 1,169.8 $ 373.1 $ 1,794.4 $ 2,490.3 $ 2,631.2 Corn .............. 896.6 215.0 989.8 1,558.4 2,518.9 Soybeans .......... 1,010.0 162.8 1,432.0 1,421.9 1,431.5 All other ......... 232.9 59.8 413.4 565.9 545.6 ---------- -------- ---------- ---------- ---------- Total ............. $ 3,309.3 $ 810.7 $ 4,629.6 $ 6,036.5 $ 7,127.2 ========== ======== ========== ========== ==========
MERCHANDISING The Company buys and sells grain through offices of its Grain Marketing Division located in Portland, Oregon; Lincoln, Nebraska; Kansas City, Kansas; St. Paul, Minnesota; Winona, Minnesota; Davenport, Iowa; and at its Agri-Service Centers. Grain purchased through Agri-Service Centers is purchased on a cash and futures basis. Grain purchased through the Grain Marketing Division is usually purchased for future delivery. Grain is sold for future delivery at a specified location, with the Company usually responsible for arranging necessary transportation to that location. Purchasers include millers, malters, exporters and foreign buyers as well as the soybean, wheat and feed operations of the Company. The Company is not dependent on any one customer. The Company has supply relationships calling for delivery of grain at prevailing market prices. Grain users store varying amounts of grain for their own use. The Company's ability to arrange transportation is a significant part of the service it offers to its customers. The Company's loading capabilities onto unit trains, ocean going vessels and barges is a component of the selling price of grain handled by the Company. Rail transportation is through independent railroads, although approximately 30% of rail movement for Grain Merchandising for the year ended August 31, 1999 was carried out through leased railcars (either directly or by use of pools in which such leased railcars participate). Vessel and truck transportation is carried out exclusively by third parties. Barge transportation is carried out by third parties, but the Company is a party to long-term affreightment agreements for approximately 20% of current needs. Virtually all grain sold domestically is sold by employees while approximately half of grain exported is sold by brokers or agents and the balance by employees. The Company has a small ownership position in Intrade, a company that owns part of a Germany-based marketing organization involved in trading grain and feedstuffs in Germany and international markets. The Company also has relationships with agents, brokers and marketing companies in other countries to assist it in export sales. COMPETITION The Company competes for both the purchase and sale of grain. Competition is intense and margins are low. Some of the Company's competitors are integrated food producers, which may also be customers. Many competitors have substantially greater financial resources than the Company. In the purchase of grain from producers, location of a delivery facility is a prime consideration but producers are willing to truck grain for sale over increasingly longer distances. Grain prices are affected by reported trading prices on national markets, shipping costs and storage capabilities. Price is affected by the capabilities of the facility. For example, if it is cheaper to deliver to a customer by unit train than by truck, a facility with unit train capability provides a price advantage. The Company believes that its relationship with Individual Members serviced by local Agri-Service Centers and with Cooperative Association Members gives it a broad origination capability. The Company competes in the sale of grain based on price and its ability to provide quantity and quality of grains required and its ability to deliver. Location of facilities is a major factor in ability to compete. Major grain merchandising companies in addition to the Company include Archer-Daniels- Midland, Cargill, ConAgra, Bunge and Louis Dreyfus, each of which handles grain volumes of more than one billion bushels annually. The Company estimates it would be among the smaller merchandisers 6 among these six. The Company also competes with numerous other grain merchandisers with annual volumes of less than one billion bushels. Since the Company's facilities are located primarily in the Midwest, Great Plains and Pacific Northwest, with a terminal in the Gulf, the Company primarily competes with the companies whose facilities are in these areas. The Company's export facilities in three major locations allow it to ship to anyplace in the world. GRAIN HANDLING AND TRANSPORTATION The Company owns export terminals, river terminals and other elevators involved in the handling of grain. All such facilities can receive inbound truck and rail. Export facilities on river systems can receive grain by barge. In addition, the Company owns 173 Farm Marketing and Supply Agri-Service Centers, which are country elevators, which receive grain from producers. The Company operates river terminals at Kansas City, Missouri (two), St. Paul, Savage and Winona, Minnesota, and Davenport, Iowa (two), which are used to load grain onto barges for shipment to both domestic and export customers via the Mississippi River system, on trucks for domestic markets and on rail for both domestic and export markets. The Company's export terminal at Superior, Wisconsin provides access to the Great Lakes and St. Lawrence Seaway, and the Company's export terminal at Myrtle Grove, Louisiana, serves the Gulf market. An export terminal at Kalama, Washington, leased by the Company, and an export terminal at Vancouver, Washington, owned by a joint venture partner, serve the Pacific market. A partnership between the Company and Cargill operates an export terminal at Tacoma, Washington, for feed grain and oilseed shipments to Pacific Rim customers. A Cargill facility in Seattle, Washington is also being utilized by the joint venture until it is sold. A facility in Spokane, Washington is used for storage and transloading, and an elevator in Petersburg, North Dakota is used to standardize barley for a particular customer. The Company entered into a joint venture with United Grain, located in Portland, Oregon, forming a grain marketing company called United Harvest, LLC. United Harvest, LLC is a joint venture 50% owned by each company, and began operation in December 1998. United Harvest, LLC will operate the Kalama, Washington and Kennewick, Washington terminal elevators owned by the Company, and the Vancouver, Washington terminal of United Grain as well as market the grain for each of the parent companies in the western United States, including Washington, Oregon, Idaho, Utah and Montana. The Company has interests in three river terminals located on the Snake River which are being utilized by United Harvest LLC. These terminals include the Lewis and Clark Terminal Association's facility located at Lewiston, Idaho, Central Ferry Terminal Association's facility located at Central Ferry, Washington and Co-Grain Elevator Company's facilities located at Upper Monumental and Burbank, Washington. Much of the grain from these terminals is loaded onto barges for shipment to Pacific Northwest export terminals. The grain marketing operation leases a fleet of covered hopper cars and enters into various contracts for covered grain barges. In addition, at various times the Company may charter vessels. PRICE RISK AND HEDGING Upon purchase, the Company has risks of carrying grain, including price changes and performance risks (including delivery, quality, quantity and shipment period), depending upon the type of purchase contract entered into. These contracts include flat price, basis fixed, delayed price, deferred payment, hedge to arrive and futures fixed. The Company is exposed to risk of loss in the market value of positions held, consisting of grain inventory and purchase contracts at a fixed or partially fixed price, in the event market prices decrease. The Company is also exposed to risk of loss on its fixed price or partially fixed price sales contracts in the event market prices increase. To reduce the price change risks associated with holding fixed price positions, the Company generally takes opposite and offsetting positions by entering into grain commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. Most of the grain volume handled by the Company can be hedged. Some grains cannot be hedged because there are no futures for certain commodities. For those commodities, risk is managed 7 through the use of forward sales and different pricing arrangements and to some extent cross-commodity futures hedging. While hedging activities reduce the risk of loss from changing market values of grain, such activities also limit the gain potential which otherwise could result from changes in market prices of grain. The Company's policy is to generally maintain hedged positions in grain, which is hedgeable, but the Company can be long or short at any time. The Grain Marketing Division's profitability is primarily derived from margins on grain merchandised and revenues generated from other merchandising activities with its customers, not from hedging transactions. Hedging arrangements do not protect against nonperformance of a contract. When a futures contract is entered into, an initial margin deposit must be sent to the applicable exchange. The amount of the deposit is set by the exchange and varies by commodity. If the market price of a short futures contract increases, then an additional margin deposit (maintenance margin) would be required. Similarly, if the price of a long futures contract decreases, a maintenance margin deposit would be required to be sent to the applicable exchange. Subsequent price changes could require additional maintenance margins or could result in the return of maintenance margins. At any one time the grain marketing operation inventory and purchase contracts for delivery to the Company may be substantial. The Grain Marketing Group has a risk management policy and procedures that include net position limits. It is defined by commodity and includes both trader and management limits. This policy and computerized procedure triggers a review by management of the grain marketing operation when any trader is outside of position limits and also triggers review by management of the Company if the grain marketing operation is outside of its position limits. The position limits are reviewed at least annually with management of the Company. The Company monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, certain purchase and sale contracts are subject to credit approvals and appropriate terms and conditions. SEASONALITY Harvest for most crops occurs in the summer and fall, and the Company purchases more grain during that period. Because of the Company's geographic location and the fact that it is further from its export facilities, grain tends to be sold later than in other parts of the country. Because many producers have significant on-farm storage capacity and because of the Company's own storage capacity, grain is bought and moved throughout the year. WORKING CAPITAL Due to the amount of grain purchased and held in inventory, the Company has significant working capital needs at various times of the year. The amount of borrowings for this purpose and the interest rate charged on such borrowings directly affect the profitability of the grain merchandising operations. EMPLOYEES As of August 31, 1999, the Grain Marketing Division had 445 employees, of which 68 were traders, 249 production staff, 14 management and 114 support staff. See "Farm Marketing and Supply" with respect to employment by Agri-Service Centers. Of these employees, 169 at seven locations are subject to collective bargaining agreements expiring at various times through 2000. OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT The soybean crushing industry converts soybeans into meal used for feeding animals, soyflour used for specialty food and other purposes and crude soybean oil. The soybean refining industry refines the crude oil for use in processed foods, such as margarine, salad dressings and baked goods, and to a more limited extent industrial uses. Soybean production is concentrated in the central United States, Brazil, China and Argentina. Crushing plants are generally located close to adequate sources of soybeans and strong demand for meal. Refineries are generally located next to the crushing plants. Oil is shipped throughout the United States and for export. Per capita domestic consumption of soybean oil has increased slightly in recent years. Exports of soybean oil are variable but generally a minor portion of total production. In recent years, exports have varied widely, which dramatically influenced margins in both crushing and refining. 8 Usage of meal is dependent on the amount of livestock being raised, which has increased in recent years. While per capita domestic consumption of meat has been stable in recent years, demand for meal has increased due to an increase in the domestic consumption of pork and poultry and an increase in meat exports. Soybean meal provides a ready source of protein with a 44% or higher protein content, compared to corn at 9%, wheat at 9.5% and barley at 11.5%. Major competitors in the industry include the Company, Archer-Daniels-Midland ("ADM"), Cargill, Ag Processing, Inc. ("AGP"), Central Soya and Bunge. Competition is driven by price, transportation costs, service and product quality. The industry is highly competitive. These and other competitors are acquiring other processors, expanding capacity of existing plants or building new plants, domestically or internationally. Unless exports increase or existing facilities are closed, this extra capacity is likely to put additional pressure on prices and challenge margins. Several competitors operate over various market segments and may be suppliers to or customers of other competitors. Historically, in the Company's trade area there has been an adequate supply of soybeans, even in years when there has been a substantial amount of soybeans exported. While the price of soybeans has fluctuated substantially, the prices of meal and oil have followed, so that margin relationships have been maintained. EQUITY PARTICIPATION UNITS At its integrated crushing and refining facility in Mankato, Minnesota, the Oilseed Processing and Refining Defined Business Unit processes soybeans into soybean meal, soyflour and crude soybean oil. The crude soybean oil, with additional purchased crude oil, is refined. At August 31, 1999 Equity Participation Units in the Oilseed Processing and Refining Defined Business Unit represented the right to deliver 1,047,000 bushels of soybeans, approximately 3% of the processing capacity of the Defined Business Unit. PRICE RISK AND HEDGING To reduce the price change risks associated with holding fixed price commodity positions, the Company generally takes opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. While hedging activities reduce the risk of loss from changing market values of oilseeds, such activities also limit the gain potential which otherwise could result from changes in market prices of oilseeds. The Company's policy is to generally maintain hedged positions within limits, but the Company can be long or short at any time. The Defined Business Unit's profitability is primarily derived from margins on oilseeds processed, not from hedging transactions. Management does not anticipate that its hedging activity will have a significant impact on future operating results or liquidity. Hedging arrangements do not protect against nonperformance of a cash contract. At any one time the Defined Business Unit's inventory and purchase contracts for delivery to the Defined Business Unit may be substantial. The Defined Business Unit has a risk management policy and procedures that include net position limits. It is defined by commodity and includes both trader and management limits. This policy and computerized procedure triggers a review by management of the Defined Business Unit when any trader is outside of position limits and also triggers review by management of the Company if the Defined Business Unit is outside of its position limits. The position limits are reviewed at least annually with management of the Company. The Defined Business Unit monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, certain purchase and sale contracts are subject to credit approvals and appropriate terms and conditions. SUPPLY The Oilseed Processing and Refining Defined Business Unit purchases virtually all of the soybeans processed by it from Members. Because the Oilseed Processing and Refining Defined Business Unit has not had long-term contracts with customers, it does not obligate itself to purchase soybeans based on orders received from customers but instead on its contemplation of future production. The Oilseed Processing and Refining Defined Business Unit does not hold significant inventories of raw beans; capacity for raw bean storage is approximately three to four weeks of production. At any one time, 9 inventories of beans and contracts for future delivery represent two to ten weeks of requirements. Inventories of raw beans and contracted purchases for future delivery are substantially hedged. The Oilseed Processing and Refining Defined Business Unit also purchases crude soybean oil for processing at its refinery. Approximately 40% of the crude oil refined is produced by the Oilseed Processing and Refining Defined Business Unit, and the balance is purchased. Major suppliers have been AGP, South Dakota Soybean Processors and ADM. Because ADM opened a refinery late in 1997 in Minnesota, it is no longer a supplier of crude oil. However, there are several producers of crude oil, and the Company has been able to replace this supply source. The refining facility has storage capacity for approximately 10 days' supply of crude oil, so it depends on a steady supply of crude oil to supplement its own output of crude oil to maintain constant production. It typically commits for several months' supply, to be priced prior to delivery. As with other agricultural commodities, the availability and price of soybeans fluctuate with forces of supply and demand. The Oilseed Processing and Refining Defined Business Unit has never experienced an inability to source soybeans. CUSTOMERS REFINED OILS. The Oilseed Processing and Refining Defined Business Unit sells refined oil throughout most of the United States although it concentrates on customers located in Minnesota, Wisconsin, North Dakota, South Dakota, northern Iowa and northern Illinois, which have lower freight costs and are therefore slightly more profitable. Customers in these states accounted for more than 50% of refined oil sales in the year ended August 31, 1999. The Company estimates that of oil sold, 25% is used for margarine, 15% to 20% for salad dressing and smaller percentages for snack foods, baked goods, imitation cheese goods, processed potato goods and others. Approximately 5% of oil sales are for industrial use. During the year ended August 31, 1999, the Oilseed Processing and Refining Defined Business Unit had over 100 customers, the largest of which was Ventura Foods, LLC and its predecessor operations described in the next paragraph. One other customer was responsible for over 9% of refined oil sales by the Defined Business Unit. Sales of refined oil are made by Defined Business Unit employees and to a lesser extent by brokers. The Company has a long-term supply agreement with Ventura Foods, LLC. which commenced January 1, 1997 and will continue for 15 years or longer if the Company continues to hold at least a 25.5% interest in Ventura Foods. The Company has agreed to supply and Ventura has agreed to purchase a minimum quantity of soybean salad oil, hydrogenated soybean oil and other edible oils that the Company may refine during the term of the agreement. The Company has agreed to sell to Ventura Foods, and Ventura Foods has agreed to purchase from the Company, during each calendar year at least 430,000,000 pounds of products or 50% of its requirements if greater, but not more than 100% of its requirements. The price for the products sold to Ventura Foods is a formula adjusted annually to be competitive with alternative sources. SOYBEAN MEAL. Soybean meal sold by the Oilseed Processing and Refining Defined Business Unit is used for feeding livestock. During the year ended August 31, 1999, the Defined Business Unit sold meal to over 500 customers, primarily feed lots and feed mills. During the year ended August 31, 1999, seven customers accounted for approximately 48% of meal sold, and three customers, which would be difficult to replace, accounted for approximately 32% of meal sold. For the year ended August 31, 1999, 69% of meal was sold in Minnesota, 22% in Wisconsin, 6% in Canada and the balance in Iowa, North Dakota and South Dakota. These sales could be adversely affected by a decline in the livestock or turkey industries in these areas. Substantially all meal sales are made directly by employees of the Defined Business Unit. SOYFLOUR. Soyflour is used in the baking industry, as milk replacers in animal feed and in industrial applications. Sales of soyflour have not been significant relative to sales of meal. COMPETITION The Company believes that the Oilseed Processing and Refining Defined Business Unit has 6% to 8% of the domestic refined soybean oil market and less than 3% of the domestic soybean crushing capacity. 10 PROCESSING Soybeans arriving by truck or rail are sampled, weighed, dumped and unloaded into bean storage. When brought out of storage, beans are cleaned, dehulled, cracked and conditioned and are compressed into flakes. Oil is removed from the flakes through a solvent process. Flakes are then further processed into soyflour or soymeal. Soymeal can be made into animal feed at various protein levels. Crude oil is filtered to remove remaining meal particles and centrifuged to separate out trace constituents. The oil can be sold as an industrial product used in plastics, inks and paints. Further processing prepares the oil for food use, by bleaching with a special clay to remove trace metals, chlorophyll and other impurities to make salad oil. By adding hydrogen under pressure to bleached oil, the Company makes partially hydrogenated soybean oil that may be used in products such as shortenings or margarines. To remove unwanted odors, flavors and mild color constituents, bleached or hydrogenated oil is heated under vacuum. The result is a product that is flavorless, odorless, tasteless and virtually clear. While the Oilseed Processing and Refining Defined Business Unit runs at between 80% to 100% of capacity throughout the year, volume is typically higher at harvest time since soybean supplies are more abundant in the fall. Producer and cooperative elevator storage capabilities allow suppliers to sell for delivery throughout the year. FACILITIES The Oilseed Processing and Refining Defined Business Unit currently has one facility located in Mankato, Minnesota, comprised of a crushing plant, a refinery, a soyflour plant and self contained utilities. A quality control lab with technically sophisticated equipment assures high quality standards. In July 1998 the Company announced its site selection for the construction of a new soybean processing and refining plant in southwestern Minnesota. The facility, to be constructed near the city of Fairmont, Minnesota, is expected to cost between $60 and $90 million. The precise configuration and size of the crushing plant and oil refinery has yet to be determined. EMPLOYEES The Oilseed Processing and Refining Defined Business Unit currently employs 203 employees, 35 in the office in administration, sales and support service and 168 in the plant. Certain production workers are subject to collective bargaining agreements with the American Federation of Grain Millers (137 employees) expiring in 2002 and the Pipefitters' Union (2 employees) expiring in 2000. VENTURA FOODS On August 30, 1996, the Company and Wilsey Foods, Inc. combined the assets and certain liabilities of the Company's Holsum Foods Consumer Products Packaging Division with the assets and liabilities of Wilsey Foods, Inc. as Ventura Foods, LLC ("Ventura Foods"). A joint venture owned by Wilsey Foods, Inc. and the Company that operated a manufacturing facility in Chambersburg, Pennsylvania was merged into Ventura Foods. The Company owns 40% and Wilsey Foods owns 60% of the equity and rights to distribution of profits of Ventura Foods. The Company's total net investment in Ventura Foods was $55.6 million as of August 31, 1999. Sales by the Oilseed Processing and Refining Defined Business Unit to Ventura Foods and its predecessors in interest (Holsum and Wilsey) are shown below:
YEARS ENDED MAY 31, ----------------------------------------- YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 ----------------- ------------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Sales ...................... $ 93,565 $ 22,685 $ 101,440 $ 110,679 $ 124,299 Percentage of total refinery sales ...................... 35% 34% 38% 45% 45%
Ventura Foods is in the business of manufacturing and/or packaging and selling food products, including salad dressings, mayonnaise, margarine, salad oils, jams, jellies, olives, syrups, soup bases and sauces. Its customers are national. Ventura Foods is governed by a committee, and each of the Company 11 and Wilsey Foods appoints half the committee members. The Company and Wilsey Foods must each retain at least a 25.5% interest in Ventura Foods. Ventura Foods will be dissolved if it has cumulative losses in excess of $25 million or is unable to discharge its liabilities as they become due. WHEAT MILLING DEFINED BUSINESS UNIT INDUSTRY OVERVIEW The Company's Wheat Milling Defined Business Unit mills durum wheat into flour and semolina and mills spring and winter (hard) wheats into bread flour. The Wheat Milling Defined Business Unit is the largest miller of durum wheat in the United States. The Wheat Milling Defined Business Unit had historically concentrated on durum wheat milling at its Rush City and Huron facilities. With the opening of its Kenosha mill in late 1995, which can produce durum and bakery flours, its Houston facility, which began production in June 1997, Mount Pocono facility, which began production in January 1999, the Defined Business Unit has broadened its markets and significantly increased its capacity. SEMOLINA AND DURUM FLOUR. Durum wheat millers process durum wheat into semolina and durum flours. Semolina and high grade durum flours are the chief ingredients in pasta; low-grade durum flour is used for pet food. Durum is grown in arid regions of the United States, such as North Dakota and certain areas of the Southwest, as well as in other countries. Most of the quality durum is grown in the Midwest, particularly North Dakota. Durum milling plants are generally located in proximity to customers; wheat is shipped to the mill for milling. Sale of semolina and durum flour is entirely dependent on pasta production. Per capita consumption of pasta has declined slightly in the past two years. Pasta in its many forms is sold at retail, for restaurants and institutional use and for use in other processed food products. Major competitors in the industry include the Company, Italgrani and Miller Milling. Competition is driven by price, service and product quality. Some competitors have developed long-term relationships with customers by locating plants adjacent to pasta manufacturing plants. BAKERY FLOUR. Bakery flour milled from spring and hard winter wheat is used in breads, cookies, pizza crusts, tortillas and other products. The baking industry is highly fragmented, with the largest participant being no more than four percent of the market. Demand for bakery flour had been increasing until 1998. Total production and per capita consumption decreased 1.3% in the year ended December 31, 1998. While there was a decline in consumption, 1998 was still the second largest production year recorded. Dietary guidelines established by the United States Department of Agriculture emphasize cereal grains in the food pyramid. The Company believes that demand for bakery flour will increase based on population growth. Imports and exports of bakery flour do not significantly affect the domestic business. EQUITY PARTICIPATION UNITS At August 31, 1999, Equity Participation Units in the Wheat Milling Defined Business Unit represented the right to deliver 4,629,000 bushels of wheat, approximately 7% of the processing capacity of the Defined Business Unit. PRICE RISK AND HEDGING To reduce the price change risks associated with holding fixed price commodity positions, the Company generally takes opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. While hedging activities reduce the risk of loss from changing market values of grain, such activities also limit the gain potential which otherwise could result from changes in market prices of grain. The Defined Business Unit's policy is to generally maintain hedged positions in grain that is hedgeable, but the Company can be long or short at any time. The Defined Business Unit's profitability is primarily derived from margins on grain processed, not from hedging transactions. Management does not anticipate that its hedging activity will have a significant impact on future operating results or liquidity. Hedging arrangements do not protect against nonperformance of a contract. 12 At any one time the Defined Business Unit's inventory and purchase contracts for delivery to the Defined Business Unit may be substantial. The Defined Business Unit has a risk management policy and procedures that include net position limits. It is defined by commodity and includes both trader and management limits. This policy triggers a review by management of the Defined Business Unit when any trader is outside of position limits and also triggers review by management of the Company if the Defined Business Unit is outside of its position limits. The position limits are reviewed at least annually with management of the Company. The Defined Business Unit monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, certain purchase and sale contracts are subject to credit approvals and appropriate terms and conditions. SUPPLY Most of the durum, spring and winter wheats processed by the Wheat Milling Defined Business Unit are purchased from Members. Some grain is purchased from Canada and a small percentage is purchased from the Southwest. Semolina and durum flour sales are hedged to a significant extent by buying durum at the time of pricing the semolina or flour. Additionally, the new durum futures market offers some limited potential for hedging. To minimize the price volatility for winter and spring wheats, the Wheat Milling Defined Business Unit usually hedges by purchasing wheat futures at the time of pricing the flour. The availability, price and quality of durum and spring and winter wheat affect the operations and profitability of the Wheat Milling Defined Business Unit. The Wheat Milling Defined Business Unit has never experienced a supply shortage of durum, but shortages have affected prices. CUSTOMERS SEMOLINA & DURUM FLOUR. The Wheat Milling Defined Business Unit sells semolina and durum flour to ten major customers and approximately 50 smaller customers, which are large and mid-size pasta manufacturers in the United States. The customer base is broad and diverse with no single customer being more than 15% of the total durum milling demand. In 1999, American Italian Pasta Company ("AIPC") began operation of a new pasta plant adjacent to the Wheat Milling Defined Business Unit's mill in Kenosha, Wisconsin. AIPC is this country's largest pasta manufacturer. Direct pipelines from the mill to the pasta plant will reduce costs to transfer product, create efficiencies for both companies, as well as provide a dedicated customer/supplier relationship. Production startup for the AIPC plant is expected in about a year. The Wheat Milling Defined Business Unit would be adversely affected by a decline in pasta production in the United States. Most of the Wheat Milling Defined Business Unit's products are marketed by employees of the Defined Business Unit. The Wheat Milling Defined Business Unit uses outside agents and distributors for the balance of its production. BREAD FLOUR. The baking industry is composed of many companies. No one customer buys more than 14% of the Wheat Milling Defined Business Unit's bread flour production. The Company believes because of the large number of potential customers and the fact that the Wheat Milling Defined Business Unit is not dependent on any customer, it would not have substantial difficulty in replacing an existing customer. The Wheat Milling Defined Business Unit's first hard wheat milling unit (Kenosha) began production in late 1995. In October 1996, the Wheat Milling Defined Business Unit expanded hard wheat capacity with the addition of a swing mill at Kenosha capable of milling either durum or hard wheat flour. A plant in Houston, which began production in June 1997, added additional hard wheat capacity. The Company believes that there is a substantial customer base available in the Houston area, as well as export markets. The mill serves a sizeable population base and there are no other milling facilities within the area. In January 1999, the Mount Pocono, Pennsylvania mill began production supplying flour to major bakery customers in the Northeast. 13 COMPETITION DURUM MILLING. The Wheat Milling Defined Business Unit's largest competitors in durum milling are Italgrani and Miller Milling Company. Dakota Growers has expanded its Carrington, North Dakota, milling facility and its pasta production capacity and has added additional milling capacity to supply its recently acquired New Hope, Minnesota plant. Philadelphia Macaroni has completed a semolina mill in Minot, North Dakota. Miller Milling has recently expanded its Winchester, Virginia, semolina mill. Barilla, an Italian pasta manufacturer and durum miller, is operating an integrated mill and pasta plant in Ames, Iowa. In the past, it has exported significant volumes of pasta from Italy into the U.S. and will now compete with domestic manufacturers in the dry retail pasta market. BREAD FLOUR. Competitors include ConAgra, ADM, Cargill, Bay State Milling, Cereal Foods and General Mills. All of these competitors have multiple milling facilities with larger bakery flour production capacity than the Wheat Milling Defined Business Unit. Capacity for hard wheat milling has been expanding faster than consumption. This additional capacity has put pressure on margins. PROCESSING The Defined Business Unit mills wheat into flour using standard industry processes. More recently manufactured equipment has reduced the labor component of wheat milling. The Company believes that its facilities are, on average, newer than its competitors. Operations are somewhat seasonal in anticipation of reduced demand for pasta in summer months. FACILITIES The Wheat Milling Defined Business Unit has five milling facilities in operation, including Mount Pocono that began production in January 1999. Each facility includes a milling plant as well as an elevator to store grain. Information on the five mills, follows:
LOCATION GRAIN MILLED CAPACITY BUSHEL EQUIVALENT - ------------------ ------------------------- ----------------- ------------------ Rush City, MN Primarily durum 10,000 cwts/day 23,500 bu/day Huron, OH Primarily durum 9,500 cwts/day 22,800 bu/day Spring and winter wheat 5,000 cwts/day 11,000 bu/day Kenosha, WI Durum 11,000 cwts/day 26,400 bu/day Spring and winter wheat 10,000 cwts/day 22,000 bu/day Houston, TX Spring and winter wheat 13,000 cwts/day 28,600 bu/day Pocono, PA Durum 4,000 cwts/day 9,600 bu/day Spring and winter wheat 14,000 cwts/day 30,800 bu/day ----------------- ------------------ Total 76,500 cwts/day 174,700 bu/day ================= ==================
At Huron, Ohio, the land and buildings are leased from ConAgra. The Rush City, Kenosha and Mount Pocono facilities are owned entirely by the Company. At Houston, the milling plant is constructed on property leased from the Port of Houston on a long-term basis and the elevator is owned by the Port of Houston, but is subject to a put through agreement with the Company. Because transportation costs for durum, spring and winter wheats are cheaper than for the milled products, it is a strategic advantage for a mill to be located close to a large customer base rather than close to the producer. Each of the Huron, Kenosha, Mount Pocono and Houston mills are in proximity to a large customer base. Approximately 85% of the Wheat Milling Defined Business Unit's current milling capacity uses equipment that is less than 10 years old. This newer equipment generates cost advantages in labor, energy, improved yields and better and more consistent products. In the last few years, some competitors have closed less efficient mills in less strategic locations. For the year ended August 31, 1999 the Wheat Milling Defined Business Unit facilities ran at 70% of capacity based upon a year of 307 operating days 14 being 100%, compared to 81% in 1998. This decrease in run time was due to startup in Mount Pocono and a temporary shut down of Huron due to shifting one line from semolina production to bread flour production. EMPLOYEES As of August 31, 1999 the Wheat Milling Defined Business Unit employed the following full time equivalents: production and plant management (165) and headquarters (22). Of these, 25 production workers at the Rush City Mill are subject to a collective bargaining agreement with the American Federation of Grain Millers expiring in 2001. FARM MARKETING AND SUPPLY The Farm Marketing and Supply Division owns and operates three types of business units: Agri-Service Centers, Feed Manufacturing and Fin Ag, Inc. AGRI-SERVICE CENTERS Agri Service Centers provide farm supplies and services to producers for their production systems. Farm supplies include plant food, feed, seed, energy products and crop protection products. Services include grain and seed marketing and other related services in production agriculture. There are 317 locations in the states of Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Colorado, Montana, Idaho, Oregon and Washington. Not all locations provide every product and service. Locations are grouped into 65 operating units of which 17 are regionalizations; these regionalizations have their own producer board and participate in separate patronage pools. Agri Service Centers purchase grain and seed from member and non-member producers and other elevators and grain dealers. Seventy-seven locations have the capability of loading unit trains. Most of the grain purchased is sold through the Company's grain marketing division, local feed usage or local processing operations. The farm supplies sold at these locations are purchased through other company divisions in the respective areas whenever possible. The Agri Service Centers sell agronomy products through 125 locations. Feed products are sold through 89 locations and energy products through 87 locations. Competitors for the purchase of grain include other elevators and large grain marketing companies. Competitors for farm supply include a variety of cooperatives, privately held and large national companies. The Company competes on the basis of services and patronage. On August 31, 1999, the group had 1,868 full time and 708 seasonal/temporary employees. Statistics for the periods indicated are as follows:
YEARS ENDED MAY 31, -------------------------------- YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995 ----------------- ------------------- ------ ------ ------ ----- Number of centers ......... 317 245 239 253 249 195 Number of operating units .................... 65 70 73 71 74 69
FIN-AG, INC. Fin-Ag, Inc. is a wholly owned subsidiary of the Company located in Sioux Falls, South Dakota. It provides seasonal cattle feeding and swine financing loans, facility financing loans and crop production loans for producers. It also provides consulting services to member cooperatives. Its competitors are other financial institutions. Most whole loans are sold to CoBank, on which the Company bears a 15% residual exposure. The Company's exposure at August 31, 1999, was approximately $3.0 million. Under the Company's borrowing arrangements the maximum amount of the loans outstanding at any one time may not exceed $50.0 million. On August 31, 1999 the total number of full time employees was 15. FEED MANUFACTURING The Company manufactures and sells feed products, ingredients, supplements and animal health products. In addition, it provides livestock production services and custom rations. The Company owns nine feed plants, three retail operations and has joint venture agreements with three additional plants. 15 On June 1, 1998, the Company formed a 50/50 LLC with Land O'Lakes, Inc. called Land O'Lakes/Harvest States Feed LLC. The Company included eight plants and three retail operations in the states of Minnesota, Nebraska, South Dakota, North Dakota and Montana with Land O'Lakes plants in Beatrice and Norfold, Nebraska and Dawson and Detroit Lakes, Minnesota to form the LLC. A four-person board, two from Cenex Harvest States and two from Land O'Lakes govern the joint venture. The administrative office and general manager of the joint venture is located at the Sioux Falls, South Dakota location. The Company is involved in joint ventures of plants in Owatonna, Minnesota, Tillamook, Oregon and Hermiston, Oregon. The Company owns a plant in Snohomish, Washington, which was not operating on August 31, 1999. On August 31, 1999 the feed manufacturing group had 240 full time and 7 part time employees in all operations. All but three employees are leased to the Land O'Lakes/Harvest States LLC. Feed tons for the periods indicated are as follows:
YEARS ENDED MAY 31, -------------------------------------- YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995 ----------------- ------------------- --------- --------- --------- -------- Manufactured feed (tons) ......... 591,510 133,381 377,000 326,000 351,000 333,000
These numbers include the total tons of the joint ventures and LLC's. SERVICES The Company's Country Services Division provides certain services to Individual Members and Cooperative Association Members. COUNTRY HEDGING, INC. Country Hedging, Inc. offers full service commodity futures and options brokerage. For the year ended August 31, 1999, 50% of revenues were from Cooperative Association Members, 37% from Individual Members and 13% from others. This separate subsidiary of the Company is a registered futures commission merchant and a clearing member of both the Minneapolis Grain Exchange and the Kansas City Board of Trade. On August 31, 1999, it had 38 employees operating primarily out of St. Paul, Minnesota. Competitors include international brokerage firms, national brokerage firms, regional brokerage firms (both co-op and non-co-op) as well as local introducing brokers. Competition is driven by price and service. AG STATES AGENCY, LLC Ag States Agency, LLC, 93% owned by the Company, is an independent insurance agency which sells insurance primarily to local cooperatives, including group benefits, property and casualty, and bonding programs. For the year ended August 31, 1999, substantially all of its revenues were from local cooperatives. Ag States Agency, LLC competes with other insurance agencies. On January 1, 1998 Ag States Agency, LLC acquired 50% ownership in Ag States Benefits, LLC. Ag States Benefits, LLC is an independent insurance agency which sells primarily group benefit policies such as health, life, dental, long term care and disability insurance to primarily local cooperative employees and members of local cooperatives. FINANCIAL SERVICES DEPARTMENT The Financial Services Department provides business planning consulting and financing to Cooperative Association Members. It offers open account financing, involving the discretionary extension of credit, and term and seasonal loans. Most of the term and seasonal loans are participated up to 90% by National Bank for Cooperatives (CoBank). Participation by CoBank is subject to credit approval on a loan-by-loan basis by CoBank, subject to an overall limit of participation of $150,000,000. In addition to financing, the open account between the Company and an Affiliated Association is used as a clearing 16 account for settlement of grain purchases and as a cash management tool. Open account financing has been provided to more than 200 Cooperative Association Members in the past year. During the year ended August 31, 1999, average aggregate loan balances outstanding were $41,753,248 (of which CoBank's participation was $19,177,110) and the highest aggregate loan balance outstanding at any one time was $55,646,123 (of which CoBank's participation was $25,146,516). The Company's borrowing arrangements limit loan balances outstanding to not more than $150,000,000 at any one time. Pursuant to its agreement with CoBank, the Company has additional credit risk on CoBank participations up to 10% of total loan commitments. Fin-Ag, Inc., a wholly owned subsidiary of the Company provides certain types of financing to members. See "Farm Marketing and Supply". AFFILIATED ACCOUNTING DEPARTMENT The Affiliated Accounting Department offers computerized country elevator accounting systems and a full complement of accounting support systems for local cooperatives, including tax and patronage allocation services, dividend ledger services and payroll services. For the year ended August 31, 1999, substantially all of its revenues were from local cooperatives. FIELD SERVICES DEPARTMENT The Field Services Department acts as a liaison between cooperative association members and the Company, providing consulting services in marketing, management, operations, accounting, tax, finance and government regulations. MEMBER RELATIONS DEPARTMENT The Member Relations Department conducts cooperative education programs for cooperative association members and assists in planning meetings and organizing visits to Company facilities. MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL INTRODUCTION The Company is an agricultural membership cooperative organized to do business with members and non-members. Net savings from member patronage of the Company shall be distributed to members on the basis of patronage, except that the Board of Directors may elect to add to the Unallocated Capital Reserve an amount not to exceed 10% of the distributable net income from patronage business. These net savings, when distributed, are referred to as "patronage dividends," regardless of whether distributed in cash or Patron Equities. The Company may obligate itself to do business with a non-member on a patronage basis. The determination of net savings may be made by allocation units which may be functional, divisional, departmental, geographic, or otherwise as determined by the Board of Directors, provided that each Defined Business Unit shall be accounted for as a separate allocation unit. Patronage refunds shall be distributed in cash, allocated patronage equities, revolving fund certificates, securities of this cooperative, other securities, or any combination thereof designated by the Board of Directors. Any non-cash allocations are redeemable only at the discretion of the Board of Directors. The net earnings (after provision for income taxes) of the Company, as reported in its financial statements for the year, less patronage dividends paid with respect to the fiscal year may be distributed in the discretion of the Board of Directors to member patrons and to non-member "consenting patrons" (defined as cooperative associations meeting all requirements for membership in this Association other than transacting the minimum amount of business) on the basis of their patronage. Distributions may be in cash, property, Non-Patronage Equity Certificates or any combination thereof designated by the Board of Directors. The current redemption policy is to redeem to estates for Non-Patronage Equity Certificates. In making any such non-member/non-patronage distributions, the Board of Directors may use any method of allocating the earnings on the basis of patronage to member patrons and Non-Member Consenting Patrons as shall be reasonable and equitable in the judgment of the Board of Directors. 17 GOVERNANCE The business and affairs of the Company are managed by a Board of Directors of not less than 17 persons, elected by the members at the Company's annual meeting. The Board currently is comprised of 27 directors and will be decreased to 17 at the December 1999 annual meeting. Various rights and obligations of members are contained in its Articles of Incorporation and Bylaws (together, the "governing documents"), each of which was amended and restated in June, 1998. The governing documents may only be amended upon approval of a majority of the votes cast at an annual or special meeting of the members, except for the higher vote described under "-- Certain Antitakeover Effects." MEMBERSHIP Membership in the Company is restricted to associations of producers of agricultural products which are organized and operating so as to adhere to the provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as amended, and to certain producers of agricultural products. The Board of Directors may establish a minimum amount of business that cooperative associations must transact with or through the Company to be eligible for membership, and also may adopt such additional conditions, qualifications, methods of acceptance, duties, rights and privileges of membership in this Company as it may from time to time deem advisable. Under the Company's governing documents, the Company has several classes of membership and has authority to issue a variety of debt and equity instruments to members. As a membership cooperative, the Company does not issue capital stock. Under the Minnesota Cooperative Law, under which the Company is organized, a cooperative may be organized on a membership basis or a capital stock basis. A cooperative is organized on a capital stock basis if holding shares of common stock entitles the holder to vote. Membership is transferable only with the consent and approval of the Board of Directors. The Company may issue equity or debt securities, on a patronage basis or otherwise, but unless authorized in, or by the Board of Directors pursuant to, the Company's Bylaws, such securities shall not entitle the holders thereof to any voting, membership or other rights to participate in the affairs of the Company and are not transferable without the prior consent of the Board of Directors. The Company's governing documents establish three classes of membership: Individual Members are individuals or entities actually engaged in the production of agricultural products. Such Individual Members include both natural persons as well as any legal entity owned or controlled by individual farmers or their families, such as joint ventures, corporations, partnerships, limited liability companies and other entities. Cooperative Associations are associations of agricultural producers. Cooperative Associations must be cooperatives or other associations of agricultural producers organized and operating under the provisions of the Agricultural Marketing Act and the Capper-Volstead Act. Defined Members are either persons actually engaged in the production of agricultural products or associations of producers of agricultural products that are holders of Equity Participation Units. See "-- Defined Members" below. Membership in the Company will be terminated by the Board of Directors if a member has become ineligible for membership (for example, by the cessation of agricultural production activities). The Board of Directors has the discretion to terminate membership for a variety of reasons, including repeated violations of the Company's Bylaws, failure to patronize the Company for a period of 12 consecutive months and breach of any contract with the Company. In addition, any member's membership in the Company is terminated when that member either dies or is legally dissolved. Upon termination of membership, a former member loses any and all voting rights in the Company. A former member has no right to require immediate repayment of patronage. VOTING RIGHTS Cooperative Association Members are entitled to: (i) one vote for each producer of agricultural products registered and accepted as a member of such cooperative association who patronized the Cooperative Association within the preceding year; (ii) one vote for each $10,000 or major fraction thereof, of the average annual business transacted with the Company during the past three fiscal years; 18 and (iii) one vote for each $1,000, or major fraction thereof, of equity issued by the Company as patronage refunds and standing on the books of the Company in the name of the Cooperative Association Member. Individual Members and Defined Members are entitled to one vote. Individual Members and Defined Members may directly cast their votes on matters presented to the members of the Company only if, for Defined Members, they have provided notice of such intention to the Company, and, for Individual Members, if they have obtained a certificate signed by a manager of the Company facility patronized by such Individual Member. Any such certificate or notice must be provided to the Company at least 10 days before the meeting at which the voting rights are to be exercised. Individual Members and Defined Members may exercise their voting power through the designation of a "Patrons' Association." A Patrons' Association is an association of the Individual Members and Defined Members associated with a grain elevator, feed mill, seed plant or any other Company facility, except supply and marketing locations brought to the Company by Cenex, as designated and recognized by the Board of Directors. The Individual Members and Defined Members that are identified with a particular Patrons' Association may, at an annual meeting of the Patrons' Association, elect delegates and alternates for the Patrons' Association on the basis of one vote per member. Patrons' Associations are entitled to: (i) one vote for each Individual Member and Defined Member grouped in such Patrons' Association (minus one vote for each Individual Member or Defined Member in such Patrons' Association who chooses to cast a vote personally); (ii) one vote for each $10,000 or major fraction thereof, of the average annual business transacted with the Company by the Individual Members and Defined Members grouped into such Patrons' Associations, during the past three fiscal years; and (iii) one vote for each $1,000,or major fraction thereof, of equity issued by this cooperative as a patronage refund and standing on the books of this Company in the name of the Individual Members and Defined Members grouped in such Patrons' Associations, calculated on an aggregate basis. Members may cast their votes, if the Board of Directors so elects, by mail voting in certain situations. At least 50 members of the Company represented in person, by delegates or by mail votes constitutes a quorum for business at any meeting, unless the Company has fewer than 500 members, in which case a quorum is comprised of 10% of the total number of members. DEFINED MEMBERS Each Defined Member is affiliated with a "Defined Business Unit" and holds Equity Participation Units in that Defined Business Unit. Holders of Equity Participation Units have delivery rights and obligations for farm products pursuant to a member marketing agreement between such Defined Member and the Company. Each Defined Business Unit is represented by a Defined Member Board, comprised of between five and ten individuals. The members of a Defined Member Board must be either Defined Members or representatives of Defined Members and in good standing and in full compliance with all delivery obligations with respect to the applicable Defined Business Unit; provided, however, no employee of the Company may serve as a member of the Defined Member Board. The initial Defined Member Board of each Defined Business Unit was elected by the Company's Board of Directors in June, 1997. Eight individuals were appointed to serve on the Wheat Milling Defined Member Board, a Chairman plus one member from District 1, three members from District 2, one from District 3, one from District 4 and one from District 5. Six individuals were appointed to serve on the Oilseed Processing and Refining Defined Member Board, a Chairman plus three members from District 1, one member from District 2 and one member from District 3. In November of 1997 the Defined Member Boards of each Defined Business Unit were elected by the Defined Members associated with the particular Defined Business Unit on a one Defined Member/one vote basis. The Defined Member Boards adopted a Nominating and Election Procedure that was sent to each Defined Member. In subsequent years, Defined Members will elect members of the Defined Member Boards as their terms expire. In December of 1998, Districts were renamed "Regions" and the Region boundaries were changed. As a result, the Wheat Milling Defined Member Board is comprised of a Chairman plus one Member from Region 1, one member from Region 2, three from Region 3, one from Region 4, and one from Region 6. The Oilseed Processing and Refining Defined Member Board is comprised of a Chairman plus three members from Region 1, one member 19 from Region 3 and one from Region 4. The Chairperson is selected by and from the Company's Board of Directors. Individuals serving on a Defined Member Board serve staggered three-year terms. Each Defined Member Board shall meet at least quarterly and shall be charged with reflecting Defined Member concerns and providing a direct communication mechanism to the Company's Board of Directors. While the Board of Directors has no present intention of doing so, the Company is authorized to retain a portion of the payments otherwise due to Defined Members for purchases of products from them. Such retention is referred to as a "unit retain." Unit retains would only be established by the Board of Directors to provide a source of cash for its immediate needs and would be limited to a small percentage of the payments due for purchase of products pursuant to the Agreement. The imposition of unit retains would adversely affect a member's cash income and cash position. The Company has the option to treat any such unit retains as taxable to the Company or to treat the unit retains as nontaxable by declaring the unit retains as "qualified." Qualified unit retains are taxable to the Defined Member in the tax year when the Defined Member receives notification that a unit retain has been established. When a qualified unit retain is reimbursed or redeemed, the Defined Member reports no additional income. Unit retains may be called for payout at the lesser of their stated or book value at the discretion of the Board of Directors. The Company intends to establish a redemption schedule if it authorizes unit retains. DEBT AND EQUITY INSTRUMENTS The Company is authorized to issue a variety of debt and equity instruments to its current members, patrons and to persons who are neither members nor patrons. The Company's outstanding capital is represented by Capital Equity Certificates, non-patronage equity certificates, Equity Participation Units and certain capital reserves. The Company's Bylaws provide the following securities may be issued to current or former members or patrons: EQUITY PARTICIPATION UNITS. Equity Participation Units may be held only by Defined Members and have no voting rights. Defined Members have voting rights to elect a Defined Member Board. CAPITAL EQUITY CERTIFICATES. Capital Equity Certificates may be issued by the Company in partial or complete distribution of patronage refunds. Capital Equity Certificates do not bear any interest or carry any dividends. They do not have a specified maturity date unless established by the Company's Board of Directors. CERTIFICATES OF INDEBTEDNESS. The Board of Directors may issue Certificates of Indebtedness from time to time. Such Certificates will carry such terms and conditions as the Board of Directors establishes in its discretion. The Board may also establish the conditions upon which such Certificates of Indebtedness may be called for payment by the Company. NON-PATRONAGE EQUITY CERTIFICATES. The Board of Directors may issue Non-Patronage Equity Certificates. Such certificates will not have a maturity date and will not bear interest or annual dividends. They will be issued and distributed only to member patrons and to Non-Member Consenting Patrons as part of a non-member/non-patronage distribution. (Non-Member Consenting Patrons include Cooperative Association Members that meet all of the requirements of membership as a Cooperative Association Member except that they do not transact at least the minimum volume of business with the Company during the preceding fiscal year.) PREFERRED CAPITAL CERTIFICATES. The Board of Directors may establish and designate the designation, preferences and relative rights of one or more series of Preferred Capital Certificates. Preferred Capital Certificates will not carry any voting rights. OTHER. The Board of Directors may issue other debt or equity instruments. The Bylaws contain no restrictions on the issuance or the terms of such other debt or equity instruments. Voting rights arise by virtue of membership in the Company, not because of holding any instrument. The Board of Directors may issue "Preferred Equities" and other debt or equity instruments to individuals who are not members or patrons of the Company. The Board of Directors has the discretion 20 to establish and designate one or more series of Preferred Equities and to fix the relative rights, preferences and privileges of such Preferred Equities. Any Preferred Equities will not carry voting rights. No such Preferred Equities are presently outstanding, and the Board of Directors has no present plan or intent to issue Preferred Equities. However, if it were to do so, it could establish rights, preferences and privileges relative to the holders of the Units and other securities of the Company. Such preferences could include provisions for priority in payment. The Board of Directors may authorize the issuance of Preferred Capital Certificates pertaining to a particular Defined Business Unit. If such Certificates were issued, they could have a preference in payment over patronage refunds of a particular Business Unit. TRANSFER OF PATRONS' EQUITIES. Debt or equity instruments held by the Company's members and patrons, including Equity Participation Units, Capital Equity Certificates, Certificates of Indebtedness, Non-Patronage Equity Certificates and Preferred Capital Certificates, may be transferred only with the consent and approval of the Company's Board of Directors. The Company may require the execution of appropriate transfer documentation, as well as representations and warranties from the proposed transferee indicating that he or she is eligible to be the holder of the instrument proposed to be transferred. Beginning June 1, 1998, inactive direct members and patrons and active direct members and patrons age 61 and older on that date will be eligible for patronage certificate redemption at age 72 or death. For active direct members and patrons who were age 60 or younger on June 1, 1998, and Cooperative Association Members, equities will be redeemed annually based on a prorata formula where the numerator is dollars available for such purpose as determined by the Board of Directors, and the denominator is the sum of the patronage certificates held by such eligible members and patrons. There can be no assurance that the Company's Board of Directors will not elect to modify its policy regarding the redemption of equities. The Board is under no restriction in modifying such policy, other than legal agreements to which the Company may be a party from time to time. Members are not required to approve a change in such policy. The Board of Directors will establish a redemption policy for Patrons' Equities arising from the Defined Business Units. DISTRIBUTION OF ASSETS UPON DISSOLUTION In the event of any dissolution, liquidation or winding up this cooperative, whether voluntary or involuntary, all debts and liabilities of this cooperative shall be paid first according to their respective priorities. As more particularly provided in the Bylaws, the remaining assets shall then be paid to the holders of equity capital to the extent of their interests therein and any excess shall be paid to the patrons of this cooperative on the basis of their past patronage. The Bylaws provide more particularly for the allocation among the members and nonmember patrons of this cooperative of the consideration received in any merger or consolidation to which this cooperative is a party. CERTAIN ANTITAKEOVER EFFECTS The governing documents may be amended upon the approval of a majority of the votes cast at an annual or special meeting. However, in the event that the Board of Directors declares, by resolution adopted by a majority of the Board of Directors present and voting, that the amendment involves or is related to a hostile takeover, the proposed amendment must be adopted by the approval of 80% of the total voting power of the members of the Company. It is within the sole determination of the Board of Directors to declare that a transaction involves a "hostile takeover," which term is not further defined in the Minnesota cooperative law or the governing documents. TAX TREATMENT Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives and applies to both cooperatives exempt from taxation under Section 521 of the Internal Revenue Code and to nonexempt corporations operating on a cooperative basis. The Company is a nonexempt cooperative. As a cooperative, the Company is not taxed on amounts withheld from its members in the form of qualified unit retains or patronage dividends, or in the amount distributed in the form of patronage payments. Consequently, such amounts are taxed only at the patron level. However, the amounts of any non-qualified unit retains or patronage dividends are taxable to the Company when allocated. Upon 21 redemption of any such non-qualified unit retains or patronage dividends, the amount is deductible to the Company and taxable at the member level. Income derived by the Company from non-patronage sources is not entitled to the "single tax" benefit of Subchapter T and is taxed to the Company at corporate income tax rates. EQUITY PARTICIPATION UNITS Equity Participation Units ("Units") may be held only by Defined Members. Defined Members are either persons actually engaged in the production of agricultural products or associations of producers of agricultural products. Each Defined Member is affiliated with a Defined Business Unit and holds Equity Participation Units in that Defined Business Unit. Holders of Equity Participation Units have delivery rights and obligations for farm products pursuant to the Agreements between such Defined Members and the Company. Each Defined Business Unit and the respective Equity Participation Units were created by resolutions (the "Resolutions") of the Board of Directors, acting pursuant to the governing documents, on January 11, 1997. The terms of the Units are governed by the governing documents and the Resolutions. The Resolutions may be amended by the Board of Directors, except in certain respects, without a vote of holders of the Units. Holders of the Units have the rights and remedies provided by the Minnesota Cooperative Law. WHEAT MILLING DEFINED BUSINESS UNIT Holders of Equity Participation Units in the Wheat Milling Defined Business Unit have a right to participate in the patronage sourced income from the operations of the Wheat Milling Defined Business Unit. Prior to the sale of any Unit to any person, such person entered into an Agreement that gave the right and obligation to such person to deliver the number of bushels of wheat equal to the number of Units purchased by such Member. Patronage sourced income from the operations of the Wheat Milling Defined Business Unit is allocated by the Company as patronage refunds based on the total amount of wheat processed. As between the holders of Equity Participation Units, patronage sourced income will be allocated to each Defined Member proportionate to the wheat delivered pursuant to the Agreement. While Defined Members are entitled to the allocation of patronage refunds originating from the Wheat Milling Defined Business Unit, they may also receive, upon allocation by the Board of Directors, nonpatronage income from operations of the Company, including operations of the Wheat Milling Defined Business Unit generating nonpatronage income. OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT Holders of Equity Participation Units in the Oilseed Processing and Refining Defined Business Unit have a right to participate in the patronage sourced income from the operations of the Oilseed Processing and Refining Defined Business Unit. Prior to the sale of any Unit to any person, such person entered into an Agreement that gave the right and obligation to such person to deliver the number of bushels of soybeans equal to the number of Units purchased by such Member. Patronage sourced income from the operations of the Oilseed Processing and Refining Defined Business Unit, excluding patronage sourced income from the refining of crude oil purchased from others and excluding patronage sourced income from Ventura Foods, will be allocated by the Company as patronage refunds based on the total amount of soybeans processed, giving effect to Units held and Units deemed to be held by the Company. As between the holders of Equity Participation Units, patronage sourced income will be allocated to each Defined Member proportionate to the soybeans delivered pursuant to the Agreement. While Defined Members are entitled to the allocation of patronage refunds originating from the Oilseed Processing and Refining Defined Business Unit, they may also receive, upon allocation by the Board of Directors, nonpatronage income from operations of the Company, including operations of the Oilseed Processing and Refining Defined Business Unit generating nonpatronage income. 22 ALLOCATIONS RELATING TO DEFINED BUSINESS UNITS Revenues from the sale of products of a Defined Business Unit shall be credited to the Defined Business Unit, and all direct expenses incurred by a Defined Business Unit shall be charged against the Defined Business Unit. Corporate, general and administrative expenses of the Company shall be allocated to each Defined Business Unit in a reasonable manner based on the utilization by such Defined Business Unit. Intracompany accounts have been established for the advancements to, and the loan of funds by, each Defined Business Unit, with interest thereon imputed at prevailing rates. Income taxes shall be allocated to each Defined Business Unit as if it were a separate taxpayer. Each Defined Business Unit shall perform and be responsible for commitments, contingencies and obligations allocated to such Defined Business Unit. Patronage sourced income from the operations of a Defined Business Unit (except as set forth above with respect to the Oilseed Processing and Refining Defined Business Unit) will be allocated by the Company as patronage refunds based on the total amount of grain processed, giving effect to Units held and Units deemed to be held by the Company. As between holders of the Units, patronage sourced income will be allocated to each Defined Member proportionate to the number of bushels of grain delivered pursuant to the Agreement. Defined Members may also receive, upon allocation by the Board of Directors, nonpatronage income from operations of the Company, including operations of a Defined Business Unit generating nonpatronage income. With respect to each year, the total net income from a Defined Business Unit will be withdrawn by the Company from the Defined Business Unit, except to the extent that patronage dividends are not paid in cash and are retained in the Defined Business Unit as equity. The Company will be responsible for the allocation of net income arising from operations of a Defined Business Unit between Defined Members of any one or more Defined Business Units and the remainder of the Company's operations. Upon the acquisition by the Company from a third party of any assets (whether by means of an acquisition of assets or stock, merger, consolidation or otherwise) reasonably related to a Defined Business Unit, such assets and related liabilities, including commitments, contingencies and obligations, shall be allocated to that Defined Business Unit and the aggregate cost or fair market value of such assets and liabilities shall be paid by the Defined Business Unit. Such allocation and determination of fair market value may be made by the Board of Directors taking into account such matters as it and its advisers, if any, deem relevant, and any such allocation and determination of fair market value shall be final and binding for all purposes whatsoever. Upon any sale, transfer, assignment or other disposition by the Company of any or all assets of a Defined Business Unit (whether by means of a disposition of assets, merger, consolidation, liquidation or otherwise), all proceeds (including non-cash consideration received) or the fair market value from such disposition shall be allocated to the Defined Business Unit. If an asset is allocated to more than one Defined Business Unit, the proceeds or the fair market value of the disposition shall be allocated among all Defined Business Units, based upon their respective interests in such assets. Such allocation and determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant, and any such allocation and determination of fair market value shall be final and binding for all purposes whatsoever. The Board of Directors may from time to time reallocate any asset from one Defined Business Unit to the Company or any other Defined Business Unit of the Company at fair market value. Such determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant, and any such allocation and determination of fair market value shall be final and binding for all purposes whatsoever. The Company shall not enter into any agreement by which the net patronage sourced earnings of a Defined Business Unit shall be allocated to any person except to a person who owns or is deemed to own Units proportionate to the patronage being so allocated. ADDITIONAL EQUITY PARTICIPATION UNITS; SALE The Board of Directors from time to time may authorize the sale by the Company of Units deemed owned by the Company for the account of the Company provided that sales shall be at a price 23 determined by the Board of Directors taking into account such matters as the Board of Directors and its financial advisers, if any, deem relevant. The Board of Directors may authorize the creation, issuance and sale of additional Equity Participation Units from time to time on such terms and for such consideration as it shall deem appropriate. Any proceeds from the sale of such additional Equity Participation Units shall be allocated to the applicable Defined Business Unit. There are no limitations on the issuance or sale of additional Units in the governing documents or in any loan agreements or other agreements or instruments to which the Company is a party. Holders of Units shall have no preemptive rights to subscribe for or purchase additional Units or any other securities issued by a Defined Business Unit or the Company. The Company intends to provide an opportunity for existing holders to subscribe for additional Equity Participation Units. The Company may, if authorized by the Board of Directors, purchase Units at such price as it shall determine from time to time for its own account, or for the account of a Defined Business Unit. MERGER, CONSOLIDATION OR SALE In connection with the merger, consolidation, liquidation or sale of all or substantially all of the assets of the Company as an entirety or upon the sale of all or substantially all of the assets of a Defined Business Unit, all, but not less than all, Units of such Defined Business Unit shall be redeemed by the Company at their original purchase price, provided that the Preferred Capital Certificates or unit retains of such Defined Business Unit not previously paid are also redeemed in connection therewith; that such payments include any prorata profit (or loss) associated with disposition of the assets of the Defined Business Unit as though the assets, subject to the liabilities, of the Defined Business Unit had been sold in connection with such event at their fair market value; and that provision is made for the allocations of patronage sourced income arising prior to such transaction. Any determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant. A sale of more than 75% of the assets or earning power will be deemed "all or substantially all" of the assets of the Company or a Defined Business Unit. OPERATIONS The operations of a Defined Business Unit shall be carried out by the Company through the Board of Directors, officers and management of the Company. The capital assets of a Defined Business Unit may be disposed of in the ordinary course of business and the disposition of any substantial portion of the assets of a Defined Business Unit as an entirety may be authorized by the Board of Directors. The Board of Directors may determine to sell the assets and operations of a Defined Business Unit or to abandon or shut down the operations of a Defined Business Unit. Abandonment or shutting down the operations of a Defined Business Unit (other than on a temporary basis) will be considered sale of all of the assets of the Defined Business Unit and will have the effect described under "-- Merger, Consolidation or Sale." AMENDMENT OF BOARD RESOLUTIONS The resolutions adopted by the Board of Directors establishing the Wheat Milling Defined Business Unit and the Oilseed Processing and Refining Defined Business Unit may be amended from time to time by the Board of Directors of the Company, except for those matters described under "Allocations Relating to Business Units" and "Merger, Consolidation or Sale," which may be amended only with the approval of a majority of Defined Members owning Units not held or deemed held by the Company. MEMBER MARKETING AGREEMENT A Defined Member is obligated to deliver during each delivery year one bushel of wheat or soybeans which is of merchantable quality, according to industry standards, to the Company for each applicable Unit held, subject to adjustment as described below, at delivery points designated by the Company. Wheat or soybeans that do not meet applicable standards may either be rejected or accepted with such discounts as may be established by the Company or agents. Deliveries may be made at any time during the Processing Year. Certain Cooperative Association Members have contracted with the Company to act as an agent for handling required deliveries (and will receive funds for that service). In 24 addition, the Company has designated most of its owned and operated elevators as delivery points (approx. 135). The Board of Directors may establish annual "tolerance ranges" allowing a Defined Member the option to deliver more or less wheat or soybeans in any given year. Upon transfer of Units, the remaining obligations under the Agreement must also be assumed by the transferee of the Units. The Agreement may be terminated by an Individual Member effective on August 31 of any year upon written notice of termination. In addition, the Agreement may be terminated following a breach of the Agreement by either party, upon thirty days' written notice from the party not in breach. The Agreement may be terminated by the Company upon sale, liquidation, dissolution or winding up of the applicable Defined Business Unit in accordance with the Company's Bylaws. The Company is obligated to take and pay for deliveries in accordance with the Agreement. The price to be paid is based on the prevailing price at the point of delivery agreed to between the Defined Member and the Company or its agent at the time of sale. The final settlement price must be established prior to the end of the processing year. In case of fire, explosions, interruption of power, strikes or other labor disturbances, lack of transportation facilities, shortage of labor or supplies, floods, action of the elements, riot, interference of civil or military authorities, enactment of legislation or any unavoidable casualty or cause beyond the control of the Company affecting the conduct of the Company's business to the extent of preventing or unreasonably restricting the receiving, handling, production, marketing or other operations, the Company shall be excused from performance during the period that the Company's business or operations are so affected. The Member shall not be liable for failure or delay in performance of the Agreement to the extent such failure or delay is caused by a crop failure due to an Act of God, such as drought or flood. The Company will pay to each Defined Member an annual patronage refund equal to the portion arising from the net savings of the applicable Defined Business Unit attributable to such Defined Member's patronage of the Defined Business Unit. Each Agreement is subject to amendment upon the approval of the Company and the majority vote of the voting power of the applicable Defined Business Unit. As a result, in the event that Members holding the majority of the voting power of the applicable Defined Business Unit approve an amendment to the Agreement which has been approved by the Company, those Defined Members who voted against or oppose the amendment will be bound to performance of the Agreement as amended. Upon the termination of the operations of a Defined Business Unit, the Marketing Agreement will automatically terminate. The Company is authorized to retain a portion of the payments otherwise due to Defined Members for purchases of products from them. Such retention is referred to as a "unit retain." The Company has the option to treat any such unit retains as taxable to the Company or to treat the unit retains as nontaxable by declaring the unit retains as "qualified." Qualified unit retains are taxable to the Defined Member in the tax year when the Defined Member receives notification that a unit retain has been established. When a qualified unit retain is reimbursed or redeemed, the Defined Member reports no additional income. Unit retains may be called for payout at the lesser of their stated or book value at the discretion of the Board of Directors. TAXATION Patronage dividends arising under the Agreements with respect to the Units will have the same tax treatment as patronage currently payable to members. TRANSFER OF EQUITY PARTICIPATION UNITS Upon any transfer of Units, the transferee will be required to certify as to eligibility and then current anticipated annual production and to sign an Agreement. In approving any transfer, the Board of Directors will require that such certificate show that the number of Units transferred does not exceed anticipated annual production, that any transferee does not own more than 1% of the outstanding capacity of any one Defined Business Unit and that the Units held by each transferor retaining units and transferee represent at least 3,000 bushels of wheat or 1,500 bushels of soybeans. 25 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The information in this Annual Report on Form 10-K for the year ended August 31, 1999, includes forward-looking statements with respect to the Company. Risks and uncertainties could cause actual results to differ materially from those discussed in such forward-looking statements. These risks and uncertainties include, but are not limited to: supply and demand forces, price risks, business competition and competitive trends, year 2000, taxation of cooperatives and dependence on certain customers. The risks and uncertainties are further described in Exhibit 99.1, and other risks or uncertainties may be described from time to time in the Company's future filings with the Securities and Exchange Commission. ITEM 2. PROPERTIES The Company owns or leases energy, grain handling and processing, and agronomy related facilities throughout the United States. Below is a summary of these locations. ENERGY Facilities include the following, all of which are owned except where indicated as leased: Refinery Laurel, Montana Propane Plants 33 locations in Iowa, Idaho, Minnesota, North Dakota, Oregon, South Dakota, Wisconsin, and Wyoming Propane Terminals 3 locations in Minnesota, North Dakota and Wisconsin Transportation Terminals/ 10 locations in Iowa, Minnesota, Montana, North Dakota, Repair Facilities South Dakota, Washington and Wisconsin, 2 of which are leased Petroleum & Asphalt 12 locations in Kansas, Montana, North Dakota, Washington Terminals/Storage Facilities and Wisconsin Pump Stations 10 locations in Montana and North Dakota Pipelines Cenex Pipeline Company Laurel, Montana to Fargo, North Dakota Front Range Pipeline Canadian Border to Laurel, Montana Convenience Stores/Gas Stations 40 locations in Iowa, Minnesota, Montana, Nebraska, South Dakota, and Wyoming Lube Plants/Warehouses 3 locations in Minnesota and Ohio
The Company has a 74.5% interest in the following facilities of NCRA: Refinery McPherson, Kansas Petroleum Terminals/Storage 2 locations in Iowa and Kansas Pipeline McPherson, Kansas to Council Bluffs, Iowa Jayhawk Pipeline Throughout Kansas, with branches in Oklahoma and Texas Jayhawk Stations 40 locations located in Kansas and Oklahoma
26 GRAIN MERCHANDISING The Company owns or leases grain terminals at the following locations: Davenport, Iowa I(1) Davenport, Iowa II(2) Kalama, Washington(2) Kansas City, Missouri I(2) Kansas City, Missouri II(2) Kennewick, Washington(1) Myrtle Grove, Louisiana(1) Petersburg, North Dakota(2) St. Paul, Minnesota(2) Savage, Minnesota(1) Spokane, Washington(1) Superior, Wisconsin(1) Winona, Minnesota(1) - ------------------ (1) Owned (2) Leased OILSEED PROCESSING AND REFINING The Oilseed Processing and Refining Defined Business Unit owns one facility in Mankato, Minnesota, comprised of a crushing plant, a refinery, a soyflour plant, and a quality control laboratory. WHEAT MILLING The Wheat Milling Defined Business Unit owns or leases flour milling facilities at the following locations: Rush City, MN(1) .................. 10,000 cwts/day Huron, OH(2) ...................... 14,500 cwts/day Kenosha, WI(1) .................... 21,000 cwts/day Houston, TX(1) .................... 13,000 cwts/day Mount Pocono PA(1) ................ 18,000 cwts/day - ------------------- (1) Owned (2) Owned equipment, leased land and facilities AGRI SERVICES CENTERS The Company owned 317 Agri Service Centers (of which some of the facilities are on leased land) located in Minnesota, Nebraska, North Dakota, South Dakota and Montana, Washington, Oregon, Idaho, Iowa and Colorado. FEED The Company owns the following feed manufacturing facilities: Dickinson, North Dakota Edgeley, North Dakota Gettysburg, South Dakota Great Falls, Montana Hardin, Montana Minot, North Dakota Norfolk, Nebraska Sioux Falls, South Dakota Snohomish, Washington Willmar, Minnesota 27 ITEM 3. LEGAL PROCEEDINGS The Company is a party to various lawsuits and administrative proceedings incidental to its business. It is impossible at this time, to estimate what the ultimate legal and financial liability of the Company will be; nevertheless, management believes, based on the information available to date and the resolution of prior proceedings, that the ultimate liability of all litigation and proceedings will not have a material impact on the financial statements of the Company taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 28 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS No equity securities were sold by the Registrant during the year ended August 31, 1999, or the three-month period ended August 31, 1998, that were not registered under the Securities Act of 1933, as amended. ITEM 6. SELECTED FINANCIAL DATA CONSOLIDATED COMPANY The selected financial information below has been derived from the Company's consolidated financial statements for the periods indicated below. The selected consolidated financial information should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this filing. SUMMARY CONSOLIDATED FINANCIAL DATA
YEARS ENDED MAY 31, YEAR ENDED THREE MONTHS ENDED -------------------------------------------------------- AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995 --------------- ------------------- ------------- --------------- ------------- ------------ (DOLLARS IN THOUSANDS) Income Statement Data: Revenues: Grain and Oilseed ................... $3,309,310 $ 810,723 $4,629,553 $ 6,036,503 $ 7,127,223 $4,191,665 Energy .............................. 1,345,772 343,747 1,858,069 1,676,842 1,402,314 1,401,262 Agronomy ............................ 593,927 91,231 696,441 683,429 560,032 528,869 Processed grain and oilseed ......... 531,877 145,645 615,049 730,101 819,864 708,219 Feed and farm supplies .............. 547,732 126,907 546,063 531,177 451,882 376,906 ---------- ----------- ---------- ------------ ----------- ---------- 6,328,618 1,518,253 8,345,175 9,658,052 10,361,315 7,206,921 Patronage dividends ................. 5,876 5,111 70,387 71,070 47,170 9,642 Other revenues ...................... 100,031 19,271 98,520 85,390 81,980 68,385 ---------- ----------- ---------- ------------ ----------- ---------- 6,434,525 1,542,635 8,514,082 9,814,512 10,490,465 7,284,948 Costs and expenses: Cost of goods sold .................. 6,140,580 1,473,243 8,149,605 9,475,682 10,185,544 6,962,256 Marketing, general, and Administrative ..................... 148,510 34,998 126,061 126,297 130,274 131,133 Interest ............................ 42,438 12,311 34,620 33,368 46,450 34,199 Minority Interests .................. 10,017 3,252 6,880 7,984 (147) 11,806 ---------- ----------- ---------- ------------ ----------- ---------- 6,341,545 1,523,804 8,317,166 9,643,331 10,362,121 7,139,394 ---------- ----------- ---------- ------------ ----------- ---------- Income before income taxes, discontinued operations, and cumulative effect of a change in accounting .......................... 92,980 18,831 196,916 171,181 128,344 145,554 Loss from discontinued operations .... 5,558 Cumulative effect of a change in accounting .......................... (6,480) Income taxes ......................... 6,980 2,895 19,615 19,280 13,139 19,929 ---------- ----------- ---------- ------------ ----------- ---------- Net income ........................... $ 86,000 $ 15,936 $ 177,301 $ 151,901 $ 115,205 $ 126,547 ========== =========== ========== ============ =========== ========== Balance Sheet Data (at end of period): Working capital ..................... $ 219,045 $ 284,452 $ 235,720 $ 219,395 $ 220,581 $ 206,205 Net property, plant and equipment .......................... 968,333 915,770 868,073 798,757 713,643 642,111 Total assets ........................ 2,787,664 2,469,103 2,436,515 2,422,564 2,484,006 2,111,882 Long-term debt, including current maturities ................. 482,666 456,840 378,408 335,737 315,985 260,328 Total equity ........................ 1,117,636 1,065,877 1,029,973 944,798 849,701 776,116
29 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT The selected financial information presented below has been derived from the Oilseed Processing and Refining Defined Business Unit's financial statements for the periods indicated below. The selected financial information should be read in conjunction with the Defined Business Unit's financial statements and notes thereto included elsewhere in this filing.
YEARS ENDED MAY 31, ----------------------------------------------- YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995 ----------------- ------------------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS EXCEPT PER BUSHEL AMOUNTS) Revenues: Processed oilseed sales ................. $ 358,042 $ 98,919 $410,386 $441,738 $399,271 $398,095 Other revenues and costs ................ 30 1,115 1,746 (1,660) 1,436 1,163 ---------- -------- -------- -------- -------- -------- 358,072 100,034 412,132 440,078 400,707 399,258 Costs and expenses: Cost of goods sold ...................... 338,386 95,304 379,272 405,791 371,425 366,407 Marketing and administrative ............ 5,095 1,257 4,730 4,342 4,545 5,138 Interest ................................ 557 251 380 322 151 -- ---------- -------- -------- -------- -------- -------- 344,038 96,812 384,382 410,455 376,121 371,545 ---------- -------- -------- -------- -------- -------- Income before income taxes ............... 14,034 3,222 27,750 29,623 24,586 27,713 Income taxes ............................. 800 525 1,825 2,100 1,600 1,500 ---------- -------- -------- -------- -------- -------- Net income ............................... $ 13,234 $ 2,697 $ 25,925 $ 27,523 $ 22,986 $ 26,213 ========== ======== ======== ======== ======== ======== Operating Data: Quantities processed Soybeans (bu.) ..... 36,759 4,607 32,626 32,232 30,446 30,808 Crude oil (lb.) ......................... 1,024,900 226,024 953,359 960,407 920,492 894,970 Production: Meal (tons) ............................. 841 217 754 742 728 741 Flour (tons) ............................ 33 10 32 36 40 41 Refined oil (lbs.) ...................... 996,176 219,918 948,797 957,398 858,240 835,396 Balance Sheet Data (at end of period): Working capital ......................... $ 22,193 $ 22,881 $ 23,111 $ 20,306 $ 28,620 $ 32,981 Net property, plant and equipment ....... 39,001 35,596 34,953 33,085 24,771 20,410 Total assets ............................ 80,735 82,868 91,482 92,416 74,113 63,673 Long-term debt, including current maturities ............................. -- -- -- -- -- -- Total equity ............................ 61,194 58,477 58,064 53,391 53,391 53,391 Other Data(1): Pretax income ........................... 14,034 3,222 $ 27,750 $ 29,623 $ 24,586 $ 27,713 Earnings from purchased oil ............. (2,907) (58) (3,265) (7,015) (3,558) (4,681) Non-patronage joint venture income ...... (976) (738) (615) (1,354) (990) Book to tax differences ................. 13 (121) (384) 2,210 (71) 393 ---------- -------- -------- -------- -------- -------- Tax basis soybean income ................. $ 11,140 $ 2,067 $ 23,363 $ 24,203 $ 19,603 $ 22,435 ========== ======== ======== ======== ======== ======== Bushels processed ....................... 36,759 9,467 32,626 32,232 30,466 30,808 Income per bushel ....................... $ 0.30 $ 0.22 $ 0.72 $ 0.75 $ 0.64 $ 0.73
YEAR ENDED AUGUST 31, 1999 ---------------- Equity Participation Units delivered (bushels) 1,253 Patronage rate ................................ $ 0.30 ------- Income to holders ............................. $ 370 =======
- ----------------- (1) Because patronage dividends attributable to the Units are allocated based on the number of bushels of soybeans delivered, information on earnings per bushel is believed by the Company to be the most relevant indicator of performance of the Oilseed Processing and Refining Defined Business Unit. 30 WHEAT MILLING DEFINED BUSINESS UNIT The selected financial information presented below has been derived from the Wheat Milling Defined Business Unit's financial statements for the periods indicated below. The selected financial information should be read in conjunction with the Defined Business Unit's financial statements and notes thereto included elsewhere in this filing.
YEARS ENDED MAY 31, YEAR ENDED THREE MONTHS ENDED ------------------------------------------------ AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995 ----------------- ------------------- ----------- ------------ ----------- ----------- (DOLLARS IN THOUSANDS EXCEPT PER BUSHEL AMOUNTS) Income Statement data: Revenues: Processed grain sales ................... $ 174,133 $ 46,914 $ 205,282 $199,079 $173,316 $ 119,725 Other revenues .......................... 1,820 ---------- -------- --------- -------- -------- --------- 174,133 46,914 207,102 199,079 173,316 119,725 Costs and expenses: Cost of goods sold ...................... 170,510 43,733 189,614 181,566 161,293 112,691 Marketing and administrative ............ 10,610 2,071 8,072 6,749 4,472 3,834 Interest ................................ 5,184 843 3,122 5,230 4,458 2,278 Other ................................... 826 162 2,000 ---------- -------- --------- -------- -------- --------- 187,130 46,647 200,970 195,545 170,223 118,803 (Loss) income before income taxes ........ (12,997) 267 6,132 3,534 3,093 922 Income taxes (benefit) ................... (1,125) 25 475 300 200 125 ---------- -------- --------- -------- -------- --------- Net (loss) income ........................ $ (11,872) $ 242 $ 5,657 $ 3,234 $ 2,893 $ 797 ========== ======== ========= ======== ======== ========= Operating Data: Wheat used (bu.) Durum .................. 15,863 4,453 19,307 21,372 19,376 16,058 Spring .................................. 11,144 2,251 8,891 6,732 3,013 1,638 Winter .................................. 9,368 1,453 3,165 Shipments (cwt): Semolina/flour .......................... 9,258 2,351 10,505 11,168 10,085 8,718 Baking flour ............................ 7,671 1,389 4,270 2,599 634 -- Balance Sheet Data (at end of period): Working capital ......................... $ (25,112) $ (1,361) $ 12,787 ($ 1,939) $ 3,338 $ 1,604 Net property and equipment .............. 110,547 97,428 85,627 69,130 59,233 43,396 Total assets ............................ 165,471 162,461 146,311 120,918 125,322 82,606 Long-term debt, including current maturities ............................. 38,515 48,520 51,209 61,214 54,000 33,750 Total equity ............................ 66,340 68,033 67,958 27,797 27,797 27,797 Other Data(1): Pretax (loss) income .................... $ (12,997) $ 267 $ 6,132 $ 3,534 $ 3,093 $ 922 Book to tax differences ................. 2,249 103 690 2,376 (85) 124 ---------- -------- --------- -------- -------- --------- Tax basis (loss) income .................. $ (10,748) $ 370 $ 6,822 $ 5,910 $ 3,008 $ 1,046 ========== ======== ========= ======== ======== ========= Bushels milled ........................... 36,375 8,156 31,363 28,104 22,390 17,697 (Loss) income per bushel ................. $ (0.30) $ 0.05 $ 0.22 $ 0.21 $ 0.13 $ 0.06
YEAR ENDED AUGUST 31, 1999 --------------- Equity Participation Units delivered (bushels) ................ 5,728 Patronage rate ................................................ $ (0.30) -------- Loss to holders to be carried forward against future income ... $ (1,693) ========
- ----------------- (1) Because patronage dividends attributable to the Units are allocated based on the number of bushels of wheat delivered, information on earnings per bushel is believed by the Company to be the most relevant indicator of performance of the Wheat Milling Defined Business Unit. 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION CONSOLIDATED COMPANY Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives combined through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives became the surviving corporation. In accordance with the Plan of Combination, the Articles of Incorporation and By-Laws of Harvest States Cooperatives were restated and the name of Harvest States Cooperatives was changed to Cenex Harvest States Cooperatives (Cenex Harvest States or the Company). The combination constituted a tax-free reorganization and has been accounted for as a pooling of interests. Prior to the Combination, Cenex's year end was September 30 and Harvest States Cooperatives' year end was May 31. Subsequent to the Combination, the Company changed its fiscal year end to August 31 and is filing this Report on Form 10-K representing the first fiscal year of the Company based upon that date. The management discussion and analysis which follows includes the consolidated statements of operations and cash flows for the years ended May 31, 1998 and 1997, which reflect the results of operations and cash flows of Harvest States Cooperatives for the years then ended combined with the results of operations and cash flows of Cenex for the years ended September 30, 1997 and 1996, respectively. The consolidated balance sheet as of May 31, 1998 reflects the financial position of Harvest States Cooperatives on that date combined with the financial position of Cenex as of September 30, 1997. The consolidated results of operations of Cenex for the eight months ended May 31, 1998 have been excluded from the reported results of operations and, therefore, have been recorded as an adjustment to the Company's equities and cash flows in the consolidated statements of equities and comprehensive income and cash flows during the three months ended August 31, 1998. RESULTS OF OPERATIONS COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31, 1998 The Company's consolidated net income of approximately $86.0 million for the year ended August 31, 1999 represents a $91.3 million (51%) decrease from the year ended May 31, 1998. This decrease is partially attributable to the absence of a plant food patronage refund of which approximately $57.4 million was received from the Company's primary supplier of plant food during the year ended May 31, 1998. In addition, depressed gross margins in the Company's food processing and energy operations also contributed to the decrease in net income. Consolidated net sales of $6.3 billion for the year ended August 31, 1999 decreased approximately $2.0 billion (24%) compared to the year ended May 31, 1998. Grain and oilseed sales of $3.3 billion decreased $1.3 billion (29%) during the year ended August 31, 1999 when compared to the year ended May 31, 1998. Although grain volumes declined 22.2 million bushels, the primary cause for the decreased sales is a decline in the average sales price of all grain and oilseeds marketed by the Company of $1.15 per bushel. Energy sales of $1.3 billion decreased $0.5 billion (28%) during the year ended August 31, 1999 compared to the year ended May 31, 1998. Refined fuels sales volumes decreased slightly in 1999 compared to 1998, and contributing to the overall energy sales decline was the refined fuels reduced average sales price of 18 cents per gallon. Agronomy sales of $593.9 million decreased $102.5 million (15%) during the year ended August 31, 1999 as compared to the year ended May 31, 1998. Plant food sales volumes decreased slightly in 1999 compared to 1998, and contributing to the overall agronomy sales decline was plant foods reduced average sales price of $36.00 per ton. Processed grain and oilseed sales of $531.9 million decreased $83.2 million (14%) during the year ended August 31, 1999 compared to the year ended May 31, 1998. This decrease is primarily attributable 32 to a reduction in sales price for processed soybean products, primarily soymeal, of approximately $76.00 per ton, in addition to a reduction of the average sales price of $2.89 per hundred weight for milled wheat products partially offset by a 3.1 million hundred weight volume increase. Feed and farm supplies sales of $547.7 million during the year ended August 31, 1999 were essentially unchanged in total when compared to the year ended May 31, 1998. Although there was a decrease in sales related to agronomy products due to decreased volume and price, this was offset by an increase in sales for feed, seed and energy products. Patronage dividends received of $5.9 million decreased $64.5 million (92%) during the year ended August 31, 1999 compared to the year ended May 31, 1998. During the year ended May 31, 1998 a patronage dividend in the amount of $57.4 million was received from the Company's primary plant food supplier. During the year ended August 31, 1998 the Company did not receive a patronage dividend from this supplier. Other revenues of $100.0 million for the year ended August 31, 1999 were essentially unchanged from the year ended May 31, 1998. The most significant change within other revenues was from the Company's share of income from joint ventures. Income from the Company's food packaging joint venture, grain marketing joint ventures and the newly formed agronomy joint ventures increased by $5.1 million and $2.3 million, and decreased by $4.3 million, respectively for the current year as compared to May 31, 1998. This net increase in joint ventures income was offset by a decline in other miscellaneous revenues. Cost of goods sold of $6.1 billion decreased $2.0 billion (25%) during the current fiscal year compared to the year ended May 31, 1998. During the year ended August 31, 1999 the average cost per bushel of all grains and oilseed procured by the Company through its grain marketing and country elevator system decreased $1.15 per bushel and the average cost of refined fuels decreased 17 cents per gallon as compared to the year ended May 31, 1998. Also during the year ended August 31, 1999 plant food volumes decreased 103,000 tons as compared to the year ended May 31, 1998. In the Company's food processing operations, the average cost per bushel of wheat and soybeans declined $1.45 and $1.94 per bushel, respectively. Marketing, general and administrative expenses of $148.5 million for the year ended August 31, 1999 increased $22.4 million (18%) compared to the year ended May 31, 1998. This increase is primarily related to additional locations and expansion of many of the Company's business segments. Interest expense of $42.4 million for the year ended August 31, 1999 increased $7.8 million (23%) compared to the year ended May 31, 1998. The average seasonal borrowings during 1999 increased as a result of higher working capital needs, and long-term borrowings which reflected finance activities related to the acquisition of property, plant and equipment, generated most of this additional expense. Minority interests in operations of $10.0 million for the year ended August 31, 1999 increased $3.1 million (46%) compared to the year ended May 31, 1998. Substantially all of the minority interest is in National Cooperative Refinery Association (NCRA), which operates a refinery near McPherson, Kansas. The Company owns approximately 75% of NCRA. This net change in minority interests during the current year is reflective of more profitable operations within the Company's majority owned subsidiaries. Income tax expense of $7.0 and $19.6 for the years ended August 31, 1999 and May 31, 1998 resulted in effective tax rates of 7.5% and 10.0%, respectively. The reduced effective tax rate for the year ended August 31, 1999 is primarily reflective of reduced nonpatronage earnings as a percentage of total pretax earnings. COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997 The Company's consolidated net income of $177.3 million for the year ended May 31, 1998 represents a $25.4 million (17%) increase from 1997. This increase is primarily attributable to improved gross margins in 1998 compared to 1997. Consolidated net sales of $8.3 billion in 1998 decreased $1.3 billion (14%) from the prior year. 33 The decrease in grain and oilseed sales of $1.4 billion (23%) was due primarily to reduced grain prices in 1998, when the weighted average sales price of all grain and oilseeds marketed by the Company declined 85 cents a bushel compared to 1997. In addition, volumes declined approximately 88 million bushels in 1998. Energy sales of $1.9 billion in 1998 increased $181.2 million (10%) as compared to the same period in 1997. This increase in energy sales is primarily attributable to volume increases in refined fuels and propane gallons of 44 million and 57 million, respectively. Agronomy sales of $696.4 million in 1998 increased $13.0 million (2%) as compared to 1997. Crop protection product sales in 1998 of $287.2 million increased $35.2 million (14%) as compared to the same period in 1997. This increase was offset by a decrease in the plant food average sales price of $3.71 per ton for the same period. Processed grain and oilseed sales of $615.0 million in 1998 decreased $115.1 million (16%) when compared to 1997. This decrease is primarily attributable to a reduction in sales price for processed soybean products of approximately $40.00 per ton, partially offset by increased sales volumes for milled wheat products. Feed and farm supplies sales of $546.1 million in 1998 were substantially the same as the prior year with an increase of $14.9 million (3%). Patronage dividends received during the year ended May 31, 1998 of $70.4 million remained at about the same level as the previous year. Other revenue of $98.5 million in 1998 increased $13.1 million (15%) when compared to 1997. The major factors contributing to this change were the expansion of various country elevator services during 1998, and losses recognized on certain properties in the amount of approximately $4.0 million in 1997. Cost of goods sold of $8.1 billion decreased $1.3 billion (14%) in 1998 when compared to 1997. During 1998 the average cost per bushel of all grains and oilseed procured by the Company through its grain marketing and country elevator system decreased 87 cents per bushel and the average cost of refined fuels increased $.02 per gallon when compared to 1997. Also during the year ended May 31, 1998 the cost of plant food decreased $4.00 per ton compared to the prior year. In the Company's food processing operations, the average cost of wheat and soybeans declined 42 cents and 70 cent per bushel, respectively. Marketing, general and administrative expenses of $126.1 million for the year ended May 31, 1998 compares to $126.3 million for the same period in 1997. This decrease is primarily related to the transfer of the Consumer Products Packaging Division to a nonconsolidated joint venture at the end of the first quarter of the year ended May 31, 1997, partially offset by increased costs in the Company's growth areas, specifically country elevator operations and wheat milling. Interest expense of $34.6 million decreased $1.3 million (4%) in 1998. This decrease is primarily attributable to lower inventory and receivable levels, partially offset by interest on additional long-term borrowings incurred primarily to finance property, plant and equipment expenditures. Income tax expense of $19.6 million and $19.3 million for 1998 and 1997, respectively, resulted in effective tax rates of 10.0% and 11.3%. The reduced effective tax rate for the year ended May 31, 1998 is primarily reflective of reduced nonpatronage earnings as a percentage of total pretax earnings. COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH THE THREE MONTH ENDED AUGUST 31, 1997 The Company's consolidated net income for the three months ended August 31, 1998 and 1997 was $15.9 million and $35.2 million, respectively, which represents a $19.3 million (55%) decrease. Relatively low commodity prices had a direct impact on volume at the Company's country elevator and grain exporting facilities and influenced demand for crop protection and plant food products. With reduced volumes in most of the Company's business operations, gross margins were eroded considerably by fixed costs. 34 Consolidated net sales of $1.5 billion decreased $0.3 billion (18%) during the three-month period ended August 31, 1998 compared to the same period in 1997. Grain volume of approximately 230.0 million bushels during the three months ended August 31, 1998 declined 27.0 million bushels compared to 1997. In addition to decreased volumes, the average sales price for all grains and oilseeds marketed by the Company declined by 41 cents a bushel. Total grain and oilseed sales decreased $219.3 million (21%) as a result of these two factors. While the gallon sales of refined fuels increased slightly during the three-month period ended August 31, 1998 compared with the same period in 1997, a reduced average sales price of 18 cents a gallon resulted in a decline in sales of $71.2 million (17%) for energy products during the 1998 period compared with 1997. Agronomy sales declined $47.4 million (34%) during the three months ended August 31, 1998 compared to the same period in 1997, resulting in a 12% decrease in plant food volumes, and 10% decrease in the average per ton sales price of such products. Processed grain and oilseed sales increased $14.9 million (11%) during the three months ended August 31, 1998 compared to the same period in 1997. This change is primarily attributable to increased volume within the Company's Oilseed Processing and Refining Defined Business Unit, where soymeal sales volume increased from approximately 105,000 tons during the three months ended August 31, 1997 to approximately 215,000 tons in 1998. During the three months ended August 31, 1997, the oilseed crushing plant was closed for 41 days to allow for the installation of equipment. During the 1998 period, this crushing plant operated at its normal capacity. Feed and farm supplies sales remained essentially unchanged between the two periods, although sales during the 1998 period represented a decline in sales relationship to actual retail capacity due to the addition of several retail locations since the end of the 1997 period. Patronage dividends decreased $2.3 million (31%) during the three months ended August 31, 1998 compared to the same period in 1997 resulting from higher patronage earnings distributed by cooperative customers and suppliers in 1997. Other revenue of $19.3 million decreased $0.2 million (1%) for the three months ended August 31, 1998 compared to the same period in 1997. Earnings from the Company's nonconsolidated consumer products packaging joint venture decreased approximately $1.1 million for the three months ended August 31, 1998 compared to the same period in 1997. Earnings from the Company's share of a grain exporting joint venture declined approximately $0.9 million during the 1998 period compared to 1997. In addition, the Company experienced a decline in service income at its export terminals due to reduced bushel volume activity at these locations. These reductions in other revenues were partially offset by a $2.9 million increase in interest income. Due to of the relatively low cost of grain during the period ended August 31, 1998, the Company did not have any short term borrowing requirements. In addition, the Company's refinancing program in anticipation of long term capital requirements, completed in June of 1998, produced temporary cash available for short term investments. Cost of goods sold of $1.5 billion decreased $306.9 million (17%) during the three months ended August 31, 1998 compared to the same period in 1997. Reduced volumes and raw material costs in most of the Company's business activities, as discussed in the sales section of this analysis, produced most of this reduction in costs. Although the commodity and other raw material costs which are a component of costs of goods sold changed in relative proportion to sales dollars, fixed operating costs remain constant regardless of volume and price activity. This factor contributed to an erosion in total gross margin of approximately $28.0 million (46%) during the three months ended August 31, 1998 compared with the same period in 1997. Marketing, general and administrative expenses of $35.0 million for the three months ended August 31, 1998 increased $5.4 million (18%) compared to the same three months ended in 1997. Costs related to the relocation of staff and consolidation of the business units, and a warranty claim for the re-roofing of a building which had been part of the Company's capital contribution to the consumer products packaging joint venture comprised the majority of this increase. 35 Interest expense of $12.3 million for the three months ended August 31, 1998 represents an increase of $4.1 million (50%) compared to the same period in 1997. Long-term borrowings to finance the acquisition of property, plant and equipment generated most of this additional expense. Long-term debt proceeds not yet expended for fixed assets generated interest income as discussed in the other revenue discussion above, and should be considered as an offset to a portion of the increase in interest expense. Minority interests in operations for the three-month periods ended August 31, 1998 and 1997 was $3.3 million and $5.5 million, respectively. Substantially all of the minority interest is in NCRA. Income tax expense of $2.9 million and $8.9 million for the three-month periods ended August 31, 1998 and 1997, respectively, resulted in effective tax rates of 15.4% and 20.1%. The effective tax rate changes from period to period based upon the portion of non-patronage business activity compared to total business activity during each period. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FROM OPERATIONS Operating activities of the Company used net cash of $27.5 million during the year ended August 31, 1999. Net income of $86.0 million and a positive adjustment of $17.2 million from net non-cash expenses, costs and revenues were offset by increased working capital requirements of approximately $130.7 million. Operating activities for the year ended May 31, 1998 provided net cash of approximately $223.6 million. Net income of $177.3 million, a positive adjustment for non-cash expenses, costs and revenues of $1.5 million, and decreased working capital requirements of approximately $44.8 million provided this net cash from operations. Operating activities for the year ended May 31, 1997 provided net cash of approximately $401.5 million. Net income of $151.9 million and decreased working capital requirements of approximately $267.5 million, were partially offset by a negative adjustment of approximately $11.3 million for net non-cash expenses, costs and revenues and net cash used for discontinued operations of approximately $6.6 million. CASH FLOWS FROM INVESTING ACTIVITIES For the years ended August 31, 1999, and May 31, 1998 and 1997, the net cash flows used in the Company's investing activities totaled approximately $160.7 million, $99.9 million and $115.8 million, respectively. The acquisition of property, plant and equipment comprised the primary use of cash totaling $124.5 million, $145.2 million and $200.3 million for the three years ended August 31, 1999, and May 31, 1998 and 1997, respectively. On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada, Ltd. (the Entities), both companies owned 50/50 by the Company and Land O'Lakes, Inc., purchased approximately 310 agronomy facilities from Terra International, Inc., at a price of approximately $350.0 million. In conjunction with this purchase transaction, the Company invested $51.5 million in the Entities and issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd. Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes Agronomy Company (of which Cenex Harvest States owns 50%), are without recourse to the Company. Cash outlays for the acquisition of property, plant and equipment and investments in other entities were partially offset by proceeds from the disposition of property, plant and equipment of approximately $6.8 million, $21.9 million and $28.4 million for the years ended August 31, 1999, and May 31, 1998 and 1997, respectively. For the year ended August 31, 2000 the Company expects to spend approximately $139.6 million for the acquisition of property, plant and equipment. Also partially offsetting cash usage were proceeds received from joint ventures and investments totaling $11.2 million, $31.5 million and $27.3 million for the years ended August 31, 1999, and May 31, 36 1998 and 1997, respectively. For the year ended May 31, 1997, discontinued operations of petroleum exploration and production operations also provided net cash of $33.2 million from the liquidation of this investment. On August 30, 1996 the Company formed a joint venture with a regional consumer products packaging company, and contributed substantially all of the net assets of the Company's consumer products packaging division as its capital investment in the joint venture. In return for these assets, the Company received a 40% interest in the joint venture, and the joint venture assumed debt of approximately $33.7 million. CASH FLOWS FROM FINANCING ACTIVITIES The Company finances its working capital needs through short-term lines of credit with National Bank for Cooperatives (CoBank) and commercial banks. In June 1998, the Company established a 364-day credit facility of $400.0 million, which was renewed in May 1999, and a five-year revolving facility of $200.0 million, all of which is committed. In addition to these lines of credit, the Company has a 364 day credit facility dedicated to NCRA, with CoBank in the amount of $50.0 million, all of which is committed. On August 31, 1999 the Company had short-term indebtedness on the 364-day credit facility of $196.0 million, and had no amount drawn on the five-year revolving facility. In addition to these bank facilities, the Company, on August 31, 1999, had additional short-term indebtedness of approximately $1.0 million in the form of other notes payable. On August 31, 1998, the Company had short-term indebtedness of approximately $0.5 million. On May 31, 1998, the Company had short-term indebtedness on its bank facilities and other short-term notes payable of approximately $52.5 million. This short-term borrowing activity follows the working capital requirements created by commodity volumes and prices as discussed in the "Cash Flows from Operations" section of this analysis. The Company has financed its long-term capital needs in the past, primarily for the acquisition of property, plant, and equipment, with long-term agreements through the banks for cooperatives. On May 31, 1998, the Company had total indebtedness related to these long-term lines of credit of $332.1 million of which approximately $17.6 million represented long-term borrowings of NCRA. The Company also had long-term debt in the form of capital leases, industrial development revenue bonds and miscellaneous notes payable totaling approximately $46.3 million on May 31, 1998. In June 1998, the Company established a new long-term loan agreement through the banks for cooperatives whereby the Company repaid $279.6 million of long-term debt and borrowed $134.0 million on the long-term credit facility. This facility committed $200.0 million of long-term borrowing capacity to the Company, with repayments through the year 2009, of which an additional $30.0 million was drawn by the Company before the commitment expired on May 31, 1999. The amount outstanding on this credit facility was $164.0 million and $134.0 million on August 31, 1999 and 1998, respectively. Also in June 1998, as part of the refinancing program for the merged operations, the Company issued a private placement with several insurance companies for long-term debt in the amount of $225.0 million, with repayments beginning in the year 2008 and ending in the year 2013. During the year ended August 31, 1999, the Company, through NCRA, borrowed an additional $10.0 million from CoBank with equal annual repayments through the year 2009. During the years ended August 31, 1999, May 31, 1998 and 1997, the Company borrowed on a long-term basis $40.0 million, $83.9 million and $74.9 million, respectively, and during the same periods repaid long-term debt of $14.6 million, $42.2 million and $55.5 million, respectively. On August 31, 1999, the Company had total long-term debt outstanding of $482.7 million, of which approximately $227.2 million was bank financing, $225.0 was private placement proceeds and $30.5 million was industrial development revenue bonds, capitalized leases and miscellaneous notes payable. In accordance with the By-Laws and action of the Board of Directors, annual net earnings from patronage sources were distributed to consenting patrons following the close of each fiscal year and were based on amounts reportable for federal income tax purposes as adjusted in accordance with the By-Laws. The cash portion of this distribution, deemed by the Board of Directors to be 30% for regular 37 patronage and 80% for Equity Participation Units, totaled approximately $43.8 million, $35.9 million and $30.8 million distributed in the years ended August 31, 1999, and May 31, 1998 and 1997, respectively. Cash patronage for the year ended August 31, 1999, deemed by the Board of Directors to be 75% for Equity Participation Units and 30% for regular patronage earnings, to be distributed in fiscal year 2000, is expected to be approximately $17.3 million and is classified as a current liability on the August 31, 1999 balance sheet. For the years ended August 31, 1999, May 31, 1998 and 1997, the Company redeemed patronage related equities in accordance with authorization from the Board of Directors in the amounts of approximately $23.8 million, $36.9 million and $18.6 million, respectively. During the three months ended August 31, 1998, the Company redeemed approximately $4.4 million of such patronage certificates. The current equity redemption policy, as authorized by the Board of Directors, allows for the redemption of capital equity certificates held by inactive direct members and patrons and active direct members and patrons at age 72 or death who were of age 61 or older on June 1, 1998. For active direct members and patrons who were of age 60 or younger on June 1, 1998, and member cooperatives, equities will be redeemed annually based on a prorata formula where the numerator is dollars available for such purpose as determined by the Board of Directors, and the denominator is the sum of the patronage certificates held by such eligible members and patrons. Such redemptions related to the year ended August 31, 1999, to be distributed in fiscal year 2000, are expected to be approximately $25.7 million and are classified as a current liability on the August 31, 1999 balance sheet. During the year ended May 31, 1997, the Company offered securities in the form of Equity Participation Units (EPUs)in its Wheat Milling and Oilseed Processing and Refining Defined Business Units. These EPUs give the holder the right and obligation to deliver to the Company a stated number of bushels in return for a prorata share of the undiluted grain based patronage earnings of these respective DBUs. The offering resulted in the issuance of such equity with a stated value of $13,870,000 and generated additional capital and cash of $10,837,000, after issuance cost and conversion privileges. Conversion privileges allowed a member to elect to use outstanding patrons' equities for the payment of up to one-sixth the purchase price of the EPUs. Holders of the EPUs will not be entitled to payment of dividends by virtue of holding such units. However, holders of the units will be entitled to receive patronage refunds attributable to the patronage sourced income from operations of the applicable defined business unit on the basis of wheat or soybeans delivered pursuant to the Member Marketing Agreement. The Board of Directors' goal is to distribute patronage refunds attributable to the EPUs in the form of 75% cash and 25% capital equity certificates, and to retire those capital equity certificates on a revolving basis seven years after declaration. However, the decision as to the percentage of cash patronage will be made each fiscal year by the Board of Directors and will depend upon the cash and capital needs of the respective Defined Business Units and is subject to the discretion of the Board of Directors. The redemption policy will also be subject to change at the discretion of the Board of Directors. EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS The Company believes that inflation and foreign currency fluctuations have not had a significant effect on its operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, a new standard related to the accounting for derivative transactions and hedging activities. In July 1999, the FASB issued SFAS No. 137 which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. While management does not believe this standard will materially impact the financial position and results of operations of the Company, it is currently evaluating the reporting requirements under this new standard. 38 YEAR 2000 In preparation for the year 2000, the Company has engaged an information technology consulting firm specializing in year 2000 systems projects. The scope of the program management effort at the Company includes internal mainframe, midrange, and LAN based systems as well as facilities, package software vendors, and interfaces with external vendors, processors and customers. Remediation and upgrades of these systems have been completed for all mission critical systems. Management believes that the total cost to the Company to review and correct its own computer systems will be approximately $2.0 million, of which $1.8 million has been expensed through August 31, 1999. Based on its assessment, the Company's management believes that the Company has in place an effective program to address the year 2000 issue in a timely manner and that it is taking the steps reasonably necessary to resolve this issue with respect to matters within its control. However, it also recognizes that failure to sufficiently resolve all aspects of the year 2000 issue in a timely fashion presents substantial risks for the Company. Furthermore, while the Company has taken, and will continue to take, steps to determine the extent of remediation efforts being undertaken by key customers and suppliers, there is no guarantee that the systems of other companies on which this Company relies will be remediated in a timely fashion to avoid having a material adverse effect on the Company's results of operations or its financial position. OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives combined through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives became the surviving corporation. In accordance with the Plan of Combination, the Articles of Incorporation and By-Laws of Harvest States Cooperatives were restated and the name of Harvest States Cooperatives was changed to Cenex Harvest States Cooperatives (Cenex Harvest States or the Company). Subsequent to the Combination, the Company changed its fiscal year to August 31 and is filing this Report on Form 10-K representing the first fiscal year of the Company based upon that date. The management discussion and analysis of the Oilseed Processing and Refining Defined Business Unit which follows, compares the first new fiscal year ended August 31, 1999 with the previous fiscal year ended May 31, 1998, as well the year ended May 31, 1998 with the year ended May 31, 1997. In addition, the three-month transition period ended August 31, 1998 is compared with the unaudited three-month period ended August 31, 1997. See the Management Discussion and Analysis for the Company in regard to new accounting pronouncements and discussion of the Year 2000. RESULTS OF OPERATIONS Certain operating information pertaining to the Oilseed Processing and Refining Defined Business Unit is set forth below, as a percentage of sales, except processing margins.
YEARS ENDED MAY 31 ---------------------------------------------- YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995 ----------------- ------------------- ---------- ---------- ---------- ---------- Gross margin percentage ......... 5.49% 3.65% 7.58% 7.76% 7.33% 8.25% Marketing, general and administrative ................. 1.42% 1.27% 1.15% .98% 1.14% 1.29% Interest ........................ 0.16% 0.25% 0.09% 0.07% 0.04% -- Processing margins Crushing/bu .................... $ .18 $ .14 $ .57 $ .59 $ .60 $ .59 Refining/lb .................... $.0127 $.0099 $.0133 $.0173 $.0154 $.0149
Because of the volatility of commodity prices, the Company believes that processing margins are a better measure of the Defined Business Unit's performance than gross margin percentages. 39 COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31, 1998 The Oilseed Processing and Refining Defined Business Unit's net income of $13.2 million for the year ended August 31, 1999 represents a $12.7 million decrease (49%) compared to the twelve-month period ended on May 31, 1998. This decrease is primarily attributable to reduced gross margins for soymeal and other processed soybean products. The average gross margin for such products declined approximately $15.60 per ton during the twelve months ended August 31, 1999, compared to the gross margin per ton generated on those products during the twelve months ended May 31, 1998. Net sales of $358.0 million for the year ended August 31, 1999 decreased by $52.3 million (13%) compared to the twelve months ended May 31, 1998. A reduction in the sales price for processed soybean products, primarily soymeal, of approximately $76.00 per ton and a decline of about $0.02 a pound for refined oil, partially offset by an 11% increase in sales volume for processed soybean products and a 7% increase in refined oil volume produced this change in sales dollars. Other revenues decreased approximately $1.7 million during the year ended August 31, 1999 compared to the year ended May 31, 1998. For the year ended May 31, 1998, the Oilseed Processing and Refining Defined Business Unit received approximately $0.7 million from an oilseed joint venture, and also recognized net gains on the sale of property, plant and equipment totaling approximately $0.7 million. During the twelve-month period ended August 31, 1999, the Oilseed Processing and Refining Defined Business Unit recorded a net loss on the disposal of property, plant and equipment of approximately $0.2 million, and did not receive any joint venture income during the period. Cost of goods sold of $338.4 million for the year ended August 31, 1999 decreased $40.9 million (11%) compared to the year ended May 31, 1998. Reduced cost for soybeans averaging $1.94 per bushel and reduced cost for crude soybean oil averaging $0.012 per pound during the year ended August 31, 1999, compared to the year ended May 31, 1998, were partially offset by a 13% increase in crush volume (4.1 million bushels) and a 7% increase in refining volume (71.5 million pounds). Marketing, general and administrative expenses of $5.1 million for the year ended August 31, 1999 increased approximately $0.4 million (8%) compared to the year ended May 31, 1998. Essentially all of this increase relates to wages and employee benefits. Interest expense for the year ended August 31, 1999 was $0.6 million, compared with approximately $0.4 million for the year ended May 31, 1998. This change is primarily attributable to capital expenditures made during and subsequent to the 1998 period. Income tax expense of $0.8 million and $1.8 million for the years ended August 31, 1999 and May 31, 1998 respectively, resulted in effective tax rates of 5.7% and 6.6%, respectively. The effective tax rate changes from period to period based upon the portion of non-patronage business activity compared to total business activity during each period. COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997 The Oilseed Processing and Refining Defined Business Unit's net income of $25.9 million for the year ended May 31, 1998 represents a $1.6 million decrease (6%) compared to the same period in 1997. This decrease is primarily attributable to reduced gross margins for soymeal and lower demand for refined soy oil, which reduced the Defined Business Unit's sales volume for refined oil. Net gains on the disposal of fixed assets of about $0.7 million partially offset the decline in gross margins. Net sales of $410.4 million for the year ended May 31, 1998 decreased by $31.4 million (7%) compared to the same period in 1997. A reduced average sales price for processed soybean products of $201.93 per ton in 1998 compared to $241.59 per ton in 1997 was the primary contributor to the reduction in sales dollars. Other revenues of $1.7 million for the year ended May 31, 1998 compared to 1997, increased $3.4 million. During the year ended May 31, 1997 the Defined Business Unit recognized a loss of $2.0 million on equipment to be replaced by plant expansion and recognized a loss of $0.3 million on an investment. During the year ended May 31, 1998, the Oilseed Processing and Refining Defined Business Unit recognized gains on fixed asset disposals of approximately $0.7 million. 40 Cost of goods sold for the year ended May 31, 1998 of $379.3 million decreased $26.5 million (7%) compared to the year ended May 31, 1997. This reduction in cost is primarily attributable to a decline in the average price of soybeans during the year ended May 31, 1998, from $7.50 a bushel in 1997 to $6.80 in 1998, and to a reduction in refined oil volume, from 968 million pounds in 1997 to 953 million pounds in 1998. Interest expense for the year ended May 31, 1998 was $0.4 million, compared with $0.3 million a year ago. Income tax expense of $1.8 million and $2.1 million for the years ended May 31, 1998 and 1997 respectively, results in effective tax rates of 6.6% and 7.1%, respectively. The effective tax rate changes from period to period based upon the portion of non-patronage business activity compared to total business activity during each period. COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH 1997 The Oilseed Processing and Refining Defined Business Unit's net income of $2.7 million for the three months ended August 31, 1998 represents a $0.5 million decrease (15%) compared to the same period in 1997. This decrease is primarily attributable to lower gross margins for refined oil. The average gross margin per pound on refined oil generated by the Oilseed Processing and Refining Defined Business Unit during the three months ended August 31,1998 declined 33% compared to that margin for the same three-month period in 1997. The impact of that reduction in profitability was partially offset by increased sales volume of soymeal, at an average gross margin 40% higher per ton than that of a year ago. Net sales of $98.9 million for the three-month period ended August 31, 1998 increased by $12.6 million (15%) compared to the same period in 1997. During the three months ended August 31, 1997, the crushing portion of the plant was shutdown for 41 days to allow for the installation of new equipment. As a result, soymeal and soyflour sales activity was reduced to approximately 110,000 tons during the 1997 three-month period, compared with almost 230,000 tons during the 1998 three-month period. While increased processing volume increased sales dollars, a significant decline of approximately $110 a ton in the sales price partially offset the volume variance. Together, these factors increased sales approximately $6.0 million. For the refined oil portion of the business, volumes were approximately the same in each of the three-month periods, while an increase in the per pound price of refined soybean oil increased sales approximately $6.6 million. Other revenues of $1.1 million during the three months ended August 31, 1998 decreased approximately $0.1 million (7%) compared to the same period in 1997. During the 1997 period, the Oilseed Processing and Refining Defined Business Unit recognized gains on disposal of replaced equipment of approximately $0.5 million. Also included in other revenues for both of the three-month periods is income from an oilseed joint venture. Income from this source during the 1998 period exceeded that recognized in the 1997 period by approximately $0.3 million. Cost of goods sold of $95.3 million for the three months ended August 31, 1998 increased $12.8 million (16%) compared to the same period ended in 1997. This change is primarily attributable to the increase in soymeal volume discussed above in the sales analysis, partially offset by a decline of approximately $2 per bushel in cost of soybeans. Marketing, general and administrative expenses of $1.3 million for the three months ended August 31, 1998 were essentially unchanged from the same period in 1997. Interest expense for the three months ended August 31, 1998 was $0.3 million, compared with $0.01 million of a year ago. This increase is primarily attributable to increased average inventory levels during the 1998 three-month period. During the 1997 period, soybean and processed product inventories were minimal during the shutdown period discussed above, as were receivables related to the sale of processed soybean products. Income tax expense of $0.5 million and $0.7 million for the three months ended August 31, 1998 and 1997 respectively, resulted in effective tax rates of 16.3% and 17.6%, respectively. The effective tax rate 41 changes from period to period based upon the portion of non-patronage business activity compared to total business activity during each period. LIQUIDITY AND CAPITAL RESOURCES The Oilseed Processing and Refining Defined Business Unit's cash requirements result from capital improvements and from a need to finance additional inventories and receivables based on increased raw material costs or levels. These cash needs are expected to be fulfilled by the Company. CASH FLOWS FROM OPERATIONS Operating activities for the years ended August 31, 1999, May 31, 1998 and May 31, 1997 provided net cash of $22.0 million, $27.2 million, and $23.6 million, respectively. For the year ended August 31, 1999, net income of $13.2 million, non-cash revenues and expenses of approximately $2.5 million, and decreased working capital requirements of approximately $6.3 million provided this net cash from operating activities. For the year ended May 31, 1998, net income of $25.9 million and non-cash revenues and expenses of approximately $1.4 million were partially offset by increased working capital requirements of approximately $0.1 million. For the year ended May 31, 1997, net income of $27.5 million and non-cash revenues and expenses of approximately $3.8 million were partially offset by increased working capital requirements of approximately $7.7 million. Operating activities for the three-month periods ended August 31, 1998 and 1997, respectively, provided net cash of $11.3 million and $21.2 million due to net income of $2.7 million and $3.2 million respectively, non-cash revenues and expenses of $0.6 million in 1998 and decreased working capital requirements of approximately $8.0 million and $18.0 million, respectively. CASH FLOWS USED FOR INVESTING ACTIVITIES The Oilseed Processing and Refining Defined Business Unit used net cash of approximately $6.0 million during the year ended August 31, 1999 for the acquisition of property, plant and equipment. During the year ended May 31, 1998, the Oilseed Processing and Refining Defined Business Unit received cash of approximately $10.7 million from the sale of soybean processing equipment and entered into a leaseback transaction for that equipment. During that same period, the Oilseed Processing and Refining Defined Business Unit expended approximately $14.0 million for the purchase of property, plant and equipment. For the year ended May 31, 1997, the Oilseed Processing and Refining Defined Business Unit expended approximately $12.1 million for the purchase of property, plant and equipment. For the year ended August 31, 2000, the Oilseed Processing and Refining Defined Business Unit expects to spend approximately $14.7 million for the acquisition of property, plant and equipment. The Oilseed Processing and Refining Defined Business Unit used net cash of approximately $1.2 million and $8.2 million during the three-month periods ended August 31, 1998 and 1997, respectively, for the purchase of property, plant and equipment. During the three-month period ended August 31, 1997, the Oilseed Processing and Refining Defined Business Unit received cash of approximately $10.3 million for the sale of soybean processing equipment, which was subsequently leased back from the purchaser. This transaction, as well as the capital expenditures for this three-month period of $8.2 million, are included in the activity for the year ended May 31, 1998. CASH FLOWS FROM FINANCING ACTIVITIES The Defined Business Unit's financing activities are coordinated through the Company's cash management department. Cash from all of the Company's operations is deposited with the Company's cash management department and disbursements are made centrally. As a result, the Defined Business Unit has a zero cash position. Financing is available from the Company to the extent of the Company's working capital position and corporate loan agreements with various banks, and cash requirements of all other Company operations. Working capital requirements for a Defined Business Unit are reviewed on a periodic basis, and could potentially be restricted based upon management's evaluation of the prevailing business conditions and availability of funds. 42 With respect to earnings for the year ended August 31, 1999, total income from the Oilseed Processing and Refining Defined Business Unit will be withdrawn by the Company from the Oilseed Processing and Refining Defined Business Unit except to the extent that patronage dividends are not paid in cash and are instead retained in the Oilseed Processing and Refining Defined Business Unit as equity. Such dividends retained as equity from the Equity Participation Unit share of earnings, which equals 30% of the total patronage refund to such patron's share of earnings, totaled approximately $1.0 million and will be matched with equity on behalf of the Company's open membership in proportion to non-Equity Participation Unit bushels processed totaling approximately $2.6 million. The Oilseed Processing and Refining Defined Business Unit had debt outstanding to the Company of $9.5 million on August 31, 1999 compared with $15.1 million on August 31, 1998. On May 31, 1998, the Oilseed Processing and Refining Defined Business Unit had debt outstanding to the Company of $22.9 million. These interest-bearing balances reflect working capital and fixed asset financing requirements at the end of the respective years. WHEAT MILLING DEFINED BUSINESS UNIT Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of Combination), Cenex, Inc. (Cenex) and Harvest States Cooperatives combined through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives became the surviving corporation. In accordance with the Plan of Combination, the Articles of Incorporation and By-Laws of Harvest States Cooperatives were restated and the name of Harvest States Cooperatives was changed to Cenex Harvest States Cooperatives (Cenex Harvest States or the Company). Subsequent to the Combination, the Company changed its fiscal year to August 31 and is filing this Report on Form 10-K representing the first fiscal year of the Company based upon that date. The management discussion and analysis of the Wheat Milling Defined Business Unit which follows, compares the first new fiscal year ended August 31, 1999 with the previous fiscal year ended May 31, 1998, as well the year ended May 31, 1998 with the year ended May 31, 1997. In addition, the three-month transition period ended August 31, 1998 is compared with the unaudited three-month period ended August 31, 1997. See the Management Discussion and Analysis for the Company in regard to new accounting pronouncements and discussion of the Year 2000. RESULTS OF OPERATIONS Certain operating information pertaining to the Defined Business Unit is set forth below, as a percentage of sales, except for margins per hundred weight (Margins/cwt).
YEARS ENDED MAY 31, ------------------------------------------------- YEAR ENDED THREE MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995 ----------------- ------------------- ---------- ---------- ---------- ---------- Gross margin percentage ......... 2.08% 6.78% 7.63% 8.80% 6.94% 5.88% Marketing, general and administrative ................. 6.09% 4.41% 3.93% 3.39% 2.58% 3.20% Interest ........................ 2.98% 1.80% 1.52% 2.63% 2.57% 1.90% Margins/cwt ..................... $ .21 $ .85 $ 1.06 $ 1.27 $ 1.12 $ .81
Because of the volatility of commodity prices, the Company believes that margins per hundred weight (manufacturing margins) are a better measure of the Defined Business Unit's performance than gross margin percentages. COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31, 1998 The Wheat Milling Defined Business Unit incurred a net loss of $11.9 million for the year ended August 31, 1999 compared to net income of $5.7 million for the year ended May 31, 1998, for a decrease of $17.5 million. Approximately $9.4 million of this decrease was created by a reduction in production at the Huron mill, where the conversion of a semolina line to hard wheat bakery flour reduced volume 43 30% compared to the year ended May 31, 1998, with essentially the same fixed costs applied against lower volumes. The Huron conversion was operational in February 1999, and the Wheat Milling Defined Business Unit is currently attempting to grow its share of the bakery flour market from this mill's production. A general deterioration in gross margins of approximately $0.66 per hundred weight for all products, along with increased marketing, general and administrative and interest expenses of $4.6 million created most of the balance of the decline in income. Net sales of $174.1 million for the year ended August 31, 1999 decreased approximately $31.1 million (15%) compared to the twelve-month period ended May 31, 1998. A reduction in the average sales price of $2.89 per hundred weight, partially offset by a 3.1 million hundred weight volume increase produced this decline in sales revenue. Increased volume at the Houston mill of 1.5 million hundred weight, increased volume at the Rush City mill of 0.7 million hundred weight, and additional production of 2.9 million hundred weight at the Mount Pocono mill which commenced operations during the current fiscal year offset a significant decline in volume of 1.7 million hundred weight at the Huron mill. Cost of goods sold of $170.5 million for the year ended August 31, 1999, decreased $19.1 million (10%) compared to the year ended May 31, 1998. This decrease was created primarily by a $1.45 per bushel decline in the cost of raw material during the year ended August 31, 1999, compared to the year ended May 31, 1998. This price variance was partially offset by an increase in volume of approximately 5.0 million bushels, and by a $5.8 million increase in plant expense, primarily attributable to the Mt. Pocono mill which commenced operations in January 1999, the Houston mill which was operating in a startup phase during much of the 1998 period and Rush City, where 1999 volume exceeded 1998 volume by 29%. Marketing, general and administrative expenses were $10.6 million for the year ended August 31, 1999, and increased approximately $2.5 million (31%) compared to the year ended May 31, 1998. Approximately $1.5 million of this increase is attributable to a provision for uncollectable accounts receivable. The balance of this increase is primarily attributable to expenses incurred at the Mount Pocono mill, which commenced operations during the current fiscal year. Interest expense of $5.2 million for the year ended August 31, 1999 increased $2.1 million (66%) compared to the year ended May 31, 1998. During the year ended May 31, 1998, the Wheat Milling Defined Business Unit received credit for cooperative bank patronage refunds received by the Company attributable to the Wheat Milling Defined Business unit's borrowings totaling approximately $0.7 million. The comparable amount received during the year ended August 31, 1999 was less than $0.1 million. On June 1, 1997 the Company contributed $38.8 million of additional capital to the Wheat Milling Defined Business Unit for the purpose of constructing the Mount Pocono mill. Throughout the construction phase of this project, the unexpended balance of this cash contribution reduced borrowing requirements to finance inventories and receivables, and consequently, reduced interest expense. As cash has been expended for Mount Pocono construction, additional borrowings have been required to finance working capital. The balance of the increase in interest expense during the year ended August 31, 1999 compared to the year ended May 31, 1998 is primarily attributable to this activity. Other expenses of $0.8 million and $0.2 million for the years ended August 31, 1999 and May 31, 1998, respectively, primarily represent the recognition of losses on certain equipment, either disposed of or obsolete for the Wheat Milling Defined Business Unit's purposes and therefore available for sale. An income tax benefit of $1.2 million for the year ended August 31, 1999 is based upon an effective tax rate of 8.7% applied to the pretax loss of $13.0 million. For the year ended May 31, 1998, income tax expense of $0.5 million resulted in an effective tax rate of 7.7%. The effective tax rate changes from period to period based upon the portion of non-patronage business activity compared to total business activity during each period. COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997 The Wheat Milling Defined Business Unit's net income of $5.7 million for the year ended May 31, 1998 increased $2.4 million (75%) compared to the same period in 1997. For the year ended May 31, 1997, the Defined Business Unit recognized a $2.0 million loss on the impairment of fixed asset value at its Rush City, Minnesota mill which represents the primary difference in net income between the two fiscal years. 44 Net sales for the year ended May 31, 1998 of $205.3 million increased $6.2 million (3%) compared to the same period ended in 1997. Increased sales volumes during the year ended May 31, 1998 contributed $19.4 million to sales, while lower average sales prices during this same period reduced sales revenue by approximately $13.2 million. The increased sales volume was generated through expanded Kenosha operations and the commencement of operations at the Houston, Texas mill during fiscal 1998 partially offset by reduced production at the Rush City, Minnesota mill. The Wheat Milling Defined Business Unit recognized other income during the year ended May 31, 1998 of $1.8 million. Of this amount $1.5 million represents warranty proceeds for milling equipment. Interest income of approximately $0.4 million was generated during the year ended May 31, 1998 on the Wheat Milling Defined Business Unit's working capital account with the Company. This interest income is primarily the result of additional capital of $38.8 million contributed by the Company on June 1, 1997 for the purpose of constructing the mill at Mt. Pocono, Pennsylvania. Construction at Mt. Pocono commenced in early September 1997, and as disbursements have made for that purpose, interest- generating funds have been depleted. Cost of goods sold of $189.6 million for the year ended May 31, 1998, increased $8.0 million (4%) compared to the same period ended in 1997. The raw material component of cost of goods sold increased approximately $5.7 million in 1998. The Wheat Milling Defined Business Unit milled approximately 31.4 million bushels during the year ended May 31, 1998, an increase of approximately 3.2 million bushels over the prior year. The cost of this additional volume was partially offset by a decline of $0.42 a bushel in the average cost of raw material. The mill expense component of cost of goods sold increased approximately $2.3 million during the year ended May 31, 1998 compared to the prior year. This increase is primarily attributable to the commencement of operations in June at the mill in Houston, Texas, partially offset by reduced variable costs at the Rush City, Minnesota mill. As a start-up operation during fiscal 1998, the Houston mill ran at approximately 50% of capacity, which generated inadequate revenue to cover costs for that location. The Rush City mill, which was closed throughout the month of June and early July of calendar year 1997, operated at approximately two-thirds of its 1997 fiscal year production level. Marketing, general and administrative expenses were $8.1 million during the year ended May 31, 1998, an increase of $1.3 million (20%) from 1997. This increase is primarily attributable to additional staffing and system expansion costs related to the Houston mill and in anticipation of future volumes from the Mt. Pocono mill. The Wheat Milling Defined Business Unit incurred interest expense of $3.1 million and $5.2 million during the years ended May 31, 1998 and 1997, respectively. This decrease of approximately $2.1 million (40%) during the 1998 twelve-month period is primarily the result of the additional capital contributed by the Company on June 1, 1997, which decreased short-term borrowing. Other expenses were $0.2 million and $2.0 million for the years ended May 31, 1998 and 1997, respectively. During the 1998 year, the Wheat Milling Defined Business Unit recognized a loss on certain equipment and during 1997, the Company assessed the carrying value of the Rush City mill relative to expected cash flows and recognized a loss due to impairment. Income tax expenses of $0.5 million and $0.3 million for the years ended May 31, 1998 and 1997, respectively, resulted in effective tax rates of 7.7% and 8.5%. The effective tax rate changes from period to period based upon the percentage of non-patronage business activity to total business activity. COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH 1997 The Wheat Milling Defined Business Unit's net income of $0.2 million for the three-month period ended August 31, 1998 decreased $1.0 million (81%) compared to the same period in 1997. Commencing in June 1998 and continuing throughout the period, the Defined Business Unit began conversion of a semolina line at the Huron mill to hard wheat bakery flour. This disruption of production resulted in a 35% decline in volume, compared to the same period in 1997. While fixed costs at the facility remained relatively constant with the prior period, revenues net of raw material costs declined significantly. This situation caused operating earnings to decline approximately $1.4 million. This decline in profit contribution from the Huron mill was partially offset by increased volume from the other mills. 45 Net sales for the three months ended August 31, 1998 of $46.9 million increased $2.5 million (6%) compared to the same period in 1997. Increased sales volume for all products of approximately 600,000 hundred weights, offset by a $0.76 per hundred weight average reduction in sales price produced this increase in sales dollars. The increased sales volume was primarily through the Houston and Rush City mills, offset by a decline in production at the Huron mill. The Houston mill was in its early startup phase during the 1997 three-month period, while the Rush City mill was not operating in June and early July of 1997 due to a shortage of business. The Huron mill operated at approximately 65% of its normal volume during the three months ended August 31, 1998, as one of the semolina milling lines at that facility was in the process of being converted to hard wheat bakery flour milling capacity. Cost of goods sold of $43.7 million for the three months ended August 31, 1998, increased $3.2 million (8%) compared to the same period in 1997. The raw material component of cost of goods sold increased $3.0 million for the 1998 period compared with 1997. Increased volume contributed $5.4 million to this increase, partially offset by $2.4 million in lower per bushel costs. Mill expenses were essentially the same between the two periods. Marketing, general and administrative expenses were $2.1 million during the three months ended August 31, 1998, an increase of $0.4 million (26%) compared to 1997. This increase was primarily attributable to additional staffing and system expansion costs related to the Houston mill and in anticipation of future volumes from the Mt. Pocono mill. During the three months ended August 31, 1998, the Wheat Milling Defined Business Unit incurred interest expense of $0.8 million. During the same period of 1997, the Wheat Milling Defined Business Unit generated interest income of approximately $0.3 million on its working capital account with the Company, which is attributable to the capital contribution of $38.8 million made by the Company on June 1, 1997 for the purpose of constructing the Mt. Pocono, Pennsylvania mill. During the three months ended August 31, 1997, the Wheat Milling Defined Business Unit incurred interest expense on its long-term debt of $1.1 million, for a net interest expense during the period of approximately $0.8 million. While the working capital credit balance which generated the prior year's interest income was depleted as construction costs for Mt. Pocono mill were paid, resulting interest costs have been capitalized as part of the new mill fixed asset. Consequently, net interest expense for the two periods was essentially unchanged. LIQUIDITY AND CAPITAL RESOURCES The Defined Business Unit's cash requirements result from capital improvements and from a need to finance additional inventories and receivables based on increased raw material cost and levels. The Company's Board of Directors has authorized the purchase of land near Orlando, Florida as the site for a new mill. The Board has authorized expenditures up to $1.8 million for the cost of the land and an access road. The land was purchased during the second quarter of the current fiscal year at a cost of approximately $1.2 million. Plans for this mill are subject to due diligence, routine regulatory review and cost verification. Anticipated costs for this mill are approximately $35.0 million and may be financed with debt, open member equity, additional equity participation units, or a combination of these financing alternatives. No determination has been made at this time as to when construction will commence. CASH FLOWS FROM OPERATIONS Operating activities for the years ended August 31, 1999, May 31, 1998 and May 31, 1997 provided net cash of approximately $2.9 million, $1.5 million and $19.6 million, respectively. For the year ended August 31, 1999, the net loss of $11.9 million was offset by non-cash expenses of approximately $6.7 million and decreased working capital requirements of approximately $8.1 million. For the year ended May 31, 1998, net income of $5.7 million and non-cash expenses of approximately $4.9 million were partially offset by increased working capital requirements of approximately $9.1 million. For the year ended May 31, 1997, net income of $3.2 million, non-cash expenses of $6.1 million decreased working capital requirements of approximately $10.3 million provided net cash from operating activities of $19.6 million. Operating activities for the three months ended August 31, 1998 and 1997, respectively, used net cash of $0.9 million and $1.3 million. For the three-month period ended in 1998, net income of $0.3 46 million and non-cash expenses of $1.3 million were offset by increased working capital requirements of approximately $2.5 million. For the same period ended in 1997, net income of $1.3 million and non cash expenses of $1.2 million were offset by increased working capital requirements of approximately $3.8 million. CASH FLOWS USED FOR INVESTING ACTIVITIES Cash flows expended for the acquisition of property, plant, and equipment during the years ended August 31, 1999, May 31, 1998 and May 31, 1997, totaled approximately $18.7 million, $20.3 million and $15.0 million, respectively. For the year ended August 31, 2000 the Wheat Milling Defined Business Unit expects to spend approximately $3.4 for the acquisition of property, plant and equipment. During the three-month periods ended August 31, 1998 and 1997, the Wheat Milling Defined Business Unit expended approximately $12.8 million and $2.3 million, respectively, for the acquisition of property, plant and equipment. CASH FLOWS FROM FINANCING ACTIVITIES The Wheat Milling Defined Business Unit's financing activities are coordinated through the Company's cash management department. Cash from all of the Company's operations is deposited with the Company's cash management department and disbursements are made centrally. As a result, the Defined Business Unit has a zero cash position. Financing is available from the Company to the extent of the Company's working capital position and corporate loan agreements with various banks and cash requirements of all other Company operations. Working capital requirements for a Defined Business Unit of the Company are reviewed on a periodic basis, and could potentially be restricted based upon management's evaluation of the prevailing business conditions and the availability of funds. The Wheat Milling Defined Business Unit had short-term debt outstanding and payable to the Company of $48.9 million on August 31, 1999, compared with $33.2 million on August 31, 1998. On May 31, 1998 the Wheat Milling Defined Business Unit had short-term debt outstanding to the Company of $16.7 million. This increase is primarily due to payments for Mount Pocono capital expenditures, for which the Company had contributed $38.8 million of capital to this account on June 1, 1997. The Wheat Milling Defined Business Unit had long-term debt outstanding to the Company of $38.5 million on August 31, 1999 compared with $48.5 million on August 31, 1998. On May 31, 1998, the Wheat Milling Defined Business Unit had long-term debt outstanding to the Company of $51.2 million. This debt, net of subsequent repayments, was incurred for the acquisition, expansion and construction of certain mills with the Wheat Milling Defined Business Unit. With respect to the net operating loss of the current period, the Company's Board of Directors has resolved that the portion of this loss attributable to the Equity Participation Units be carried forward, as authorized in the Company's By-Laws, against future earnings attributable to the Equity Participation Units. The total loss carryforward attributed to the Equity Participation Units is approximately $1.7 million. ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company, as part of its trading activity, utilizes futures and option contracts offered through regulated commodity exchanges to reduce risk. The Company is exposed to risk of loss in the market value of inventories and fixed or partially fixed purchase and sale contracts. So as to reduce that risk, the Company generally takes opposite and offsetting positions using future contracts or options. Certain commodities cannot be hedged with future or option contracts because such contracts are not offered for these commodities by regulated commodity exchanges. Inventories and purchase contracts for those commodities are hedged with forward sales contracts to the extent practical so as to arrive at a net commodity position within the formal position limits set by the Company and deemed prudent for each of those commodities. Commodities for which future contracts and options are 47 available are also typically hedged first in this manner, with futures and options used to hedge within position limits that portion not covered by forward contracts. Unrealized gains and losses on futures contracts and options used to hedge grain and oilseed inventories and fixed priced contracts are recognized for financial reporting, and the inventories and fixed priced contracts are marked to market so that gains or losses on the derivative contracts are offset by gains or losses on inventories and fixed priced contracts during the same accounting period. Unrealized gains and losses on futures contracts and options used to hedge energy inventories and fixed priced contracts are deferred until such future contracts and options are closed. The inventories hedged with these derivatives are valued at lower of cost or market. Open hedge positions and deferred gains and losses for futures and option contracts were not significant as of August 31, 1999, and a change in market price producing additional gain or loss on these derivative contracts would be offset partially or entirely with an offsetting gain or loss on inventories and fixed priced contracts. The Company manages interest expense using a mix of fixed and floating rate debt. These debt instruments are carried at amounts approximating estimated fair value. Short term debt used to finance inventories and receivables is represented by notes payable within thirty days or less so that the blended interest rate to the Company for all such notes approximates current market rates. Long-term debt used to finance non-current assets carries various fixed interest rates and is payable at various dates so as to minimize the effect of market interest rate changes. The effective interest rate to the Company on fixed rate debt outstanding on August 31, 1999 was approximately 7.3%; a 10% adverse change in market rates would not materially effect the Company's results of operations, financial position or liquidity. The Company conducts essentially all of its business in U.S. dollars and has no mark to market risk regarding foreign currency fluctuations on August 31, 1999. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements listed in 14(a)(1) follow the signatures. Registrant is not required to provide the supplementary financial information required by Item 302. Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS The table below lists the directors of the Company as of August 31, 1999. These were the initial directors of Cenex Harvest States Cooperatives and consisted of the 14 incumbent directors of Harvest States Cooperatives and the 13 incumbent directors of Cenex, Inc. as of May 31, 1998. DIRECTOR NAME AND ADDRESS AGE DISTRICT SINCE ---------------- --- -------- ----- Bruce Anderson 47 3 1995 13500 42nd St NE Glenburn, ND 58740-9564 Robert Bass 45 5 1994 S 2276 Highway K Reedsburg WI 53959 Steven Burnet 59 6 1983 94699 Monkland Lane Moro, OR 97039-9705 Steve Carney 48 2 1988 P.O. Box 1122 Scobey, MT 59263-1122 Curt Eischens 47 1 1990 RR 1 Box 59 Minneota, MN 56264 Robert Elliott 49 8 1996 324 Hillcrest Alliance NE 69301 Edward Ellison 64 1 1978 401 Hamburg Ave., P.O. Box 8 Herman, MN 56248-0008 Sheldon Haaland 61 1 1984 RR 2, Box 55 Hanley Falls, MN 56245-9731 Fred Harris 65 6 1991 1004 Powell Street Grandview WA 98930 Jerry Hasnedl 53 1 1995 RR 1, Box 39 St. Hilaire, MN 56754 Edward Hereford 60 6 1983 1902 Cashup Flat Road Thornton, WA 99176-9710 Douglas Johnson 56 2 1989 HC 89, Box 5240 Sidney MT 59270 James Kile 51 6 1992 508 W Bell Lane St John WA 99171 49 DIRECTOR NAME AND ADDRESS AGE DISTRICT SINCE ---------------- --- -------- ----- Gerald Kuster 64 3 1979 780 First Ave. N.E. Reynolds, ND 58275-9742 Leonard Larsen 63 3 1993 5128-11th Ave. N. Granville, ND 58741-9595 Tyrone Moos 63 4 1991 HCR 1, Box 1 Philip, SD 57567-9601 Gaylord Olson 66 3 1985 RR 1 Buxton ND 58218 Duane Risan 63 3 1989 7452-37th Street N.W. Parshall, ND 58770-9403 Denis Schilmoeller 64 7 1992 4758 450th Street Granville IA 51022 Duane Stenzel 53 1 1993 RR 2, Box 173 Wells, MN 56097 Michael Toelle 37 1 1992 RR 1 Box 190 Browns Valley MN 56219 Richard Traphagen 54 4 1983 39555 124th Street Columbia SD 57433 Russell Twedt 50 2 1993 P.O. Box 296 Rudyard, MT 59540-0296 Merlin Van Walleghen 63 4 1993 24106-408th Avenue Letcher, SD 57359-6021 Elroy Webster 66 1 1982 Route 2 Box 123 Nicollet MN 56074 Arnold Weisenbeck 64 5 1976 6602 Highway 25 Durand WI 54736 William Zarak, Jr. 64 3 1983 3711 124th Ave. S.W. South Heart, ND 58655-9767 BRUCE ANDERSON was elected to the board in 1995. He has held positions with North Dakota Farmers Union, Farmers Union Mutual Insurance Co. and has served a four-year term in the North Dakota House of Representatives. He is a member of the North Dakota Agricultural Products Utilization Commission. Bruce and his wife Pam raise small grains on their farm near Glenburn, North Dakota. ROBERT BASS, elected to the board in 1994, operates a 500-acre dairy and feed grain farm with his brother near Reedsburg, Wisconsin. Bob currently serves as president of the board of Co-op Country Partners in Baraboo, Wisconsin, an affiliate with 1998-99 sales of $43 million. He holds a B.S. degree from the University of Wisconsin in agricultural education and is a former vo-ag teacher. 50 STEVEN BURNET has been a board member since 1983 and has served as past Chairman of Harvest States Cooperatives. He is a member of the Oregon Wheat Growers League and the Oregon Cattlemen's Association. Steve is a past president of Mid-Columbia Grain Growers and past vice president of North Pacific Grain Growers. He serves as a director on the Agricultural Co-op Council of Oregon and is a former board member of the Oregon State University Alumni Association. Steve and his wife, Patty, grow dryland wheat and barley, and support a cow/calf and yearling operation with irrigated hay and pasture. STEVE CARNEY has been a board member since 1988. He is a patron of Farmers Elevator Company at Scobey and Peerless, Montana, a division of Cenex Harvest States, PRO Co-op at Peerless, Grain Growers Oil Company in Scobey and Prairie States Terminal at Zahl, North Dakota. Steve is a member of Montana Grain Growers Association; Montana Stock Growers Association; Montana Farmers Union; PRO Co-op at Peerless and Grain Growers Oil Co. in Scobey, Montana. He raises spring wheat and durum with his wife, Diana, and his brother Jack. CURT EISCHENS was elected to the board in 1990. He has been a director for Farmers Co-op Association in Canby for nine years, eight as chairman. He is director of the Minnesota Association of Cooperatives, and a member of the Minnesota Soybean Association and Minnesota Farmers Union. Curt and his wife, Wendy, operate a corn and soybean farm near Canby, Minnesota. ROBERT ELLIOTT, elected to the board in 1996, is the first director for the region consisting of Nebraska, Kansas, Oklahoma, Colorado and Texas. He and his wife, Jayne, operate a 5,000-acre farm near Alliance, Nebraska. Bob is president of the Hemingford Scholarship Foundation. He is past president of the Nebraska Wheat Growers Association and served on the boards of Western Cooperative Alliance (Westco) and New Alliance Bean & Grain Company. EDWARD ELLISON was elected to the board in 1978. He is a member of Herman-Norcross Ag Center and Farmers Co-op Oil, Elbow Lake, and is also a past director/chairman of Herman Market Co. Ed serves on the boards of the Agricultural Utilization Research Institute (AURI), and Farmland Insurance. He also is a former board member of Agricultural Cooperative Development International (ACDI). Ed and his wife, Barbara, have three sons and a daughter. With two of their sons, they raise soybeans, corn and wheat on their Grant County farm. SHELDON J. HAALAND was elected to the board in 1984. He is a member of several cooperatives, including Minnesota Corn Processors in Marshall, Tri-Line Co-op in Clarkfield, and Cenex Harvest States' Marshall Agri-Service Center. He has previously served on the boards of Cottonwood Co-op Oil Co. and Western Transport Co-op, and has been an advisory board member of the Southwest State University Co-op Program. Sheldon, his wife, Margery, and family raise corn, soybeans and wheat. FRED HARRIS was elected to the board in 1991. He and his wife, Ruth, operate a 36-acre apple and cherry orchard near Grandview, Washington. He retired in 1991 as manager of Bleyhl Farm Service at Grandview after serving 27 years. Besides his involvement in cooperatives, he has been active in many facets of civic, community and church life. JERRY HASNEDL was elected to the board in 1995. He is a member and past director of Northwest Grain, a Cenex Harvest States regionalization; a member of Farmers Union Oil Co. in Thief River Falls; Garden Valley Telephone Co-op in Erskine; Red Lake Electric Co-op in Red Lake Falls; Minnesota Wheat Growers; and Minnesota Barley Growers. He is currently serving on the interim board for Minnesota Marketplace. Jerry and his wife, Ruth, raise wheat, barley, corn, soybeans, sunflowers and alfalfa on their northern Minnesota farm. EDWARD HEREFORD has been a board member since 1983. Ed serves on the boards of the Idaho Co-op Council and ACDI/VOCA. He is a patron of Whitman County Growers, where he served as a director and board president; Colfax Grange Supply; and Grange Supply in Pullman. He is a member of Thornton Grange, the Washington Association of Wheat Growers, and the Washington Assn. of Peas and Lentils Growers. Ed, his wife, Diane, and their two sons, produce wheat, barley, peas and lentils on their dryland farm. 51 DOUGLAS JOHNSON joined the board in 1989. Johnson served on the Montana Farmers Union board for eight years. He spent 13 years on the board of Richland Homes Nursing Home and currently serves as President of the board of Trinity Lutheran Church. He and his wife, Pamela, and a son, farm 4,000 acres near Sidney in northeastern Montana. JAMES KILE, the first graduate of Young Producer Institute to join the board, was elected in 1992. He served 18 years, 10 as chairman, on the board of his local St. John Grange Supply, and represents Cenex Harvest States on the Washington State Council of Farmer Cooperatives and is a member of Grange and Washington Association of Wheat Growers. He and his wife, Barb, operate a 1,300-acre dryland wheat, barley and pea operation near St. John, Washington. GERALD KUSTER was elected to the board in 1979 and became chairman in 1997. Kuster's more than three decades of involvement in co-ops include serving as a member and president of the board of Agri-City Cooperative Service in Grand Forks, and vice president of the Burdick Center for Cooperatives, North Dakota State University. He is a member of the Americus Township board and a deacon on the Trinity Free Lutheran Church board. Gerald and his wife, Arla Mae, operate a 4,000-acre farm with their son, Loren. LEONARD LARSEN has been a board member since 1993. He is a member of the Farmers Union Oil Companies in Minot and Velva, Cenex Harvest States Sunprairie Grain, and Dakota Growers Pasta Company. Starting as a board member of the Simcoe Elevator in 1970, Leonard served through the unification with the Minot Farmers Union Elevator, where he was a board member for 11 years and chairman for six. He has served on the Hendrickson Township board, the First Lutheran Church council, and the Granville Economic Development Corporation. He is a member of the North Dakota Farmers Union and a 34-year member of the American Legion. Leonard, his wife, Marlene, and a son, farm a grain, sunflower, canola and flax operation. TYRONE MOOS has been a board member since 1991. He is a member of South Dakota Farmers Union, South Dakota Farm Bureau, and First Lutheran Church. He is a past chairman of the local co-op elevator board, a former FmHA County committee member and a former member of the Philip School Board. Tyrone and his wife, Elvera, along with their son and two daughters, operate a combination farm and ranch partnership. They raise winter wheat, millet and corn, also managing cow/calf and hog finishing operations. GAYLORD OLSON became a member of the board in 1985. He has served on the local Farmers Union Oil and Elevator Company boards at Buxton, North Dakota, for over 30 years. Prior to 1985, he had served as vice president of North Dakota Farmers Union and North Dakota Farmers Union Mutual Insurance Company and North Dakota Farmers Union Service Association. With two of their five children, Gaylord and his wife, Gayle, operate a 1,500-acre, third-generation, centennial farm near Buxton. DUANE RISAN has been a member of board since 1989 and currently serves as chairman of the Wheat Milling Defined Member Board. A former educator, he has a degree in mathematics and education from Jamestown College. He is a member of Dakota Growers Pasta Co. and a patron of Dakota Quality Grain Co-op. Duane raises durum, spring wheat and barley with his wife, Joyce, and a son. DENIS SCHILMOELLER was elected to the board in 1992 as Iowa's first director. He has served on the board of Farmers Cooperatives of Paullina and Granville, Iowa, since 1985, with five of those years as chairman of the board. He represents the regional with the Iowa Institute for Cooperatives and has served as a director of Remsen Mutual Insurance Association since 1978. He with his wife, RoseMary, and a son operate a corn, soybean and livestock farm near Granville in northwest Iowa. DUANE STENZEL was elected to the board in 1993 and currently serves as chairman of the Oilseed Processing & Refining defined member board. He is a member of Watonwan Farm Service; Wells Farmers Elevator, where he served as board president and secretary. He raises 665 acres of soybeans, sweet corn and corn on his farm in south central Minnesota, acreage that also includes land homesteaded by his great-grandfather more than 100 years ago. 52 MICHAEL TOELLE was elected to the board in 1992. He has been serving on the board of Country Partners Cooperative of Browns Valley for 11 years and as chairman for the past 7 years. He also is actively involved in National FFA Organization, Ag Council of America, Minnesota Wheat Growers, Minnesota Corn Growers and Minnesota Soybean Growers associations. He currently serves as chairman of the Finance & Investment Committee for the Cenex Harvest States Foundation. He and his wife, Sue, operate a grain, hog and beef farm with his brother and parents near Browns Valley. RICHARD TRAPHAGEN was elected to the board in 1983 and currently serves as the second vice chairman of the Cenex Harvest States board. He is past chairman of the board of Centrol, Inc., of South Dakota and of the board of the Farmers Union Cooperative Association of Brown County in Columbia, South Dakota. He has served on a number of other boards. Richard and his wife, Cindy, operate a 1,600-acre corn, soybean and wheat farm. RUSSELL TWEDT has been a board member since 1993. Russ is a member of Farmers Union Oil Co. of Great Falls and Farmers Union Oil Co. of Rudyard, where he served as chairman. He is a member of the Co-op Curriculum Executive Committee for Montana State University and a member of other industry and community organizations. He is former chair of the local Water Users Association and a former ASCS County committeeman. Russ is a third-generation Hill County farmer and rancher. Russ, his wife, Diana, and family raise winter wheat, spring wheat, barley, oats and hay, and have a cow/calf operation. MERLIN VAN WALLEGHEN has been a board member since 1993. He is a former director of Farmers Co-op Elevator Association of Mitchell, Letcher and Alexandria, serving as board president for 10 years. Merlin also served nine years on the South Dakota Association of Cooperatives board of directors, seven as president. A former FmHA committee member, he is currently chairman of the Sanborn County Development board and also a member of Heartland Consumer Power District board. Merlin and his wife, Patricia, and a son, operate a grain farm producing corn and soybeans. ELROY WEBSTER was elected to the board in 1982 and became its chairman in 1988. His leadership record includes service as a director for the Minnesota Association of Cooperatives, Western Co-op Transport Association and Agland Cooperative. Webster is past chairman of the Agricultural Council of America and is chairman of the Board of Trustees for the Cenex Harvest States Foundation. He also works with Southwest State University as an advisor for its Cooperative Studies program. Webster is an active farmer with a corn and soybean operation near Nicollet, Minnesota. ARNOLD WEISENBECK was elected to the board in 1976. He recently retired from his board position for the Durand Cooperatives where he had served for 20 years, 13 as chairman. He serves as stockholder representative on the board of Universal Cooperatives, Minneapolis, Minnesota. Arnie and his wife, Edie, and their two sons, operate a 2,000-acre farm near Durand, Wisconsin, which has been in the family since the late 1800's. WILLIAM ZARAK, JR. has been a member of the board since 1983. Bill is a member of Dakota Growers Pasta Co. and Southwest Grain Cooperative, a Cenex Harvest States regionalization. He owns and operates a 2,000-acre family farm with his wife, Darlene, and two of their sons. On this southwestern North Dakota acreage, they raise small grains, corn, beef cows and hogs, and also backgrounds calves. At the December 1999 annual meeting, the Board will decrease from 27 to 17, consisting of five directors from Region 1 (comprised of the state of Minnesota), one director from Region 2 (comprised of the states of Montana and Wyoming), three directors from Region 3 (comprised of the state of North Dakota), two directors from Region 4 (comprised of the state of South Dakota), two directors from Region 5 (comprised of the states of Wisconsin, Michigan and Illinois), two directors from Region 6 (comprised of the states of Alaska, Arizona, California, Idaho, Oregon, Washington and Utah), one director from Region 7 (comprised of the states of Iowa and Missouri) and one director from Region 8 (comprised of the states of Colorado, Nebraska, Kansas, Oklahoma and Texas. (In addition to the states referenced above, the Board of Directors has temporarily assigned the states of Connecticut, Indiana, Kentucky and Ohio to Region 5, the states of Alabama, Arkansas, Florida, Louisiana and Mississippi to Region 7 and the state of New Mexico to Region 8.) Downsizing will be achieved by early retirement. Ten directors have accepted an early retirement option that will be effective December 1999. The plan 53 developed by the Board for staggered terms designated terms for each director based upon their last election date. The plan calls for the election in 1999 of directors in each of the following Regions: Region 1 (Minnesota) (two seats) Incumbent Curt Eischens Incumbent Jerry Hasnedl Region 2 (Montana, Wyoming) No Incumbent Region 3 (North Dakota) Incumbent Bruce Anderson Region 5 (Wisconsin, Michigan, Illinois) No Incumbent Region 6 (Alaska, Arizona, California, Incumbent Steve Burnet Idaho, Oregon, Washington, Utah) Region 7 (Iowa, Missouri) Incumbent Denis Schilmoeller All these elections will be for three-year terms and are open to any eligible candidate. To be eligible, a candidate must meet the following qualifications: o At the time of the election, the individual must be less than the age of 68. o The individual must be a member of this cooperative or a member of a Cooperative Association Member. o The individual must reside in the Region from which he or she is to be elected. o The individual must be an active farmer or rancher. "Active farmer or rancher" means an individual whose primary occupation is that of a farmer or rancher. o The definition of "farmer or rancher" shall not include anyone who is a full-time employee of this cooperative, or of a Cooperative Association Member. o The individual must currently be serving or shall have served at least one full term as a director of a Cooperative Association Member of this cooperative. EXECUTIVE OFFICERS The table below lists the executive officers and other senior officers of the Company as of August 31, 1999, none of whom holds any equity in the Company. Officers are elected annually by the Board of Directors.
NAME AGE POSITION - ---- --- ----------------------------------------------------------- Noel K. Estenson 60 Chief Executive Officer John D. Johnson 51 President and General Manager Michael H. Bergeland 55 Executive Vice President -- Grain & Agri Services James D. Tibbetts 49 Executive Vice President -- Consumer Foods Leon E. Westbrock 52 Executive Vice President -- Energy & Crop Inputs Other senior officers: Patrick Kluempke 51 Senior Vice President -- Corporate Planning Tom Larson 51 Senior Vice President -- Public and Government Affairs Maury Miller 54 Senior Vice President -- Financial/Member Services Robert Oebser 59 Group Vice President -- Energy Mark Palmquist 42 Senior Vice President -- Aligned Grain John Schmitz 49 Senior Vice President and Chief Financial Officer David Swenson 44 Senior Vice President -- Farm Marketing & Supply Debra Thornton 48 Senior Vice President -- General Counsel and Administration
NOEL K. ESTENSON. Noel Estenson, Chief Executive Officer of Cenex Harvest States, started his career at Cenex in 1963. He was appointed President and CEO in 1987. On June 1, 1998, Cenex, Inc. and Harvest States Cooperatives merged to form Cenex Harvest States Cooperatives and Mr. Estenson was named Chief Executive Officer of the Company. In addition, Mr. Estenson is currently Chairman of the boards of CF Industries, Inc. and National Council of Farmer Cooperatives, based in Washington, D.C. Mr. Estenson was raised on his family's potato and grain farm in Northwestern Minnesota's Red River Valley. He graduated from North Dakota State University with a degree in agricultural economics. 54 JOHN D. JOHNSON. John Johnson was born in Rhame, N.D., and grew up in Spearfish, S.D. He earned a degree in business administration and a minor in economics from Black Hills State University. In 1976, he joined Harvest States Cooperatives as a feed consultant in the FTA Feeds Division, later becoming regional sales manager, Director of Sales and Marketing and then General Manager of GTA Feeds. In 1992, he was elected Group Vice President of Farm Marketing and Supply for Harvest States Cooperatives and was selected President and CEO in January 1995. Mr. Johnson became President and General Manager of Cenex Harvest States upon its creation June 1, 1998. Mr. Johnson serves on Ventura Foods, Sparta Foods and NCRA boards of directors. MICHAEL H. BERGELAND. Michael Bergeland, Executive Vice President of Grain and Agri-Services, is responsible for the Farm Marketing and Supply Division and the Aligned Grain Division of Cenex Harvest States. Mr. Bergeland is a native Minnesotan, and the son of a cooperative elevator manager. He attended Moorhead State College before joining Harvest States Cooperatives in 1967. He has held various positions in the Grain Marketing Division, which included grain merchandising at the GTA marketing offices of Montevideo, MN; Great Falls, MT; and Portland OR. He returned to the St. Paul office in 1978 as a senior corn merchandiser. In 1982, Mr. Bergeland was named Director of Line Elevator Operations, In May of 1987, he was named Senior Vice President and Director of Country Services. In January 1995, he was appointed Group Vice President of Grain and Agri Services. JAMES D. TIBBETTS. James D. (Jim) Tibbetts, Executive Vice President -- Consumer Foods, manages the Company's current partnerships with Ventura Foods and Sparta Foods. He also identifies further food processing and packaging opportunities that help the Company deliver value to consumers. Mr. Tibbetts joined Harvest States Cooperatives in November 1995. During the first year, he managed the Holsum Foods Division. This food manufacturing operation was merged with the food manufacturing operations of Mitsui of Japan to form Ventura Foods, LLC., a major packager of agricultural-based vegetable oil products in August, 1996. Prior to joining the Company, Mr. Tibbetts was a Senior Vice President for Farm Credit Leasing in Minneapolis, Minnesota. Mr. Tibbetts is a native of South Dakota and was raised on a Midwestern diversified farm. He graduated from Northern State University in Aberdeen, S.D., with a degree in Business Administration. LEON E. WESTBROCK. Leon Westbrock is the Executive Vice President -- Energy and Crop Inputs for Cenex Harvest States. He joined the cooperative system in 1976 in the Merchandising Department at Cenex. He then managed local cooperatives in Michigan, North Dakota, Elbow Lake, MN and Alexandria MN. In 1998, he became co-president of Country Energy, LLC., an energy sales, distribution and marketing alliance between Cenex Harvest States and Farmland Industries. At the regional level, Mr. Westbrock has held numerous positions in member services and petroleum. He serves as Chairman of Cooperative Refining, LLC and as Vice Chairman of the Board of Directors of Universal Cooperatives. He also serves on the Cenex/Land O'Lakes Agronomy Company Board and is the Chairman of the National Cooperative Refinery Association Board. Mr. Westbrock was born and raised on his family's 640-acre small grain and dairy farm near Browns Valley, MN. Mr. Westbrock received a Bachelor's Degree from St. Cloud State University and served a tour in the U.S. Army. OTHER SENIOR OFFICERS: PATRICK KLUEMPKE, Senior Vice President of Corporate Planning, was raised on a family dairy farm in central Minnesota, and received a Bachelor of Science degree in Finance and Accounting from St. Cloud University and the University of Minnesota. Mr. Kluempke served in the United States Army in South Vietnam and South Korea, as Aide to General J. Guthrie. He began his agribusiness career in grain procurement and merchandising at General Mills and later with Louis Dreyfus Corporation in export marketing. Mr. Kluempke joined the predecessor to Cenex Harvest States when G.T.A. was being merged with North Pacific Grain Growers, in 1983, to form Harvest States Cooperatives and has held various positions in the commodity marketing division and at the corporate level. Mr. Kluempke serves on the board of Ventura Foods, a joint venture company between Cenex Harvest States and Mitsui & Company, Japan. TOM LARSON is Sr. Vice President, Public and Government Affairs at Cenex Harvest States. After growing up on a 480-acre crop and hog farm near Slayton, Minnesota, he earned a Bachelor's degree in Agriculture Education from South Dakota State University. After working as a vo-ag teacher, he took 55 an agronomy sales position with Cenex and later managed the local cooperative at Hoffman, Minnesota, for two years. Mr. Larson returned to the regional cooperative in 1978 and held positions in marketing and planning. He moved to Agronomy in 1987 and became director of Agronomy Services for Cenex/Land O'Lakes Agronomy Company in 1988. He was later named Vice President of Agronomy Services until 1996 when he became Vice President of Cenex Supply and Marketing which included overseeing the operation of more than two dozen Cenex-owned agricultural supply outlets. Mr. Larson was named to his current position -- Senior Vice President, Public and Governmental Affairs -- in January 1999. He oversees the public affairs area of the Company, which includes communications, corporate giving, meetings and travel and governmental affairs, including the Washington, D.C. office. He is active in the FFA organization and is a recipient of its Honorary American Degree. Mr. Larson and his wife, Denice, have two children and reside in Circle Pines, Minnesota. MAURY MILLER, Senior Vice President of Financial/Member Services, grew up on a farm in Clarkfield, MN. He is a graduate of Gustavus Adolphus College and also served as an officer in the U.S. Navy. Mr. Miller joined Cenex in 1971 and in 1978 was named Vice President of Planning. Since 1987 he has been Vice President of Member Services and Marketing Communications for the Cenex Land O'Lakes joint venture. In 1999, he became Senior Vice President of Financial/ Member Services. ROBERT OEBSER, Group Vice President, Energy, is responsible for the Company's refinery at Laurel, Montana, as well as pipeline and terminal operations and crude oil supply. He joined Cenex in 1985 as General Manager, Refining and Crude Supply, and was promoted to his present position in September 1987. Mr. Oebser was chairman of the National Cooperative Refinery Association Board of Directors at August 31, 1999. Prior to joining Cenex, Bob spent twenty years in the petroleum industry. A native of Chicago, Mr. Oebser grew up in Iowa and prior to three-years in the Air Force, he graduated from the University of Iowa with a degree in Business Administration. MARK PALMQUIST is the Senior Vice President of the Aligned Grain Division. He is responsible for all areas of Grain Marketing including terminal operations, exports, logistics, transportation, and grain marketing joint ventures. He is also responsible for the operations of wheat milling and oilseed processing. Mr. Palmquist has worked for Cenex Harvest States in the Grain Marketing Division for 19 years. Starting as a grain buyer and moving into merchandising, Mark has traded many different commodities including corn, soybeans and spring wheat. In 1990, he assumed the role of Vice President and director of Grain Marketing and then, in 1993, was promoted to Senior Vice President. Mr. Palmquist attended Gustavus Adolphus College in St. Peter, MN, graduating in 1979. He also attended the Master of Business Administration program at the University of Minnesota. JOHN SCHMITZ is the Senior Vice President and Chief Financial Officer of the Company. Mr. Schmitz joined Harvest States Cooperatives in 1974 as Corporate Accountant and has held a number of accounting and finance positions within the Company, including divisional controller positions in Country Services, Farm Marketing & Supply and Grain Marketing. In 1986, he was named Vice President and controller of Harvest States, and had served in that position up to the time of the merger with Cenex when he became Vice President, Finance, of Cenex Harvest States. In May 1999, Mr. Schmitz became Senior Vice President and Chief Financial Officer. Mr. Schmitz earned a Bachelor of Science Degree in Accounting from St. Cloud State University, and is a member of the American Institute of Certified Public Accountants, the Minnesota Society of CPA's and the National Society of Accountants for Cooperatives. DAVID R. SWENSON, Senior Vice President of the Farm Marketing & Supply Division, is responsible for all aspects of the division including Agri Service Centers, Regionalizations, Feed Operations, Farm Supply, Fin-Ag and all Cenex Supply and Marketing locations. Mr. Swenson grew up on a cash grain farm near Elbow Lake, MN. He graduated from the University of Minnesota with an agriculture business administration degree and began his career with the St. Paul Bank for Cooperatives. He then joined the Company in 1979 as the director of Financial and Field Services. He has also had the following responsibilities: Vice President, director of Line Operations 1986-1990, Senior Vice President, director of Country and Ag Marketing Services 1991-1992, Senior Vice President, Corporate Planning and Business Development 1992-1993, and Senior Vice President, Country and Marketing Services 1993-1994. In 1995 Mr. Swenson was appointed to Senior Vice President, Farm Marketing & Supply and is also an active member on various boards in the Ag Industry. 56 DEBRA THORNTON, Senior Vice President, General Counsel and Administration, is responsible for the Company's legal, risk management, administration and human resources operations. She was born in Sioux Falls, SD, but has spent most of her life in the Twin Cities. She graduated from Mankato State College in 1973 with a Bachelor of Science Degree and worked as an insurance adjuster for a couple of years before attending William Mitchell College of Law. While she attended law school at night, Ms. Thornton worked as a law clerk for a Minneapolis litigation firm, Hvass, Weisman & King. She graduated cum laude in 1979 with a Juris Doctorate degree. In 1979, Debra joined Harvest States as an attorney and was named Vice President and Corporate Counsel in 1993. On June 1, 1998, following Harvest States Cooperatives merger with Cenex, Inc., Ms. Thornton was named Senior Vice President and General Counsel of Cenex Harvest States Cooperatives. On June 1, 1999, she was appointed to her current position as Senior Vice President, General Counsel and Administration. Ms. Thornton is a member of the Minnesota State Bar Association, the American Bar Association, the American Corporate Counsel Association and the Legal, Tax and Accounting Committee of the National Council of Farmer Cooperatives. As of June 1, 1998, Noel Estenson, who was the President and Chief Executive Officer of Cenex, became the Chief Executive Officer of Cenex Harvest States to serve through no later than December 31, 2000. John D. Johnson, who was the President and Chief Executive Officer of the Harvest States Cooperatives, became the President and General Manager of Cenex Harvest States, reporting to the Chief Executive Officer. Mr. Johnson will assume the position of Chief Executive Officer of Cenex Harvest States upon Mr. Estenson's retirement. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION. The following table sets forth the cash and noncash compensation earned by the Chief Executive Officer and each of the four most highly compensated executive officers of the Company (other than the Chief Executive Officer) whose total salary and bonus or similar incentive payment earned during the year ended August 31, 1999, exceeded $100,000 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION --------------------------------------- NAME AND OTHER ANNUAL ALL OTHER PRINCIPAL POSITION YEAR ENDED SALARY(1) BONUS(1) COMPENSATION(2) COMPENSATION(3) - -------------------------------- ------------ ----------- ---------- ----------------- ---------------- Noel K. Estenson 8/31/99 $543,333 $355,680 $20,000 $12,719 Chief Executive Officer 5/31/98 480,000 352,800 6,836 8,850 5/31/97 476,250 360,000 6,679 8,850 John D. Johnson 8/31/99 583,347 235,971 8,622 13,468 President and General Manager 5/31/98 550,000 350,000 6,699 11,600 5/31/97 500,000 150,000 7,172 7,186 Michael H. Bergeland 8/31/99 273,765 227,100 7,172 16,757 Executive Vice President -- 5/31/98 233,100 140,000 6,099 10,352 Grain and Agri-Services 5/31/97 224,000 120,000 7,048 7,890 James D. Tibbetts 8/31/99 257,500 55,200 3,665 10,226 Executive Vice President -- 5/31/98 180,000 108,000 2,489 5,266 Consumer Foods 5/31/97 160,000 80,000 5,699 2,882 Leon E. Westbrock 8/31/99 313,269 125,972 723 11,066 Executive Vice President -- 5/31/98 252,500 181,688 3,662 8,850 Energy and Crop Inputs 5/31/97 245,000 151,263 2,114 8,850
- ------------------ (1) Amounts shown include amounts deferred at the employee's election under the Company's Deferred Compensation Program and amounts waived in exchange for share options. (2) Amounts shown include personal use of a Company vehicle. (3) Other compensation includes the Company's matching contributions under the Company's 401(k) Plan and the portion of group term life insurance premiums paid by the Company. 57 On June 1, 1999 the Company entered into an employment agreement with Noel Estenson, the CEO. The employment agreement provides that Mr. Estenson will be employed from June 1, 1999 through December 31, 2000. The agreement provides a base salary of $520,000 per year with increases annually of not less than 4%. In addition, Mr. Estenson would be entitled to receive annual variable and long-term incentive compensation based on projected earnings in the long-range business plan in effect on January 1, 1998. The agreement provides that if the Company and Farmland Industries, Inc. complete the proposed consolidation prior to December 31, 2000, and Mr. Estenson remains employed through December 31, 2000, he shall be entitled to an incentive payment of 2.99 times his average W-2 income for the five calendar years ending December 31, 1999. In the event that he is terminated without cause or resigns for good reason as defined in the agreement, he would receive severance pay based on the same formula; provided, however, that in no event will Mr. Estenson be entitled to both severance pay and a transaction incentive. The employment agreement also includes covenants by Mr. Estenson not to compete with the Company for a period of two years after his employment ends. On June 16, 1999 the Company entered into an employment agreement with John Johnson, the President and General Manager. The employment agreement provides for a rolling three-year period of employment commencing on June 16, 1999 at an initial base salary of at least $575,000, subject to annual review. Mr. Johnson's employment may be terminated at any time by either party, subject to the rights and obligations set forth in the employment agreement. The Company is obligated to pay Mr. Johnson a severance allowance of 2.99 times his base salary and target bonus in the event Mr. Johnson's employment is terminated for any reason other than for cause (as such term is defined in the employment agreement), death, disability or voluntary termination. The employment agreement includes a provision to pay Mr. Johnson a transaction incentive in the amount of his base salary plus target bonus for the calendar year 1999 if the Company and Farmland Industries, Inc. complete the proposed consolidation prior to December 31, 2000 and Mr. Johnson has not by then resigned or been terminated for cause. The employment agreement provides that if the consolidation with Farmland is closed on or before December 31, 2000 and if Mr. Johnson is not offered the position of CEO of the consolidated company on or before June 1, 2001 and he thereafter resigns, he shall receive 1.99 times his base salary plus target bonus. The agreement further provides that if the consolidation with Farmland is not closed on or before December 31, 2000 and he is not offered the position of CEO of Cenex Harvest States on or before December 31, 2000, he shall be entitled to 2.99 times his base salary plus target bonus. The contract provides for a gross-up for any possible excise tax. Mr. Johnson has also agreed to a non-compete clause for one or two years, depending on the circumstances. The Company has also entered into an employment agreement with Michael Bergeland, an Executive Vice President dated May 1, 1999. This agreement is for a term beginning on the effective date and continuing through August 31, 2001. Base salary has been set at $300,000, subject to annual review, and the maximum annual bonus under the variable pay plan. At expiration of the agreement, Mr. Bergeland will be given five years credit on his non-qualified retirement plan. Mr. Bergeland is also entitled to a transaction incentive of one times base pay plus target bonus for 1999 if the consolidation with Farmland closes on or before December 31, 2000. Mr. Bergeland has agreed to a three-year non-compete clause. Certain management employees are eligible to participate in a plan providing an opportunity to receive a bonus based on Annual Compensation (base and target bonus) if the unification of Cenex Harvest States and Farmland Industries takes place prior to 12/31/00. The plan requires continued employment through the date of unification. The plan also provides a severance arrangement tied to Annual Compensation if employment is terminated under certain circumstances, within two years after the unification. THE FOLLOWING SUMMARIZES CERTAIN BENEFITS IN EFFECT AS OF 8/31/99 TO THE NAMED EXECUTIVE OFFICERS. MANAGEMENT COMPENSATION INCENTIVE PROGRAM Each Named Executive Officer is eligible to participate in the Management Compensation Incentive Program (the "Incentive Program") for the year ending August 31, 1999. The Incentive Program is based on Company, group or division performance and individual performance. These amounts were paid after August 31, 1999. The target incentive is 50% of base compensation. 58 RETIREMENT PLAN Each of the Named Executive Officers is entitled to receive benefits under the Company's Cash Balance Retirement Plan (the "Retirement Plan"). An employee's benefit under the Retirement Plan depends on credits to the employee's account, which are based on the employee's total salary each year the employee works for the Company, the length of service with the Company and the rate of interest credited to the employee's account balance each year. Credits are made to the employee's account from Pay Credits, Special Career Credits and Investment Credits. The amount of Pay Credits added to an employee's account each year is a percentage of the employee's gross salary, including overtime pay, commissions, severance pay, bonuses, any compensation reduction pursuant to the 401(k) Plan and any pretax contribution to any of the Company's welfare benefit plans, paid vacations, paid leaves of absence and pay received if away from work due to a sickness or injury. The Pay Credits percentage received is determined on a yearly basis, based on the years of Benefit Service completed as of January 1 of each year. An employee receives one year of Benefit Service for every calendar year of employment in which the employee completed at least 1,000 hours of service. Effective January 1, 1999, Pay Credits are earned according to the following schedule: PAY BELOW SOCIAL SECURITY PAY ABOVE SOCIAL SECURITY YEARS OF BENEFIT SERVICE TAXABLE WAGE BASE TAXABLE WAGE BASE - -------------------------- ------------------------- ------------------------- 1 to 3 years ............. 3% 6% 4 to 7 years ............. 4% 8% 8 to 11 years ............ 5% 10% 12 to 15 years ........... 6% 12% 16 years and more ........ 7% 14% Special Career Credits were designed to supplement the benefits of mid-career employees affected by the change from the former plan to the current Retirement Plan. Employees qualify for Special Career Credits only if they were employed by the Company and met certain age and service requirements (as defined by the Retirement Plan) on January 1, 1988. The following table shows the credits for those who qualify: TOTAL OF AGE AND BENEFIT SERVICE ON JANUARY 1, 1988 SPECIAL CAREER CREDITS - -------------------------------------------------- ---------------------- 50 to 54 ......................................... 1% of total salary 55 to 59 ......................................... 2% of total salary 60 to 64 ......................................... 3% of total salary 65 to 69 ......................................... 4% of total salary 70 or more ....................................... 5% of total salary Special Career Credits continue at the percentage rate determined from the employee's status on January 1, 1988, for as long as the employee is with the Company. The Company credits an employee's account at the end of the year with an Investment Credit based on the balance at the beginning of the year. The Investment Credit is based on the average return for one-year U.S. Treasury Bills for the preceding 12-month period. The maximum Investment Credit will not exceed 12% for any year. As of December 31, 1998, the dollar value of the account of each of the Named Executive Officers was: Noel K. Estenson ............................................. $848,035 John D. Johnson .............................................. 215,310 Michael H. Bergeland ......................................... 453,294 Leon E. Westbrock ............................................ 276,457 James D. Tibbetts ............................................ 148,151 Mr. Estenson, Mr. Westbrock and Mr. Bergeland could be eligible for a retirement benefit, under a grandfather provision of a prior provision of the plan, or a predecessor plan, instead of the above amount. Such amount would be affected by age at retirement and salary. 59 DEFERRED COMPENSATION PLAN Effective April 1, 1994, the Company established a deferred compensation plan (the "Deferred Compensation Plan"). Participants in the Deferred Compensation Plan are select management or highly compensated employees of the Company who have been designated as eligible by the President of the Company to participate in such plan. Under the Deferred Compensation Plan, a participant may elect to have an amount of deferred compensation credited to the participant's account for the applicable Plan Year (as defined in the Deferred Compensation Plan). The compensation actually earned during the Plan Year by a participant who elects deferred compensation is reduced by the percentage or amount so elected. A participant may elect to contribute no more than 30% of each payment of base compensation, provided that the percentage selected is expected to result in annual contributions totaling at least $1,000. Also, the participant may elect to contribute either a percentage or a specific dollar amount of any bonus or similar incentive payment that may become payable during the Plan Year, provided the contribution will not be less than the smaller of $1,000 or 100% of the bonus payable. The deferred compensation credited under the Deferred Compensation Plan is allocated to the account of the participant as of the date that the compensation would otherwise have been paid to the Participant in cash. Income is credited to each account each Plan Year at an annual rate equal to 1% over the five-year U.S. Treasury Bond rate as of October 1 of the year preceding the Plan Year, as adjusted as appropriate to reflect contributions to and distributions from the account during the Plan Year. A participant's credits to his or her account are unsecured obligations of the Company to pay the participant the actual amount of the credits upon distribution pursuant to the Deferred Compensation Plan. Each participant or beneficiary is only a general creditor of the Company with respect to his or her account. Accounts are maintained for recordkeeping purposes only. Obligations of the Company to pay benefits under the Deferred Compensation Plan may be satisfied by distributions from a grantor trust created by the Company in its sole discretion for such purpose. The Company has not created any such trust. Amounts credited to a participant's account are distributed on a predetermined date, such as the date of retirement or the date the participant attains a particular age, in either a lump sum or in installments pursuant to the participant's prior irrevocable election. The Deferred Compensation Plan also provides for distribution upon the participant's death or disability, for unforeseeable emergencies and upon termination of the plan. The President of the Company may at any time amend the Plan in whole or in part for any reason. No amendment may decrease the benefits under the Plan which have accrued prior to the date of such amendment, but any amendment may modify the interest rate to be used for future deferrals and for the balance in each account on the date the amendment was adopted. The Company, by action of the President, may at any time terminate the Plan. In October 1997, the Company adopted a share option plan, which allows executive officers to waive bonuses and up to 30 percent of salary in exchange for options to purchase at a discount, shares of selected mutual funds. The Company has filed a Form S-8, dated December 12, 1997 on this program. This plan allows officers to buy investments at a specific price. Some options have vesting schedules. 401(k) PLAN Each Named Executive Officer is eligible to participate in the Cenex Harvest States Savings Plan (the "401(k) Plan"). All benefit-eligible employees of the Company are eligible to participate in the 401(k) Plan. Effective January 1, 1999 participants may contribute between 1% and 16% (not to exceed 6% in the case of "highly compensated" employees) of their pay on a pre-tax basis. Each of the Named Executive Officers is a "highly compensated" employee. The Company matches 50% of the first 6% of pay contributed each year. The Company's Board of Directors may elect to reduce or eliminate matching contributions for any year or any portion thereof. Participants are 100% vested in their own contributions and in any Company matching contribution made on the participant's behalf. DEFERRED COMPENSATION SUPPLEMENTAL RETIREMENT PLAN Each of the Named Executive Officers may participate in the Company's Deferred Compensation Supplemental Retirement Plan (the "Supplemental Plan"). Participants in the Supplemental Plan are select management or highly compensated employees of the Company who have been designated as 60 eligible by the President of the Company to participate in such plan. Compensation deferred under the Deferred Compensation Plan or waived under the Share Option Plan, is not eligible for Pay Credits or Special Career Credits under the Cash Balance Retirement Plan or matching contributions under the 401(k) Plan. The Supplemental Plan is intended to replace the benefits lost under those plans due to Section 415 of the Internal Revenue Code of 1986, as amended (the "Code") which cannot be considered for purposes of benefits due to Section 401(a)(17) of the Code under the qualified plans that the Company offers. The Supplemental Plan is not funded or qualified for special tax treatment under the Code. As of December 31, 1998, the dollar value of the account of each of the Named Executive Officers was approximately: Noel K. Estenson .......................................... $3,962,808 John D. Johnson ........................................... 1,296,217 Michael H. Bergeland ...................................... 709,236 Leon E. Westbrock ......................................... 692,807 James D. Tibbetts ......................................... 70,887 DIRECTORS' COMPENSATION The Board of Directors met monthly during the year ended August 31, 1999. Through August 31, 1999 the Company provided its directors with compensation of $42,000, paid in twelve monthly payments, with the two Co-Chairmen of the Board receiving an additional annual compensation of $12,000, paid in twelve monthly payments. The directors receive a per diem of $300 plus actual expenses and travel allowance for each day spent on Company meetings (other than regular Board meetings and the Annual Meeting), life insurance and health and dental insurance. The directors have a retirement benefit of $125 per month per year of service, with a maximum benefit of $1,875 per month, for life with a guarantee of 120 months (paid to beneficiary in the event of death). This benefit commences at age 60 or retirement, whichever is later. This retirement benefit may be converted to a lump sum. The retired directors may also continue health benefits until eligible for Medicare and thereafter pay at their own expense for a Medicare supplemental policy. The ten directors who volunteered to take the early retirement option effective December, 1999 will receive $4,000 per month for 24 months, or the equivalent lump sum using the GATT rate as the discount rate. COMMITTEES OF THE BOARD OF DIRECTORS The Board appoints ad hoc committees from time to time to review certain matters and make reports and recommendations to the full Board of Directors for action. The entire Board of Directors determines the salaries and incentive compensation for the chief executive officer and for the president and general manager using industry and compensation studies. The Board of Directors has a standing committee to review the results and scope of the annual audit and other services provided by the Company's independent auditors, and another standing committee to review equity redemption policy and its application to situations believed by the equity holder or patron's equity department to be unusual. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION As noted above, the Company's Board of Directors did not have a Compensation Committee. The entire Board of Directors determined the compensation of the Chief Executive Officer and the terms of the employment agreement with the Chief Executive Officer. The Chief Executive Officer determined the compensation for all other executive officers, other than the president and himself. 61 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Beneficial ownership of equity securities as of August 31, 1999, is shown below:
AMOUNT AND NATURE OF BENEFICIAL TITLE OF CLASS NAME OF BENEFICIAL OWNER(1) OWNERSHIP % OF CLASS - -------------- --------------------------------------- ------------- ---------- Wheat Milling Equity Participation Units: Directors: Bruce Anderson ...................... -- Robert Bass ......................... -- Steven Burnet ....................... 30,000 units * Steve Carney ........................ 27,000 units * Curt Eischens ....................... -- Robert Elliott ...................... -- Edward Ellison ...................... 6,000 units * Sheldon Haaland ..................... -- Fred Harris ......................... -- Jerry Hasnedl ....................... 10,000 units * Edward Hereford ..................... -- Douglas Johnson ..................... -- James Kile .......................... -- Gerald Kuster ....................... 22,000 units * Leonard Larsen ...................... 9,000 units * Tyrone Moos ......................... 3,000 units * Gaylord Olson ....................... -- Duane Risan ......................... 24,000 units * Denis Schilmoeller .................. -- Duane Stenzel ....................... -- Michael Toelle ...................... -- Richard Traphagen ................... -- Russell Twedt ....................... 5,000 units * Merlin Van Walleghen ................ -- Elroy Webster ....................... -- Arnold Weisenbeck ................... -- William Zarak, Jr. .................. 6,000 units * Noel Estenson ....................... -- John D. Johnson ..................... -- Michael H. Bergeland ................ -- James Tibbetts ...................... -- Leon Westbrock ...................... -- Patrick Kluempke .................... -- Tom Larson .......................... -- Maury Miller ........................ -- Robert Oebser ....................... -- Mark Palmquist ...................... -- John Schmitz ........................ -- David Swenson ....................... -- Debra Thornton ...................... -- Directors and executive officers as a --------------- ---- group .............................. 142,000 units 3.07% =============== ====
62
AMOUNT AND NATURE OF BENEFICIAL TITLE OF CLASS NAME OF BENEFICIAL OWNER(1) OWNERSHIP % OF CLASS - -------------- --------------------------------------- ------------- ---------- Oilseed Processing and Refining Equity Participation Units: Directors: Bruce Anderson ...................... -- Robert Bass ......................... -- Steven Burnet ....................... -- Steve Carney ........................ -- Curt Eischens ....................... -- Robert Elliott ...................... -- Edward Ellison ...................... 12,000 units 1.15% Sheldon Haaland ..................... 1,500 units * Fred Harris ......................... -- Jerry Hasnedl ....................... 1,500 units * Edward Hereford ..................... -- Douglas Johnson ..................... -- James Kile .......................... -- Gerald Kuster ....................... 5,000 units * Leonard Larsen ...................... -- Tyrone Moos ......................... -- Gaylord Olson ....................... -- Duane Risan ......................... -- Denis Schilmoeller .................. -- Duane Stenzel ....................... 2,500 units * Michael Toelle ...................... -- Richard Traphagen ................... -- Russell Twedt ....................... -- Merlin Van Walleghen ................ 6,000 units * Elroy Webster ....................... -- Arnold Weisenbeck ................... -- William Zarak, Jr. .................. -- Noel Estenson ....................... -- John D. Johnson ..................... -- Michael H. Bergeland ................ -- James Tibbetts ...................... -- Leon Westbrock ...................... -- Patrick Kluempke .................... -- Tom Larson .......................... -- Maury Miller ........................ -- Robert Oebser ....................... -- Mark Palmquist ...................... -- John Schmitz ........................ -- David Swenson ....................... -- Debra Thornton ...................... -- Directors and executive officers as a --------------- ---- group .............................. 28,500 units 2.72% =============== ====
- ------------------ (1) Includes units held by spouse. * Less than 1%. No director listed above has the right or option to acquire beneficial ownership in additional securities other than by purchase on the open market from current holders of such securities. Executive officers, as non-producers, are ineligible to hold these securities. 63 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Because directors must be active patrons of the Company or an Affiliated Association, transactions between the Company and directors are customary and expected. Transactions include the sale of commodities to the Company and the purchase of products and services from the Company. During each of the periods indicated the value of those transactions between a particular director (and members of such directors' immediate family, which includes such director's spouse; parents; children; siblings; mothers and fathers-in-law; sons and daughters-in-law; and brothers and sisters-in-law) and the Company that exceeded $60,000 are shown below. YEAR ENDED NAME AUGUST 31, 1999 - ---- --------------- William Zarak ........................................... $ 80,415 Steve Carney ............................................ 318,571 Jerry Hasnedl ........................................... 187,151 Merlin Van Walleghen .................................... 165,041 Edward Ellison .......................................... 631,790 Gerald Kuster ........................................... 101,986 Arnold Weisenbeck ....................................... 295,112 64 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS FILED ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The following financial statements and the Report of Independent Accountants therein are filed as part of this Form 10-K.
PAGE NO. -------- I. CENEX HARVEST STATES COOPERATIVES Consolidated Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ................ F-1 Consolidated Statements of Operations for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 ............................ F-2 Consolidated Statements of Equities and Comprehensive Income for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 ................................................................................... F-3 Consolidated Statements of Cash Flows for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 ............................ F-5 Notes to Consolidated Financial Statements .................................................. F-6 Report of Independent Accountants ........................................................... F-25 II. OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ............................. F-26 Statements of Operations for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-27 Statements of Defined Business Unit Equity and Comprehensive Income (Loss) for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 ...................................................................... F-28 Statements of Cash Flows for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-29 Notes to Financial Statements ............................................................... F-30 Report of Independent Accountants ........................................................... F-37 Independent Auditors' Report ................................................................ F-38 III. WHEAT MILLING DEFINED BUSINESS UNIT Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ............................. F-39 Statements of Operations for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-40 Statements of Defined Business Unit Equity and Comprehensive Income (Loss) for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 ...................................................................... F-41 Statements of Cash Flows for the year ended August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-42 Notes to Financial Statements ............................................................... F-43 Report of Independent Accountants ........................................................... F-50 Independent Auditors' Report ................................................................ F-51
(a)(2) FINANCIAL STATEMENT SCHEDULES None. (a)(3) EXHIBITS 10.32 Benefit Plan dated June 9, 1999 incorporated by reference, exhibit 10.32 of registrant's 10-Q for the period ended May 31, 1999. 10.33 Tacoma Export Marketing Company Amended and Restated Partnership Agreement between Cargill, Incorporated and Cenex Harvest States Cooperatives dated as of July 12, 1999. 10.34 Cooperative Refining, LLC Limited Liability Company Agreement dated September 1, 1999. 10.35 Transaction Agreement dated September 23, 1999 between Cenex Harvest States and Farmland Industries, Inc. 10.36 Employment Agreement between Michael Bergeland and Cenex Harvest States Cooperatives dated May 1, 1999. 65 23.1 Consent of Independent Accountants. 23.2 Independent Auditors' Consent. 24.1 Power of Attorney. 99.1 Cautionary Statement. 99.2 Independent Auditor's Report. 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedules for the three months ended August 31, 1998 due to reclassifications made to conform to current presentation, and for the years ended May 31, 1998 and 1997 due to the merger of Harvest States Cooperatives and Cenex, Inc. accounted for as a pooling of interests. (b) REPORTS ON FORM 8-K No reports on Form 8-K have been filed by the Registrant during the fourth quarter of the year ended August 31, 1999. (c) EXHIBITS The exhibits shown in Item 14(a)(3) above are being filed herewith. (d) SCHEDULES None. SUPPLEMENTAL INFORMATION As a cooperative, the Company does not utilize proxy statements. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 22, 1999. CENEX HARVEST STATES COOPERATIVES By: /s/ NOEL K. ESTENSON ------------------------- Noel K. Estenson CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on November 22, 1999:
SIGNATURE TITLE - -------------------------------------------------------------- -------------------------------------------------- /s/ NOEL K. ESTENSON Chief Executive Officer ------------------------------------- (principal executive officer) Noel K. Estenson /s/ JOHN SCHMITZ Senior Vice President and Chief Financial Officer ------------------------------------- (principal financial officer) John Schmitz /s/ JODELL HELLER Vice President and Controller ------------------------------------- (principal accounting officer) Jodell Heller Gerald Kuster* Co-Chairman of the Board of Directors Elroy Webster* Co-Chairman of the Board of Directors Bruce Anderson* Director Robert Bass* Director Steven Burnet* Director Steve Carney* Director Curt Eischens* Director Robert Elliott* Director Edward Ellison* Director Sheldon Haaland* Director Fred Harris* Director Jerry C. Hasnedl* Director Edward Hereford* Director Douglas Johnson* Director James Kile* Director Leonard D. Larsen* Director Tyrone A. Moos* Director Gaylord Olson* Director Duane G. Risan* Director Denis Schilmoeller* Director Duane Stenzel* Director Michael Toelle* Director Richard Traphagen* Director Russell Twedt* Director Merlin Van Walleghen* Director Arnold Weisenbeck* Director William J. Zarak, Jr.* Director * By: /s/ NOEL K. ESTENSON -------------------- Noel K. Estenson ATTORNEY-IN-FACT
67 (This page has been left blank intentionally.) CENEX HARVEST STATE COOPERATIVES CONSOLIDATED BALANCE SHEETS
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 -------------- -------------- ------------- (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents .................................. $ 75,667 $ 120,008 $ 68,798 Receivables ................................................ 606,641 471,516 492,003 Inventories ................................................ 549,703 479,734 533,948 Other current assets ....................................... 39,414 37,707 57,757 ----------- ----------- ---------- Total current assets ..................................... 1,271,425 1,108,965 1,152,506 Investments ................................................. 427,896 347,334 320,621 Property, plant and equipment ............................... 968,333 915,770 868,073 Other assets ................................................ 120,010 97,034 95,315 ----------- ----------- ---------- TOTAL ASSETS ............................................. $ 2,787,664 $ 2,469,103 $2,436,515 =========== =========== ========== LIABILITIES AND EQUITIES CURRENT LIABILITIES: Notes payable .............................................. $ 196,986 $ 475 $ 52,446 Current portion of long-term debt .......................... 21,562 13,855 29,743 Patrons' credit balances ................................... 44,970 41,324 40,182 Patrons' advance payments .................................. 127,755 148,021 112,348 Drafts outstanding ......................................... 30,654 26,367 33,569 Accounts payable ........................................... 449,774 383,161 447,756 Book cash overdraft ........................................ 17,951 28,375 19,257 Accrued expenses ........................................... 119,728 119,373 92,543 Patronage dividends and equity retirements payable ......... 43,000 63,562 88,942 ----------- ----------- ---------- Total current liabilities ................................ 1,052,380 824,513 916,786 Long-term debt .............................................. 461,104 442,985 348,665 Other liabilities ........................................... 88,173 75,801 80,364 Minority interests in subsidiaries .......................... 68,371 59,927 60,727 Commitments and contingencies ............................... 1,117,636 1,065,877 1,029,973 ----------- ----------- ---------- TOTAL LIABILITIES AND EQUITIES ........................... $ 2,787,664 $ 2,469,103 $2,436,515 =========== =========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-1 CENEX HARVEST STATE COOPERATIVES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ---------------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS) REVENUES: Grain and oilseed ............................. $ 3,309,310 $ 810,723 $ 4,629,553 $ 6,036,503 Energy ........................................ 1,345,772 343,747 1,858,069 1,676,842 Agronomy ...................................... 593,927 91,231 696,441 683,429 Processed grain and oilseed ................... 531,877 145,645 615,049 730,101 Feed and farm supplies ........................ 547,732 126,907 546,063 531,177 ----------- ---------- ----------- ----------- 6,328,618 1,518,253 8,345,175 9,658,052 Patronage dividends ........................... 5,876 5,111 70,387 71,070 Other revenues ................................ 100,031 19,271 98,520 85,390 ----------- ---------- ----------- ----------- 6,434,525 1,542,635 8,514,082 9,814,512 ----------- ---------- ----------- ----------- COST AND EXPENSES: Cost of goods sold ............................ 6,140,580 1,473,243 8,149,605 9,475,682 Marketing, general and administrative ......... 148,510 34,998 126,061 126,297 Interest ...................................... 42,438 12,311 34,620 33,368 Minority interests ............................ 10,017 3,252 6,880 7,984 ----------- ---------- ----------- ----------- 6,341,545 1,523,804 8,317,166 9,643,331 ----------- ---------- ----------- ----------- INCOME BEFORE INCOME TAXES ..................... 92,980 18,831 196,916 171,181 INCOME TAXES ................................... 6,980 2,895 19,615 19,280 ----------- ---------- ----------- ----------- NET INCOME ..................................... $ 86,000 $ 15,936 $ 177,301 $ 151,901 =========== ========== =========== =========== DISTRIBUTION OF NET INCOME: Patronage refunds ............................. $ 57,500 $ 32,650 $ 144,578 $ 119,171 Nonpatronage refunds .......................... 8,609 Deferred patronage ............................ 21,773 (24,134) (2,482) 11,137 Unallocated capital reserve ................... 6,727 7,420 26,596 21,593 ----------- ---------- ----------- ----------- Net income .................................. $ 86,000 $ 15,936 $ 177,301 $ 151,901 =========== ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-2 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
CAPITAL NONPATRONAGE EQUITY EQUITY COMMON CERTIFICATES CERTIFICATES STOCK -------------- -------------- -------------- (DOLLARS IN THOUSANDS) BALANCES, JUNE 1, 1996 ......................................... $ 241,516 $ 9,740 $ 21 Patronage determination Patronage distribution ........................................ 30,877 6,115 Equity retirement determination ............................... Equities retired .............................................. (8,130) (74) (1) Equities issued ............................................... 5,066 Other, net .................................................... 90 (637) Comprehensive income: Net income ................................................... Other comprehensive income ................................... Total comprehensive income .................................... Initial investment offering, net .............................. (2,035) Cash patronage refund provisions .............................. Equity retirement provisions .................................. --------- -------- ---------- BALANCES, MAY 31, 1997 ......................................... 267,384 15,144 20 Patronage determination ....................................... Patronage distribution ........................................ 31,258 6,863 Equity retirement determination ............................... Equities retired .............................................. (9,542) (520) Equities issued ............................................... 10,561 Other, net .................................................... 128 (178) Comprehensive income: Net income ................................................... 8,609 Other comprehensive loss ..................................... Total comprehensive income .................................... Cash patronage refund provisions .............................. Equity retirement provisions .................................. (13,329) --------- -------- ---------- BALANCES, MAY 31, 1998 ......................................... 286,460 29,918 20 Results of operations of Cenex, Inc. for the eight months May 31, 1998 .......................................... (21) (36) Exchange of equities to effect pooling ........................ 540,058 (20) Included with May 31, 1998 equity retirements payable ......... 4,429 Equities retired .............................................. (4,429) (13) Equities issued ............................................... 911 Other, net .................................................... (64) Comprehensive income: Net income ................................................... Other comprehensive loss ..................................... Total comprehensive income .................................... Cash patronage refund provisions .............................. Equity retirement provisions .................................. 1,832 --------- -------- ---------- BALANCES, AUGUST 31, 1998 ...................................... 829,240 29,805 -- Patronage determination ....................................... 19,412 Patronage distribution ........................................ 99,052 (612) Equities retired .............................................. (23,700) (97) Equities issued ............................................... 14,714 Other, net .................................................... (674) (311) Comprehensive income: Net income ................................................... Other comprehensive loss ..................................... Total comprehensive income .................................... Cash patronage refund provisions .............................. Equity retirement provisions .................................. (25,750) --------- -------- ---------- BALANCES, AUGUST 31, 1999 ...................................... $ 912,294 $ 28,785 $ -- ========= ======== ==========
[WIDE TABLE CONTINUED FROM ABOVE
WHEAT OILSEED PROCESSING PREFERRED MILLING & REFINING STOCK EPUs EPUs ------------- -------------- ------------------- (DOLLARS IN THOUSANDS) BALANCES, JUNE 1, 1996 ......................................... $ 456,618 Patronage determination ....................................... Patronage distribution ........................................ 42,014 Equity retirement determination ............................... 11,189 Equities retired .............................................. (11,107) Equities issued ............................................... Other, net .................................................... (2,060) Comprehensive income: Net income ................................................... Other comprehensive income ................................... Total comprehensive income .................................... Initial investment offering, net .............................. $ 9,574 $ 4,296 Cash patronage refund provisions .............................. Equity retirement provisions .................................. (27,453) ---------- --------- ------- BALANCES, MAY 31, 1997 ......................................... 469,201 9,574 4,296 Patronage determination ....................................... Patronage distribution ........................................ 52,831 Equity retirement determination ............................... 27,453 Equities retired .............................................. (27,362) Equities issued ............................................... Other, net .................................................... (3,451) (96) (96) Comprehensive income: Net income ................................................... Other comprehensive loss ..................................... Total comprehensive income .................................... Cash patronage refund provisions .............................. Equity retirement provisions .................................. (31,273) ---------- --------- ------- BALANCES, MAY 31, 1998 ......................................... 487,399 9,478 4,200 Results of operations of Cenex, Inc. for the eight months May 31, 1998 .......................................... 52,639 Exchange of equities to effect pooling ........................ (540,038) Included with May 31, 1998 equity retirements payable ......... Equities retired .............................................. Equities issued ............................................... Other, net .................................................... (6) (6) Comprehensive income: Net income ................................................... Other comprehensive loss ..................................... Total comprehensive income .................................... Cash patronage refund provisions .............................. Equity retirement provisions .................................. ---------- --------- --------- BALANCES, AUGUST 31, 1998 ...................................... -- 9,472 4,194 Patronage determination ....................................... Patronage distribution ........................................ Equities retired .............................................. Equities issued ............................................... Other, net .................................................... (214) (6) Comprehensive income: Net income ................................................... Other comprehensive loss ..................................... Total comprehensive income .................................... Cash patronage refund provisions .............................. Equity retirement provisions .................................. ---------- --------- --------- BALANCES, AUGUST 31, 1999 ...................................... $ -- $ 9,258 $ 4,188 ========== ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-3 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
UNALLOCATED ACCUMULATED OTHER ALLOCATED PATRONAGE DEFERRED CAPITAL COMPREHENSIVE CAPITAL TOTAL REFUNDS PATRONAGE RESERVE INCOME (LOSS) RESERVER EQUITIES - ------------- -------------- ------------- ------------------- ------------- --------------- (DOLLARS IN THOUSANDS) $ 72,370 $ (82,862) $ 143,641 $ 458 $ 8,200 $ 849,702 31,358 (357) 31,001 (103,728) (6,512) (31,234) 11,189 (19,312) 5,066 636 (1,971) 119,171 11,137 21,593 151,901 823 823 ----------- 152,724 ----------- (998) 10,837 (35,751) (35,751) (27,453) ---------- ---------- --------- --------- ------- ----------- 83,420 (71,725) 158,003 1,281 8,200 944,798 36,061 (309) 35,752 (119,481) (7,511) (36,040) 27,453 (37,424) 10,561 299 (6) (3,400) 144,578 (2,482) 26,596 177,301 (86) (86) ----------- 177,215 ----------- (44,340) (44,340) (44,602) ---------- ---------- --------- --------- ------- ----------- 100,238 (74,207) 177,078 1,195 8,194 1,029,973 (23,310) (13,086) 13,401 29,587 -- 4,429 (4,442) 911 (1,177) (2) (1,255) 32,650 (24,134) 7,420 15,936 (1,294) (1,294) ----------- 14,642 ----------- (9,800) (9,800) 1,832 ---------- ---------- --------- --------- ------- ----------- 99,778 (111,427) 196,722 (99) 8,192 1,065,877 44,150 63,562 (143,928) 1,738 (43,750) (23,797) 14,714 350 (44) (899) 57,500 21,773 6,727 86,000 (1,071) (1,071) ----------- 84,929 ----------- (17,250) (17,250) (25,750) ---------- ---------- --------- --------- ------- ----------- $ 40,250 $ (89,654) $ 205,537 $ (1,170) $ 8,148 $ 1,117,636 ========== ========== ========= ========= ======== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ------------------------------ AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- ------------ ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................ $ 86,000 $ 15,936 $ 177,301 $ 151,901 ---------- ---------- ---------- ---------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ............................ 81,246 20,570 69,877 63,387 Noncash net (income) loss from joint ventures ............ (22,363) 9,142 (8,381) (7,635) Adjustment of inventories to market value ................ (35,346) 12,108 10,153 (24,384) Noncash portion of patronage dividends received .......... (4,847) (9,305) (61,732) (38,787) Gain on sale of property, plant and equipment ............ (1,706) (458) (7,487) (3,125) Other, net ............................................... 196 (978) (768) Changes in operating assets and liabilities: Receivables ............................................. (133,641) 92,897 63,221 52,143 Inventories ............................................. (34,623) 31,178 25,753 194,101 Other current assets and other assets ................... (29,483) (3,441) 2,929 (1,712) Patrons' credit balances ................................ 3,646 (1,552) 10,594 (1,760) Patrons' advance payments ............................... (20,266) 39,533 (45,531) (55,554) Accounts payable and accrued expenses ................... 66,968 (89,932) (18,215) 68,839 Drafts outstanding and other liabilities ................ 16,670 (3,234) 6,066 11,508 ---------- ---------- ---------- ---------- Total adjustments ........................................ (113,549) 97,506 46,269 256,253 ---------- ---------- ---------- ---------- Net cash (used in) provided by continuing operations ............................................ (27,549) 113,442 223,570 408,154 Net cash used in discontinued operations ................ -- -- -- (6,630) ---------- ---------- ---------- ---------- Net cash (used in) provided by operating activities ..... (27,549) 113,442 223,570 401,524 ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment .............. (124,471) (41,152) (145,231) (200,275) Proceeds from disposition of property, plant and equipment ............................................ 6,785 824 21,877 28,447 Discontinued operations investing activities, net ......... 33,164 Investments ............................................... (54,358) (1,592) 1,566 12,686 Investments redeemed ...................................... 11,241 391 29,933 14,657 Changes in notes receivable ............................... 334 792 (5,036) 834 Other investing activities, net ........................... (278) 327 (3,033) (5,307) ---------- ---------- ---------- ---------- Net cash used in investing activities ................... (160,747) (40,410) (99,924) (115,794) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in notes payable .................................. 196,511 (53,025) (88,901) (224,831) Long-term debt borrowings ................................. 40,000 359,078 83,916 74,905 Principal payments on long-term debt ...................... (14,585) (317,228) (42,171) (55,544) Changes in book cash overdraft ............................ (10,424) (20,939) (8,418) (10,001) Proceeds from sale of equity participation units, net ..... 10,837 Retirements of equity ..................................... (23,797) (4,442) (36,880) (18,576) Cash patronage dividends paid ............................. (43,750) (35,898) (30,819) ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities ..... 143,955 (36,556) (128,352) (254,029) ---------- ---------- ---------- ---------- NET CASH FLOWS OF CENEX, INC. FROM OCTOBER 1, 1997 THROUGH MAY 31, 1998 ................................. 14,734 ---------- ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................................... (44,341) 51,210 (4,706) 31,701 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................................... 120,008 68,798 73,504 41,803 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 75,667 $ 120,008 $ 68,798 $ 73,504 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-5 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- Cenex Harvest States Cooperatives (Cenex Harvest States) or (the Company) is an agricultural cooperative organized for the mutual benefit of its members. Members of the cooperative are located primarily throughout the Midwest and Northwest regions of the United States. In addition to grain marketing, milling and oilseed processing, the Company provides its patrons with energy and agronomy products and other farm supplies. Sales are both domestic and international. In accordance with the By-Laws and by action of the Board of Directors, annual net savings from patronage sources is distributed to consenting patrons following the close of each year, and is based on amounts reportable for federal income tax purposes as determined by the cooperative and further adjusted in accordance with the By-Laws. The By-Laws provide that an amount of up to 10% of the distributable annual net savings from patronage sources be added to the unallocated reserve as determined by the Board of Directors. BASIS OF PRESENTATION -- Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives combined through merger on June 1, 1998 (the Combination), with Harvest States Cooperatives the surviving corporation. In accordance with the Plan of Combination, the Articles of Incorporation and By-Laws of Harvest States Cooperatives were restated and the name was changed to Cenex Harvest States Cooperatives. As a result of the Combination, each holder of common stock of Cenex became a member of Cenex Harvest States, to the extent eligible for membership, and all equity interests of Cenex were determined and exchanged for equal equity interests in Cenex Harvest States at its stated dollar amount on a dollar-for-dollar basis as more thoroughly set forth in the Plan of Combination. Prior to the Combination, Cenex's year end was September 30 and Harvest States Cooperatives' year end was May 31. Subsequent to the Combination, the Company changed its fiscal year end to August 31. The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests. The Company's consolidated financial statements reflect the financial position and results of operations of the combined companies as if the merger had occurred on June 1, 1996. The consolidated statements of operations and cash flows for the years ended May 31, 1998 and 1997, reflect the results of operations and cash flows for Harvest States Cooperatives for the years then ended combined with the results of operations and cash flows of Cenex for the years ended September 30, 1997 and 1996, respectively. The consolidated balance sheet as of May 31, 1998 reflects the financial position of Harvest States Cooperatives on that date combined with the financial position of Cenex as of September 30, 1997. The consolidated results of operations of Cenex for the eight months ended May 31, 1998, have been excluded from the reported results of operations and, therefore, have been recorded as an adjustment to the Company's equities and cash flows in the consolidated statements of equities and comprehensive income and cash flows during the three months ended August 31, 1998. All significant transactions between Harvest States Cooperatives and Cenex prior to the Combination have been eliminated. Certain amounts previously reported have been reclassified to conform to the current year presentation. CONSOLIDATION -- The consolidated financial statements include the accounts of Cenex Harvest States and all of its wholly-owned and majority-owned subsidiaries, including National Cooperative Refinery Association (NCRA). The effects of all significant intercompany transactions have been eliminated. CASH EQUIVALENTS -- Cash equivalents include short-term highly liquid investments with original maturities of three months or less at date of acquisition. INVENTORIES AND HEDGING -- Grain, processed grain, oilseed and processed oilseed are stated at market values including appropriate adjustments for open purchases, sales and futures contracts. All other inventories are stated at the lower of cost or market. The cost of certain energy inventories F-6 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (wholesale refined products, crude oil and asphalt) is determined on the last-in, first-out (LIFO) method; all other inventories are valued on the first-in, first-out (FIFO) and average cost methods. The Company enters into exchange-traded commodity futures and options contracts to hedge its exposure to price fluctuations on energy, grain and oilseed transactions to the extent considered practicable for minimizing risk from market price fluctuations. Futures contracts used for hedging are purchased and sold through regulated commodity exchanges. Inventories, however, may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and in part to the Company's assessment of its exposure from expected price fluctuations. Noncommodity exchange purchase and sale contracts may expose the Company to risk in the event that a counterparty to a transaction is unable to fulfill its contractual obligation. The Company manages its risk by entering into purchase contracts with preapproved producers and establishing appropriate limits for individual suppliers. Sales contracts are entered into with organizations of acceptable creditworthiness, as internally evaluated. Commodity trading in futures and options contracts is a natural extension of cash market trading. The commodity futures and options markets have underlying principles of increased liquidity and longer trading periods than the cash market, and hedging is one method of reducing exposure to price fluctuations. The Company's use of futures and options contracts reduces the effects of price volatility, thereby protecting against adverse short-term price movements while somewhat limiting the benefits of short-term price movements. Gains and losses on futures transactions related to energy inventories are credited or charged to cost of goods sold. Energy related gains and losses on hedge contracts not yet closed are accounted for as unrealized gains and losses and, accordingly, are deferred in the consolidated balance sheets as part of inventories. All other futures transactions are marked to market. Open hedge positions and deferred gains and losses for futures and options contracts were not significant as of August 31, 1999 and 1998, and May 31, 1998. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, a new standard related to the accounting for derivative transactions and hedging activities. In July 1999, the FASB issued SFAS No. 137 which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. While management does not believe this standard will materially impact financial results of the Company, it is currently evaluating the reporting requirements under this new standard. INVESTMENTS -- Investments in cooperatives are stated at cost, plus patronage refunds received in the form of capital stock and other equities. Patronage dividends are recorded at the time written notices of allocation are received. Joint ventures and other investments in which the Company has significant ownership and influence, but not control, are included in the consolidated financial statements under the equity method of accounting. Investments in other debt and equity securities are considered available for sale and are stated at market value, with unrealized amounts included in accumulated other comprehensive income (loss). PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS -- Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Leasehold rights and other intangible assets are amortized using the straight-line method over 3 to 40 years, primarily 15 to 20 years. The cost and related accumulated depreciation and amortization of assets sold or otherwise disposed of are removed from the related accounts and resulting gains or losses are reflected in operations. The Company periodically reviews F-7 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) property, plant and equipment and other long-lived assets in order to assess recoverability based on projected income and related cash flows on an undiscounted basis. Should the sum of the related, expected future net cash flows be less than the carrying value, an impairment loss would be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. REVENUE RECOGNITION -- Grain and oilseed sales are recorded at time of settlement, net of freight charges. All other sales are recognized upon shipment to customers, net of freight charges. ENVIRONMENTAL EXPENDITURES -- Liabilities related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based on current available facts, existing technology, undiscounted site-specific costs and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. All liabilities are monitored and adjusted as new facts or changes in law or technology occur. Environmental expenditures are capitalized when such costs provide future economic benefits. INCOME TAXES -- The Company is a nonexempt agricultural cooperative and files a consolidated federal income tax return with its 80% or more owned subsidiaries. The Company is subject to tax on net income from nonpatronage sources and undistributed patronage-sourced income. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. COMPREHENSIVE INCOME -- As of June 1, 1998, the Company adopted SFAS No.130, which established new rules for the reporting of comprehensive income and its components. The adoption of SFAS No. 130 had no impact on the Company's net income. SFAS No. 130 requires unrealized gains and losses on the Company's available-for-sale securities as well as the Company's charge to equity related to its pension liability to be included as components of other comprehensive income (loss) and accumulated other comprehensive income (loss) in the consolidated statements of equities and comprehensive income. SEGMENT INFORMATION -- Effective August 31, 1999 the Company adopted SFAS No. 131, which requires the management approach in determining business segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. RECEIVABLES Receivables as of August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ----------- (DOLLARS IN THOUSANDS) Trade ......................................... $595,403 $474,454 $494,270 Other ......................................... 34,493 20,377 22,601 -------- -------- -------- 629,896 494,831 516,871 Less allowances for doubtful accounts ......... 23,255 23,315 24,868 -------- -------- -------- $606,641 $471,516 $492,003 ======== ======== ========
All export sales are denominated in U.S. dollars. Export sales for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 are as follows:
FOR THE THREE FOR THE YEARS ENDED FOR THE YEAR MONTHS ENDED ----------------------- ENDED AUGUST 31, MAY 31, MAY 31, AUGUST 31, 1999 1998 1998 1997 ----------------- -------------- --------- -------- (DOLLARS IN MILLIONS) Africa ................ $158 $ 94 $ 280 $ 227 Asia .................. 310 149 1,217 2,318 Europe ................ 358 79 404 577 North America ......... 198 104 331 360 South America ......... 122 10 268 18
3. INVENTORIES Inventories as of August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ----------- (DOLLARS IN THOUSANDS) Energy .............................. $209,661 $170,544 $225,008 Grain and oilseed ................... 202,166 153,384 145,998 Agronomy ............................ 69,050 67,760 64,226 Processed grain and oilseed ......... 14,342 37,464 37,544 Feed and farm supplies .............. 50,908 47,842 58,876 Other ............................... 3,576 2,740 2,296 -------- -------- -------- $549,703 $479,734 $533,948 ======== ======== ========
As of August 31, 1999, the Company valued approximately 29% of inventories, primarily related to energy, using the lower of cost, determined on the LIFO method, or market (22% and 25% as of August 31, 1998 and May 31, 1998, respectively). As of August 31, 1999 and 1998, and May 31, 1998, reserves amounting to $20.4 million, $61.7 million and $24.6 million, respectively, have been established to reduce energy inventories to estimated market value. F-9 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS Investments as of August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ----------- (DOLLARS IN THOUSANDS) Cooperatives: CF Industries, Inc. ............................. $152,996 $152,996 $136,125 National Bank for Cooperatives (CoBank) ......... 33,942 37,630 36,061 Ag Processing, Inc. ............................. 23,252 19,438 19,487 Land O'Lakes, Inc. .............................. 19,256 15,489 12,078 Joint Ventures: Ventura Foods, LLC .............................. 55,562 41,666 40,954 Cenex/Land O'Lakes Agronomy Company ............. 36,933 34,068 29,202 Agro Distribution, LLC .......................... 45,741 Tacoma Export Marketing Company ................. 8,821 6,849 7,147 Other ............................................ 51,393 39,198 39,567 -------- -------- -------- $427,896 $347,334 $320,621 ======== ======== ========
Effective July 1, 1999 St. Paul Bank for Cooperatives (St. Paul Bank) merged with CoBank and, as a result, the existing investment in St. Paul Bank was transferred to CoBank. The Company's investment in St. Paul Bank as of August 31, 1998 and May 31, 1998 has been included with CoBank in the table above. On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada, Ltd., (the Entities) both companies owned 50/50 by the Company and Land O'Lakes, Inc., purchased approximately 310 agronomy facilities from Terra International, Inc., at a price of approximately $350.0 million. In conjunction with this purchase transaction, the Company invested $51.5 million in the Entities and issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd. Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes Agronomy Company (of which Cenex Harvest States owns 50%), are without recourse to the Company. SFAS No. 107 requires disclosure of the fair value of all financial instruments to which the Company is a party. All financial instruments are carried at amounts that approximate estimated fair value, except for investments in cooperatives, for which there are no quoted market prices and, as such, it is not practicable to estimate their fair value. Various agreements with other owners of investee companies and a majority-owned subsidiary set out parameters whereby Cenex Harvest States may buy and sell additional interests in those companies, upon the occurrence of certain events, at fair values determinable as set forth in the specific agreements. F-10 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment as of August 31, 1999 and 1998, and May 31, 1998 are as follows:
ESTIMATED USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31, IN YEARS 1999 1998 1998 ------------- ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Energy refineries ............................. 3-40 $ 660,424 $ 633,149 $ 601,899 Distribution and general ...................... 3-40 298,931 283,773 233,891 Grain terminals and country elevators ......... 3-50 272,311 243,005 249,368 Energy pipelines and terminals ................ 3-40 220,367 211,781 211,207 Grain processing plants ....................... 3-40 208,210 164,026 187,316 Feed plants ................................... 3-40 27,216 27,081 27,060 Construction in progress ...................... 64,508 77,548 35,722 --------- --------- --------- 1,751,967 1,640,363 1,546,463 Less accumulated depreciation and amortization ................................. 783,634 724,593 678,390 --------- --------- --------- $ 968,333 $ 915,770 $ 868,073 ========= ========= =========
In May 1995, the Cenex Board of Directors approved a plan to dispose of its exploration and production (E&P) operations. A purchase and sale agreement was signed, and the transaction recorded in early fiscal year 1996. The E&P operations have been accounted for as discontinued operations. 6. OTHER ASSETS Other assets as of August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Intangible assets, less accumulated amortization of $22,720, $20,886, and $18,241, respectively ........ $ 21,539 $22,888 $20,912 Notes receivable .................................... 4,547 6,172 11,836 Other assets ........................................ 93,924 67,974 62,567 -------- ------- ------- $120,010 $97,034 $95,315 ======== ======= =======
F-11 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt as of August 31, 1999 and 1998, and May 31, 1998 consisted of the following:
INTEREST RATES AT AUGUST 31, AUGUST 31, AUGUST 31, MAY 31, 1999 1999 1998 1998 ------------------- ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Notes payable(a),(e) ................... 5.40% to 7.01% $196,986 $ 475 $ 52,446 ======== ======== ======== Long-term debt: Revolving term loans from cooperative banks, payable in installments through 2009, when the balance is due(b),(e) ................ 6.48% to 14.32% $227,211 $192,005 $332,130 Private placement, payable in equal installments beginning in 2008 through 2013(c),(e) .................. 6.81% 225,000 225,000 Industrial Revenue Bonds, payable in installments through 2010(d) ......... 5.23% to 9.26% 27,045 36,155 42,665 Other notes and contracts ............. 4.00% to 12.00% 3,410 3,680 3,613 -------- -------- -------- Total long-term debt ................... 482,666 456,840 378,408 Less current portion .................. 21,562 13,855 29,743 -------- -------- -------- Long-term portion ...................... $461,104 $442,985 $348,665 ======== ======== ========
- ------------------ (a) The Company finances its working capital needs through short-term lines of credit with banks for cooperatives and commercial banks. In June 1998, the Company established a 364-day credit facility of $400.0 million, which was renewed in May 1999, and a five-year revolving credit facility of $200.0 million, all of which is committed. On August 31, 1999, $196.0 million was outstanding on the 364-day credit facility, with no amounts outstanding on the five-year revolving credit facility as of that date. (b) In June 1998, the Company repaid certain of its existing debt and established a new long-term credit agreement under which the term loan balance outstanding as of May 31, 1998 was repaid and partially refinanced through the new agreement. The new long-term agreement commits $200.0 million of long-term borrowing capacity to the Company through May 31, 1999, of which $164.0 million was drawn before the expiration date of that commitment. NCRA term loans are collateralized by NCRA's investment in the cooperative bank. (c) In June 1998, as a part of the refinancing program for the merged operations, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $225.0 million. (d) Industrial Revenue Bonds are collateralized by property, plant and equipment, primarily energy refinery equipment, with a cost of approximately $155.9 million, $156.1 million and $156.3 million, less accumulated depreciation of approximately $97.5 million, $91.3 million and $85.7 million as of August 31, 1999 and 1998, and May 31, 1998, respectively. (e) Restrictive covenants under various note agreements have requirements for maintenance of minimum working capital levels and other financial ratios. Based on quoted market prices for the same or similar issues, the fair value of long-term debt approximates book value as of August 31, 1999 and 1998, and May 31, 1998. F-12 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED) For the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998, and 1997, the Company capitalized interest of $1.7 million, $0.4 million, $1.8 million, and $3.7 million, respectively. The aggregate amount of long-term debt payable as of August 31, 1999, is as follows (dollars in thousands): 2000 ................. $ 21,562 2001 ................. 29,087 2002 ................. 17,495 2003 ................. 13,524 2004 ................. 14,561 Thereafter ........... 386,437 8. INCOME TAXES The provision for income taxes for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- --------- ---------- (DOLLARS IN THOUSANDS) Current .............. $5,783 $ 5,189 $17,886 $ 21,129 Deferred ............. 1,197 (2,294) 1,729 (1,849) ------ -------- ------- -------- Income taxes ......... $6,980 $ 2,895 $19,615 $ 19,280 ====== ======== ======= ========
The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Deferred tax assets: Accrued expenses and valuation reserves .................... $10,741 $10,017 $14,435 Postretirement health care and pension liabilities ......... 3,665 3,137 3,982 Alternative minimum tax credit carryforward ................ 883 920 1,013 Other ...................................................... 5,880 6,340 4,915 ------- ------- ------- Total deferred tax assets ................................. 21,169 20,414 24,345 ------- ------- ------- Deferred tax liabilities: Property, plant and equipment .............................. 3,185 3,169 8,335 Equity method investments .................................. 8,513 6,279 4,120 Other ...................................................... 3,165 3,505 6,769 ------- ------- ------- Total deferred tax liabilities ............................ 14,863 12,953 19,224 ------- ------- ------- Net deferred tax asset ...................................... $ 6,306 $ 7,461 $ 5,121 ======= ======= =======
As of August 31, 1999, net deferred tax assets of approximately $1.6 million and $4.7 million are included in other current assets and other assets, respectively ($3.5 million and $4.0 million, respectively, as of August 31, 1998, and $1.9 million and $3.3 million, respectively, as of May 31, 1998). F-13 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) The reconciliation of the statutory federal income tax rate to the effective rate for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- --------- ---------- Statutory federal income tax rate ................... 35.0% 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit ................................. 3.9 4.1 4.2 4.2 Patronage earnings .................................. (24.1) (67.4) (29.1) (27.5) Tax effect of changes in deferred patronage ......... ( 6.8) 51.3 0.5 ( 2.6) Rate changes on deferred tax assets and liabilities ........................................ 0.5 (11.2) Other ............................................... ( 1.0) 3.6 ( 0.6) 2.2 ----- ----- ----- ----- Effective tax rate .................................. 7.5% 15.4% 10.0% 11.3% ===== ===== ===== =====
The principal differences between financial statement income and taxable income for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 are as follows:
FOR THE YEAR FOR THE THREE FOR THE YEARS ENDED ENDED MONTHS ENDED -------------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 -------------- -------------- ------------- ------------- (DOLLARS IN THOUSANDS) Income before income taxes ................ $ 92,980 $ 18,831 $ 196,916 $ 171,181 Financial reporting/tax differences: Environmental reserves ................... 1,343 (563) 1,916 (776) Oil and gas activities, net .............. 18,005 8,448 (405) (13,851) Energy inventory market reserves ......... (48,445) 7,150 (9,279) (21,064) Other, net ............................... 9,258 12,310 2,488 25,993 Patronage refund provisions .............. (57,500) (32,650) (144,578) (119,171) --------- --------- ---------- ---------- Taxable income ............................ $ 15,641 $ 13,526 $ 47,058 $ 42,312 ========= ========= ========== ==========
9. EQUITIES PATRON'S EQUITY -- In accordance with the By-Laws and by action of the Board of Directors, annual net savings from patronage sources is distributed to consenting patrons following the close of each year and is based on amounts reportable for federal income tax purposes as adjusted in accordance with the By-Laws. The cash portion of this distribution is determined annually by the Board of Directors, with the balance issued in the form of capital equity certificates. Annual net savings from sources other than patronage may be added to the unallocated capital reserve or, upon action by the Board of Directors, allocated to members in the form of non-patronage equity certificates. Inactive direct members and patrons and active direct members and patrons age 61 and older on June 1, 1998 are eligible for redemption of their capital equity certificates at age 72 or death. For other F-14 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EQUITIES (CONTINUED) active direct members and patrons and member cooperatives, equities will be redeemed annually as determined by the Board of Directors. On May 31, 1997, the Company completed an offering for the sale of equity participation units (EPUs) in its Wheat Milling Defined Business Unit and its Oilseed Processing and Refining Defined Business Unit to qualified subscribers. Qualified subscribers are identified as Defined Members or representatives of Defined Members which are persons or associations of producers actually engaged in the production of agricultural products. Subscribers were allowed to purchase a portion of their EPUs by exchanging existing patronage certificates. The purchasers of EPUs have the right and obligation to deliver annually the number of bushels of wheat or soybeans equal to the number of units held. Unit holders participate in the net patronage sourced income from operations of the applicable defined business unit as patronage refunds. Retirement of patrons' equities attributable to EPUs is at the discretion of the Board of Directors, and it is the Board's goal to retire such equity on a revolving basis seven years after declaration. CENEX EQUITY PRIOR TO JUNE 1, 1998 -- In accordance with the Cenex By-Laws and by action of the Cenex Board of Directors, annual net savings from patronage sources was distributed to consenting patrons following the close of each year, and was based on amounts reportable for federal income tax purposes as adjusted in accordance with the Cenex By-Laws. A minimum of 20% of the patronage refund was paid in cash with the balance distributed in the form of preferred stock. The Cenex By-Laws required that annual net savings from sources other than patronage be added to the unallocated capital reserve. The Cenex By-Laws also provided that an amount equal to 10% of the distributable annual net savings from patronage sources be added to the unallocated capital reserve, until the total unallocated capital reserve reached 25% of total equities. The authorized preferred stock consisted of 30,000,000 shares at a par value of $25 each. The preferred stock was nonvoting and was not subject to the payment of dividends. The Articles of Incorporation provided that the preferred stock may be retired at par value at any time and in any order as determined by the Cenex Board of Directors. The authorized common stock consisted of 5,000 shares at a par value of $25 each. Common stock was not subject to the payment of dividends. Voting rights were limited to holders of common stock, with cooperative associates entitled to one vote for each of their registered producer members, plus one additional vote for each $1,000, or major fraction thereof, of preferred stock or equity issued as patronage. F-15 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EQUITIES (CONTINUED) The following is a summary of share activity for common and preferred stock of Cenex for the eight months ended May 31, 1998 and for the years ended September 30, 1997 and 1996:
COMMON PREFERRED -------- --------------- Shares outstanding, September 30, 1995 .......... 844 18,821,335 Patronage distribution .......................... 1,682,589 Equities retired, net ........................... (17) (419,485) Other ........................................... (33,115) --- ---------- Shares outstanding, September 30, 1996 .......... 827 20,051,324 Patronage distribution .......................... 2,115,756 Equities retired, net ........................... (13) (1,059,461) Other ........................................... (107,515) --- ---------- Shares outstanding, September 30, 1997 .......... 814 21,000,104 Patronage distribution .......................... 2,578,292 Equities retired, net ........................... (31) (1,254,979) Other ........................................... (201,856) --- ---------- Shares outstanding, May 31, 1998 ................ 783 22,121,561 === ==========
HARVEST STATES COOPERATIVES EQUITY PRIOR TO JUNE 1, 1998 -- In accordance with the Harvest States Cooperatives By-Laws and by action of the Harvest States Cooperatives Board of Directors, annual net earnings from patronage sources were distributed to consenting patrons following the close of each year and were based on amounts reportable for federal income tax purposes as adjusted in accordance with the Harvest States Cooperatives By-Laws. The cash portion of the distribution was determined annually by the Harvest States Cooperatives Board of Directors, with the balance issued in the form of capital equity certificates. Annual net earnings from sources other than patronage were added to the unallocated capital reserve or, upon action by the Harvest States Cooperatives Board of Directors, allocated to members in the form of nonpatronage certificates. The Harvest States Cooperatives Board of Directors authorized the redemption of capital equity certificates held by patrons who were 72 years of age and those held by estates of deceased patrons. The Harvest States Cooperatives Board of Directors also authorized the redemption of nonpatronage certificates held by estates of deceased patrons. DEFERRED PATRONAGE -- The Company follows the practice of accounting for deferred patronage charges and credits in a separate equity account instead of including such amounts in the unallocated capital reserve. Deferred patronage results from the fact that patronage distributions are primarily determined on the basis of taxable income rather than net income as reported in the consolidated financial statements. Deferred patronage consists of items which have been included in the computation of net income for financial statement purposes, but not for income tax or patronage purposes. As the items reverse, patronage refunds and deferred patronage are affected. F-16 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Effective June 1, 1998, the Company adopted SFAS No. 132, a new standard on disclosure requirements related to pension and other postretirement benefits. Accordingly, disclosures related to all periods prior to the three months ended August 31,1998, have been restated in accordance with this new standard.
PENSION BENEFITS OTHER BENEFITS ---------------------------------------- ---------------------------------------- FOR THE THREE FOR THE MONTHS FOR THE FOR THE FOR THE THREE FOR THE YEAR ENDED ENDED YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED AUGUST 31, AUGUST 31, MAY 31, AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 1999 1998 1998 ------------ -------------- ------------ ------------ --------------- ----------- (DOLLARS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of period ........... $ 265,045 $ 245,444 $ 219,869 $ 23,474 $ 22,210 $ 21,298 Service cost ................... 8,733 5,212 7,046 1,421 387 727 Interest cost .................. 17,817 11,771 16,275 1,769 956 1,525 Plan participants' contributions ................. 131 Plan amendments ................ 10,673 772 247 (630) -- Actuarial (gain) loss .......... (8,322) 6,021 18,275 3,993 517 (38) Assumption change .............. (6,103) 5,348 (146) 326 Settlements .................... 275 Special termination benefits ...................... 674 Benefits paid .................. (21,467) (10,197) (16,268) (1,338) (1,053) (1,302) --------- --------- --------- --------- --------- --------- Benefit obligation at end of period ..................... $ 266,651 $ 265,045 $ 245,444 $ 28,543 $ 23,474 $ 22,210 ========= ========= ========= ========= ========= ========= Change in plan assets: Fair value of plan assets at beginning of period ........... $ 241,949 $ 252,659 $ 211,845 Actual return on plan assets ........................ 35,622 (6,263) 47,549 Company contributions .......... 3,256 5,750 9,419 $ 1,338 $ 922 $ 1,302 Participants' contributions .... 131 Net transfers .................. 114 Benefits paid .................. (21,467) (10,197) (16,268) (1,338) (1,053) (1,302) --------- --------- --------- --------- --------- --------- Fair value of plan assets at end of period ................. $ 259,360 $ 241,949 $ 252,659 $ -- $ -- $ -- ========= ========= ========= ========= ========= =========
F-17 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
PENSION BENEFITS OTHER BENEFITS ----------------------------------------- ------------------------------------------- AUGUST 31, AUGUST 31, MAY 31, AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 1999 1998 1998 ------------ ------------ ----------- ------------ ------------ ------------- (DOLLARS IN THOUSANDS) Funded status ...................... $ (7,291) $ (23,096) $ 7,215 $ (28,543) $ (23,474) $ (22,210) Employer contributions after measurement date .................. 5,331 3,336 200 97 102 Unrecognized actuarial loss (gain) ............................ 27,869 59,511 27,746 (2,341) (6,372) (7,487) Unrecognized transition (asset) obligation ........................ (2,690) (3,938) (5,081) 13,004 13,941 14,444 Unrecognized prior service cost 10,386 524 (34) (592) 3 2 --------- --------- -------- --------- --------- --------- Prepaid benefit (accrued) cost ..... $ 33,605 $ 33,001 $ 33,182 $ (18,272) $ (15,805) $ (15,149) ========= ========= ======== ========= ========= ========= Amounts recognized on balance sheets consist of: Prepaid benefit cost .............. $ 42,099 $ 41,554 $ 36,493 Accrued benefit liability ......... (13,158) (9,396) (4,609) $ (18,272) $ (15,805) $ (15,149) Intangible asset .................. 3,272 350 816 Accumulated other comprehensive loss ............... 1,392 493 482 --------- --------- -------- --------- --------- --------- Net amount recognized ............. $ 33,605 $ 33,001 $ 33,182 $ (18,272) $ (15,805) $ (15,149) ========= ========= ======== ========= ========= =========
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended August 31, 1999. The rate was assumed to decrease gradually to 6% for 2003 and remain at that level thereafter. F-18 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
PENSION BENEFITS ----------------------------------------------------- FOR THE FOR THE THREE MONTHS FOR THE YEARS ENDED YEAR ENDED ENDED ------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- ------------ ------------ (DOLLARS IN THOUSANDS) Components of net periodic benefit cost: Service cost ......................... $ 8,733 $ 5,212 $ 7,046 $ 7,474 Interest cost ........................ 17,817 11,771 16,275 16,209 Expected return on assets ............ (26,552) (14,809) (18,199) (17,788) Prior service cost amortization . ...................... 812 214 189 252 Actuarial loss (gain) amortization ........................ 8,145 671 1,307 1,456 Transition amount amortization ........................ (1,248) (1,143) (2,506) (2,507) Special termination benefits ......... 674 ------- ---------- ------- ------- Net periodic benefit cost ............ $ 7,707 $ 2,590 $ 4,112 $ 5,096 Additional expense due to settlement of retiree obligation .......................... 275 1,168 ------- ---------- ------- ------- Net periodic benefit cost ............ $ 7,982 $ 2,590 $ 4,112 $ 6,264 ======= ========== ======= ======= Weighted-average assumptions: Discount rate ........................ 7.30% 6.83% 7.25% 7.65% Expected return on plan assets ....... 8.50% 8.63% 8.40% 8.25% Rate of compensation increase ........ 5.00% 5.02% 5.08% 5.17%
[WIDE TABLE CONTINUED FROM ABOVE]
OTHER BENEFITS ---------------------------------------------------- FOR THE FOR THE THREE MONTHS FOR THE YEARS ENDED YEAR ENDED ENDED ------------------------ AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------- -------------- ------------ ---------- (DOLLARS IN THOUSANDS) Components of net periodic benefit cost: Service cost ......................... $1,421 $ 387 $ 727 $ 598 Interest cost ........................ 1,769 956 1,525 1,620 Expected return on assets ............ Prior service cost amortization . ...................... (38) (1) 1 Actuarial loss (gain) amortization ........................ (82) (268) (354) (210) Transition amount amortization ........................ 936 503 937 936 Special termination benefits ......... ------ ------- ------ ------ Net periodic benefit cost ............ $4,006 $ 1,577 $2,836 $2,944 Additional expense due to settlement of retiree obligation .......................... ------ ------- ------ ------ Net periodic benefit cost ............ $4,006 $ 1,577 $2,836 $2,944 ====== ======= ====== ====== Weighted-average assumptions: Discount rate ........................ 7.30% 6.85% 7.42% 7.75% Expected return on plan assets ....... N/A N/A N/A N/A Rate of compensation increase ........ 5.00% 4.90% 5.13% 5.25%
The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows as of August 31, 1999 and 1998, and May 31, 1998.
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Projected benefit obligation ........... $25,264 $22,268 $17,749 Accumulated benefit obligation ......... 19,746 17,002 13,387 Fair value of plan assets .............. 8,092 7,604 7,868
The Company provides defined life insurance and health care benefits for certain retired employees. The plan is contributory based on years of service and family status, with retiree contributions adjusted annually. The Company has other contributory defined contribution plans covering substantially all employees. Total contributions by the Company to these plans were approximately $4.5 million, $1.1 million, $4.2 million and $3.9 million for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, respectively. F-19 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED) Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in the assumed health care cost trend rates would have the following effects:
1% POINT 1% POINT INCREASE DECREASE ---------- ----------- (DOLLARS IN THOUSANDS) Effect on total of services and interest cost components .................................... $ 327 $ (277) Effect on postretirement benefit obligation ......... 2,111 (1,819)
11. SEGMENT REPORTING The Company's businesses are organized, managed and internally reported as four segments. These segments, which are based on products and services, include agronomy, energy, grain marketing and farm marketing & supply and processed grain and consumer products. Due to cost allocations and intersegment activity, management does not represent that these segments, if operated independently, would report the income before income taxes and other financial information presented. Segment information for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
PROCESSED GRAIN MARKETING GRAIN AND AND FARM CONSUMER AGRONOMY ENERGY MARKETING & SUPPLY PRODUCTS OTHER TOTAL ------------ -------------- -------------------- ------------ ------------- -------------- (DOLLARS IN THOUSANDS) For the year ended August 31, 1999: Net sales ............................. $ 593,927 $ 1,345,772 $ 3,857,042 $ 531,877 $ 6,328,618 Patronage dividends ................... 184 (1,236) 7,109 (492) $ 311 5,876 Other revenues ........................ (4,313) 924 72,506 12,197 18,717 100,031 --------- ----------- ----------- --------- --------- ----------- 589,798 1,345,460 3,936,657 543,582 19,028 6,434,525 Cost of goods sold .................... 558,536 1,228,472 3,844,974 508,598 6,140,580 Marketing, general and administrative ....................... 16,605 47,536 48,965 17,854 17,550 148,510 Interest .............................. 1,413 16,584 18,378 6,561 (498) 42,438 Minority interests .................... 9,889 128 10,017 --------- ----------- ----------- --------- --------- ----------- Income before income taxes ............ $ 13,244 $ 42,979 $ 24,340 $ 10,569 $ 1,848 $ 92,980 ========= =========== =========== ========= ========= =========== Total identifiable assets ............. $ 361,381 $ 1,112,127 $ 780,973 $ 293,499 $ 239,684 $ 2,787,664 ========= =========== =========== ========= ========= =========== For the three months ended August 31, 1998: Net sales ............................. $ 91,231 $ 343,747 $ 937,630 $ 145,645 $ 1,518,253 Patronage dividends ................... 51 4,913 $ 147 5,111 Other revenues ........................ 25 12,651 1,888 4,707 19,271 --------- ----------- ----------- --------- --------- ----------- 91,231 343,823 955,194 147,533 4,854 1,542,635 Cost of goods sold .................... 86,377 306,768 941,380 138,718 1,473,243 Marketing, general and administrative ....................... 3,813 12,340 10,633 3,937 4,275 34,998 Interest .............................. 78 4,389 6,193 1,208 443 12,311 Minority interests .................... 3,260 (72) 64 3,252 --------- ----------- ----------- --------- --------- ----------- Income (loss) before income taxes ..... $ 963 $ 17,066 $ (2,940) $ 3,670 $ 72 $ 18,831 ========= =========== =========== ========= ========= =========== Total identifiable assets ............. $ 314,469 $ 943,004 $ 693,567 $ 296,340 $ 221,723 $ 2,469,103 ========= =========== =========== ========= ========= ===========
F-20 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. SEGMENT REPORTING (CONTINUED)
PROCESSED GRAIN MARKETING GRAIN AND AND FARM CONSUMER AGRONOMY ENERGY MARKETING & SUPPLY PRODUCTS OTHER TOTAL ------------ ------------- -------------------- ------------ ------------- ------------- (DOLLARS IN THOUSANDS) For the year ended May 31, 1998: Net sales .......................... $ 696,441 $1,858,069 $ 5,175,616 $ 615,049 $8,345,175 Patronage dividends ................ 57,552 1,276 11,136 $ 423 70,387 Other revenues ..................... 434 71,767 10,284 16,035 98,520 --------- ---------- ----------- --------- --------- ----------- 753,993 1,859,779 5,258,519 625,333 16,458 8,514,082 Cost of goods sold ................. 662,238 1,739,809 5,179,290 568,268 8,149,605 Marketing, general and administrative ................... 14,637 42,637 39,265 13,830 15,692 126,061 Interest ........................... 43 15,163 15,741 4,143 (470) 34,620 Minority interests ................. 6,749 131 6,880 --------- ---------- ----------- --------- --------- ----------- Income before income taxes ......... $ 77,075 $ 55,421 $ 24,223 $ 39,092 $ 1,105 $ 196,916 ========= ========== =========== ========= ========= ========== Total identifiable assets .......... $ 319,217 $ 988,674 $ 643,044 $ 287,399 $ 198,181 $2,436,515 ========= ========== =========== ========= ========= =========== For the year ended May 31, 1997: Net sales .......................... $ 683,429 $1,676,842 $ 6,567,680 $ 730,101 $9,658,052 Patronage dividends ................ 55,615 2,114 12,738 $ 603 71,070 Other revenues ..................... 751 1,709 64,256 1,019 17,655 85,390 --------- ---------- ----------- --------- --------- ----------- 739,795 1,680,665 6,644,674 731,120 18,258 9,814,512 Cost of goods sold ................. 652,552 1,578,503 6,573,160 671,467 9,475,682 Marketing, general and administrative ................... 13,082 43,206 36,881 13,704 19,424 126,297 Interest ........................... 14 11,814 16,423 6,453 (1,336) 33,368 Minority interests ................. 7,854 130 7,984 --------- ---------- ----------- --------- --------- ----------- Income before income taxes ......... $ 74,147 $ 39,288 $ 18,210 $ 39,496 $ 40 $ 171,181 ========= ========== =========== ========= ========= ===========
Assets included in other primarily consisted of intercompany transactions and corporate facilities. 12. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL -- The Company is required to comply with various environmental laws and regulations incident to its normal business operations. In order to meet its compliance requirements, the Company establishes reserves for the future costs of remediation of identified issues, which are included in cost of goods sold in the consolidated statements of operations. Additional costs for matters which may be identified in the future cannot be presently determined; while the resolution of any such matters may have an impact on the Company's consolidated financial results for a particular reporting period, management believes any such matters will not have a material adverse effect on the consolidated financial position of the Company. OTHER LITIGATION AND CLAIMS -- The Company is involved as a defendant in various lawsuits, claims and disputes which are in the normal course of the Company's business. The resolution of any such matters may have an impact on the Company's consolidated financial results for a particular reporting period; however, management believes any resulting liability will not have a material adverse effect on the consolidated financial position of the Company. INTERNAL REVENUE SERVICE -- Certain income tax returns have been reviewed by the Internal Revenue Service and various state tax authorities. In connection with these reviews, certain adjustments have been proposed which, if upheld, could result in additional tax liability to the Company. While the F-21 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) outcome of any proposed adjustments may have an impact on the Company's consolidated financial results for a particular reporting period, management believes that any tax assessment which may result from these adjustments will not have a material adverse effect on the consolidated financial position of the Company. GRAIN STORAGE -- As of August 31, 1999 and 1998, and May 31, 1998, the Company stored grain and processed grain products for others totaling $99.4 million, $111.5 million, and $81.6 million, respectively. Such stored commodities and products are not the property of the Company and therefore are not included in the Company's inventories. LINES OF CREDIT -- The Company is a guarantor for lines of credit for related companies totaling up to $28.1 million, of which $5.8 million was outstanding as of August 31, 1999. All outstanding loans with respective creditors are current as of August 31, 1999. LEASE COMMITMENTS -- The Company leases approximately 4,200 rail cars with remaining lease terms of one to 10 years. In addition, the Company has commitments under other operating leases for various refinery, manufacturing and transportation equipment, vehicles and office space. Some leases include purchase options at not less than fair market value at the end of the leases. Total rental expense for all operating leases, net of rail car mileage credits received from the railroad and sublease income was approximately $29.8 million, $8.6 million, $30.5 million and $30.0 million for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, respectively. Mileage credits and sublease income were approximately $12.8 million, $4.7 million, $14.2 million and $13.6 million for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, respectively. Minimum future lease payments required under noncancellable operating leases as of August 31, 1999 are as follows:
EQUIPMENT RAIL CARS VEHICLES AND OTHER TOTAL ----------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) 2000 ........................................ $17,734 $ 8,723 $11,498 $ 37,955 2001 ........................................ 12,551 6,670 11,091 30,312 2002 ........................................ 10,182 4,552 10,652 25,386 2003 ........................................ 7,136 2,851 9,487 19,474 2004 ........................................ 3,233 1,050 8,090 12,373 Thereafter .................................. 7,157 271 7,846 15,274 ------- ------- ------- -------- Total minimum future lease payments ......... $57,993 $24,117 $58,664 $140,774 ======= ======= ======= ========
F-22 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION Additional information concerning supplemental disclosures of cash flow activities for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ---------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- ----------- ----------- (DOLLARS IN THOUSANDS) Net cash paid during the period for: Interest ........................................... $ 42,765 $ 10,851 $ 36,632 $ 36,283 Income taxes ....................................... 8,161 8,248 21,409 16,448 Significant noncash transactions: Noncash patronage refunds issued from prior year's earnings ................................... 99,052 84,089 72,891 Noncash nonpatronage certificates issued from prior year's earnings ............................. 7,998 6,863 6,115 Capital equity certificates issued in exchange for elevator properties ............................... 14,714 911 10,561 4,986 Capital equity certificates exchanged for EPUs ..... 2,035
Summarized financial information of Cenex for the period October 1, 1997 through May 31, 1998 is as follows (dollars in thousands): Net sales ..................... $1,798,219 Net income .................... 62,776 Cash flows from: Operating activities ......... 83,118 Investing activities ......... (49,666) Financing activities ......... (18,718) 14. SUBSEQUENT EVENT During September 1999, the Boards of Directors of Cenex Harvest States Cooperatives and Farmland Industries, Inc. (Farmland) approved a Transaction Agreement to unify the two cooperatives. The Transaction Agreement has not yet been approved by the members of either cooperative. On September 1, 1999, NCRA and Farmland formed Cooperative Refining, LLC, (Cooperative Refining) a joint venture established to operate and manage the refineries of NCRA and Farmland. In conjunction with the formation of Cooperative Refining, NCRA contributed certain assets, primarily inventories, to Cooperative Refining in exchange for its ownership interest and entered into certain leases and product purchase agreements with Cooperative Refining. F-23 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. UNAUDITED INTERIM INFORMATION As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives merged with Cenex, Inc. to form Cenex Harvest States Cooperatives. Prior to the merger, Harvest States Cooperatives' year end was May 31. Cenex's year end was September 30 and subsequent to the merger, the Company changed its fiscal year end to August 31. Therefore, the transition period for the three months ended August 31, 1998 has been included in the financial statements. Comparable information for the three months ended August 31, 1997 is as follows:
UNAUDITED ----------------------- (DOLLARS IN THOUSANDS) Revenues: Grain and oilseed ................................ $1,030,047 Energy ........................................... 414,948 Processed grain and oilseed ...................... 130,770 Feed and farm supplies ........................... 126,568 Agronomy ......................................... 138,673 ---------- $1,841,006 ---------- Cost of goods sold ................................ $1,780,171 Income taxes ...................................... 8,865 Net income ........................................ 35,211 Net cash provided by operating activities ......... 126,038 Net cash used in investing activities ............. (24,507) Net cash used in financing activities ............. (130,251)
F-24 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Members and Patrons of Cenex Harvest States Cooperatives: In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations, equities and comprehensive income and cash flows present fairly, in all material respects, the financial position of Cenex Harvest States Cooperatives and subsidiaries as of August 31, 1999 and 1998, and May 31, 1998, and the results of their operations and their cash flows for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. The consolidated balance sheet as of May 31, 1998, and the consolidated statements of operations, equities and comprehensive income and cash flows for the years ended May 31, 1998 and 1997, give retroactive effect to the merger of Harvest States Cooperatives and CENEX, Inc. on June 1, 1998, in a transaction accounted for as a pooling of interests, as described in Note 1 to the consolidated financial statements. We did not audit the financial statements of Harvest States Cooperatives, which statements reflect approximately 38% of total assets as of May 31, 1998, and approximately 29% and 31% of net income for the years ended May 31, 1998 and 1997, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Harvest States Cooperatives, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota October 29, 1999 F-25 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) BALANCE SHEETS
AUGUST 31 ----------------------- MAY 31, 1999 1998 1998 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Receivables ...................................... $24,650 $28,703 $32,585 Inventories ...................................... 17,084 18,569 23,759 Other current assets ............................. 185 ------- ------- ------- Total current assets ........................... 41,734 47,272 56,529 Property, plant and equipment ..................... 39,001 35,596 34,953 ------- ------- ------- TOTAL ASSETS ................................... $80,735 $82,868 $91,482 ======= ======= ======= LIABILITIES AND DEFINED BUSINESS UNIT EQUITY CURRENT LIABILITIES: Due to Cenex Harvest States Cooperatives ......... $ 9,546 $15,071 $22,891 Accounts payable ................................. 5,768 7,547 8,867 Accrued expenses ................................. 4,227 1,773 1,660 ------- ------- ------- Total current liabilities ...................... 19,541 24,391 33,418 Commitments and contingencies Defined business unit equity ...................... 61,194 58,477 58,064 ------- ------- ------- TOTAL LIABILITIES AND DEFINED BUSINESS UNIT EQUITY ................................... $80,735 $82,868 $91,482 ======= ======= =======
The accompanying notes are an integral part of the financial statements. F-26 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF OPERATIONS
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ---------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- ----------- ----------- (DOLLARS IN THOUSANDS) REVENUES: Processed oilseed sales ....................... $358,042 $ 98,919 $410,386 $441,738 Other revenue (expense) ....................... 30 1,115 1,746 (1,660) -------- -------- -------- -------- 358,072 100,034 412,132 440,078 -------- -------- -------- -------- COSTS AND EXPENSES: Cost of goods sold ............................ 338,386 95,304 379,272 405,791 Marketing, general and administrative ......... 5,095 1,257 4,730 4,342 Interest ...................................... 557 251 380 322 -------- -------- -------- -------- 344,038 96,812 384,382 410,455 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES ..................... 14,034 3,222 27,750 29,623 PROVISIONS FOR INCOME TAXES .................... 800 525 1,825 2,100 -------- -------- -------- -------- NET INCOME ..................................... $ 13,234 $ 2,697 $ 25,925 $ 27,523 ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-27 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF DEFINED BUSINESS UNIT EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997 (DOLLARS IN THOUSANDS) BALANCE, MAY 31, 1996 ............................................ $ 53,391 Net and comprehensive income .................................... 27,523 Divisional equity distributed to the Company .................... (27,523) --------- BALANCE, MAY 31, 1997 ............................................ 53,391 Net and comprehensive income .................................... 25,925 Defined Business Unit equity distributed to the Company ......... (21,252) --------- BALANCE, MAY 31, 1998 ............................................ 58,064 Net and comprehensive income .................................... 2,697 Defined Business Unit equity distributed to the Company ......... (2,284) --------- BALANCE, AUGUST 31, 1998 ......................................... 58,477 Net and comprehensive income .................................... 13,234 Defined Business Unit equity distributed to the Company ......... (10,517) --------- BALANCE, AUGUST 31, 1999 ......................................... $ 61,194 =========
The accompanying notes are an integral part of the financial statements. F-28 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ----------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- ----------- ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ......................................... $ 13,234 $ 2,697 $ 25,925 $ 27,523 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ..................................... 2,330 551 2,021 1,777 Loss (gain) on sale of property, plant and equipment ....................................... 204 (658) 2,045 Changes in operating assets and liabilities: Receivables ...................................... 4,053 3,882 1,584 (11,374) Inventories ...................................... 1,485 5,190 (908) 3,385 Other current assets ............................. 185 2,125 (1,999) Accounts payable and accrued expenses ............ 675 (1,207) (2,913) 2,201 --------- --------- --------- --------- Net cash provided by operating activities ........ 21,981 11,298 27,176 23,558 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposition of property, plant and equipment ..................................... 10,723 Acquisition of property, plant and equipment ......................................... (5,939) (1,195) (13,953) (12,137) --------- --------- --------- --------- Net cash used in investing activities ............ (5,939) (1,195) (3,230) (12,137) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in due to Cenex Harvest States Cooperatives ...................................... (5,525) (7,819) (2,694) 16,102 Defined Business Unit equity distributed to the Company ....................................... (10,517) (2,284) (21,252) (27,523) --------- --------- --------- --------- Net cash used in financing activities ............ (16,042) (10,103) (23,946) (11,421) --------- --------- --------- --------- INCREASE (DECREASE) IN CASH ......................... -- -- -- -- CASH AT BEGINNING OF PERIOD ......................... -- -- -- -- --------- --------- --------- --------- CASH AT END OF PERIOD ............................... -- -- -- -- ========= ========= ========= =========
The accompanying notes are an integral part of the financial statements. F-29 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS -- Cenex Harvest States Cooperatives' Oilseed Processing and Refining Defined Business Unit (the Defined Business Unit) is a defined business unit of Cenex Harvest States Cooperatives (the Company) and is not organized as a separate legal entity. The purpose of the Defined Business Unit is to carry on the operations of the Oilseed Processing and Refining Division. The assets and liabilities of the Defined Business Unit continue to be 100% owned by the Company. The Defined Business Unit operates a single soybean crushing and oil refining plant in Mankato, Minnesota and serves customers throughout the United States. Effective June 1, 1998, Harvest States Cooperatives merged with CENEX, Inc. to form Cenex Harvest States Cooperatives. As a result of the merger, the Defined Business Unit became a defined business unit of Cenex Harvest States Cooperatives at that date. CASH MANAGEMENT -- The Defined Business Unit draws all of its cash requirements from and deposits all cash generated with the Company's centralized cash management system. INVENTORIES AND HEDGING -- Oilseed and processed oilseed products are stated at market, including adjustments for open purchase, sales and futures contracts and deferral of profit on processed oilseed products. The Defined Business Unit follows the general policy of hedging its oilseed inventories and unfilled orders for oilseed products to the extent considered practicable to minimize risk from market price fluctuations. Futures contracts used for hedging are purchased and sold through regulated commodity exchanges. Inventories, purchase commitments and sales commitments, however, may not be completely hedged due, in part, to the absence of satisfactory hedging facilities for certain commodities and geographical areas and, in part, to the Defined Business Unit's assessment of its exposure from expected price fluctuations. Noncommodity exchange purchase and sale contracts may expose the Defined Business Unit to risk in the event that a counterparty to a transaction is unable to fulfill its contractual obligation. The Defined Business Unit manages its risk by entering into purchase contracts with preapproved producers and companies and by establishing appropriate limits for individual suppliers. Sales contracts are entered into with organizations of applicable creditworthiness, as internally evaluated. In June 1998, Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, a new standard related to the accounting for derivative transactions and hedging activities. In July 1999, the FASB issued SFAS No. 137 which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. While management does not believe this standard will materially impact the financial results of the Defined Business Unit, it is currently evaluating the reporting requirements under this new standard. PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and resulting gains or losses are reflected in operations. Management periodically reviews the carrying value of property, plant and equipment for potential impairment by comparing its carrying value to the estimated undiscounted future cash flows expected to result from the use of these assets. Should the sum of the related, expected future net cash flows be less than the carrying value, an impairment loss would be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. INCOME TAXES -- Net income generated on oilseed purchased by the Defined Business Unit from nonmembers is characterized as nonpatronage income and is, therefore, taxable. Net income generated on oilseed purchased from the Company and holders of Equity Participation Units (EPUs) is considered F-30 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to be patronage to the extent of the Company's patronage purchase percentage of that particular commodity; the other portion of such income is considered nonpatronage and is, therefore, taxable. Results of operations of the Defined Business Unit are included in the consolidated federal income tax return of the Company. The Company has a policy that provides for the payment of taxes as calculated on an individual company basis for each of its defined business units and divisions. REVENUE RECOGNITION -- Sales of processed oilseeds are recognized upon shipment to customers, net of freight charges. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. RECEIVABLES Receivables at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Trade ........................................ $25,045 $29,098 $32,980 Less allowance for doubtful accounts ......... 395 395 395 ------- ------- ------- $24,650 $28,703 $32,585 ======= ======= =======
Sales to one customer accounted for 25% of total sales for the year ended August 31, 1999. Sales to two customers accounted for 25% and 10% of total sales for the three months ended August 31, 1998 and for the year ended May 31, 1998, and 25% and 11% of total sales for the year ended May 31, 1997. 3. INVENTORIES Inventories at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Processed oilseed products ......... $11,918 $17,857 $16,833 Oilseed ............................ 5,166 712 6,926 ------- ------- ------- $17,084 $18,569 $23,759 ======= ======= =======
F-31 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment at August 31, 1999 and 1998, and May 31, 1998 are as follows:
ESTIMATED USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31, IN YEARS 1999 1998 1998 ------------- ------------ ------------ ---------- Land ........................................... $ 2,096 $ 763 $ 763 Elevators, crushing plant and refinery ......... 15 to 20 23,270 22,103 22,103 Machinery and equipment ........................ 5 to 18 56,266 51,565 51,565 Furniture and fixtures ......................... 3 to 12 424 379 379 Other .......................................... 5 to 12 71 103 103 Construction in progress ....................... 3,741 5,626 4,432 ------- ------- ------- 85,868 80,539 79,345 Less accumulated depreciation .................. 46,867 44,943 44,392 ------- ------- ------- $39,001 $35,596 $34,953 ======= ======= =======
5. DUE TO CENEX HARVEST STATES COOPERATIVES The Defined Business Unit satisfies its working capital needs through borrowings, both long- and short-term, from the Company to the extent the Company's borrowing capacity permits. Amounts outstanding under this arrangement at August 31, 1999 and 1998, and May 31, 1998 totaled $9,546, $15,071 and $22,891, respectively. The Company charges the Defined Business Unit interest on its daily average of short-term borrowings at a rate equivalent to the weighted average interest rate on short-term borrowings of the Company. The weighted average borrowing rate of the Company's short-term borrowings was 5.8% for the year ended August 31, 1999, for the three months ended August 31, 1998, and for each of the years ended May 31, 1998 and 1997. Amounts due from the Company receive interest in the same manner at the same rate. Long-term borrowings, if needed, could be obtained at the Company's long-term borrowing rate. No long-term borrowings were outstanding at August 31, 1999 and 1998, and at May 31, 1998. 6. DEFINED BUSINESS UNIT EQUITY On May 31, 1997, the Company completed an offering for the sale of EPUs in its Oilseed Processing and Refining Defined Business Unit to qualified subscribers. Qualified subscribers are identified as Defined Members or representatives of Defined Members which are persons or associations of producers engaged in the production of agricultural products. The purchasers of EPUs have the right and obligation to deliver annually the number of bushels of soybeans equal to the number of units held. Unit holders participate in the net patronage sourced income from operations of the Oilseed Processing and Refining Defined Business Unit as patronage refunds distributed by the Company. EPUs represent an ownership interest in the Company, not the Defined Business Unit. 7. RETIREMENT PLANS The Company has noncontributory defined benefit retirement plans covering substantially all salaried and full-time hourly employees of the Defined Business Unit. The retirement plan benefits for salaried employees are based on years of service and the participants' total compensation. Benefits for hourly employees are based on various monthly amounts for each year of credited service. The plans are funded by annual contributions to tax-exempt trusts in accordance with federal law and regulations. Plan F-32 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED) 7. RETIREMENT PLANS (CONTINUED) assets consist principally of corporate obligations, U.S. government bonds, money market funds and immediate participation guarantee contracts. Pension costs billed to the Defined Business Unit for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, were approximately $538, $135, $120 and $147, respectively. The Defined Business Unit's portion of the actuarial present value of accumulated benefit obligations and net pension assets available for benefits has not been determined. Selected information at August 31, 1999 and 1998, and May 31, 1998 for the Company's plan is as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Projected benefit obligation for service rendered to date ......... $196,034 $92,854 $94,075 Plan assets at fair value ......................................... 175,376 84,961 86,889
The determination of the actuarial present value of the projected benefit obligation was based on a weighted average discount rate of 7.0% and a rate of increase in future compensation of 5% for all periods. The expected long-term rate of return on plan assets was 9.0% for the year ended August 31, 1999, and 8.5% for all other periods. 8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS The Company provides certain health care benefits for retired employees of the Defined Business Unit. Employees become eligible for these benefits if they meet minimum age and service requirements and are eligible for retirement benefits. The accrued postretirement medical and other benefits costs of the Company that are not funded were as follows at August 31, 1999 and 1998, and May 31, 1998:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Total postretirement benefit obligation ........................ $ 23,290 $ 10,408 $ 10,261 Unrecognized transition obligation ............................. (10,158) (7,835) (7,970) Unrecognized net gains ......................................... 2,026 1,864 1,850 --------- -------- -------- Accrued postretirement medical and other benefit costs ......... $ 15,158 $ 4,437 $ 4,141 ========= ======== ========
The net periodic costs billed to the Defined Business Unit for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 were approximately $258, $87, $246 and $229, respectively. The calculations assumed a discount rate of 7.0% for the year ended August 31, 1999, and for the three months ended August 31, 1998, and 7.75% for the year ended May 31, 1998, and a health care cost trend rate of 8.0% for the year ending August 31, 1999, declining to 6.0% for 2004 and remaining at that level thereafter. F-33 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED) 9. INCOME TAXES A reconciliation of the statutory federal tax rate to the effective rate for the year ended August31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ ------------ --------- ---------- Statutory federal income tax rate ................. 35.0% 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit ..................................... 4.1 4.1 5.0 4.9 Patronage earnings ................................ (33.4) (23.2) (32.7) (32.6) Other, net ........................................ .4 ( .7) ( .2) ----- ----- ----- ----- Effective rate .................................... 5.7% 16.3% 6.6% 7.1% ===== ===== ===== =====
The Defined Business Unit has no significant deferred income tax assets or liabilities. 10. COMMITMENTS AND CONTINGENCIES Noncancellable operating leases for approximately 389 rail cars with remaining lease terms of one to fifteen years are used by the Defined Business Unit. In September 1997, the Defined Business Unit (the Lessee) entered into a sales leaseback agreement. After 111 months, the Lessee has the option to: (i) purchase the equipment at fair market value; (ii) continue the lease; or (iii) return the equipment to the Lessor and pay a maximum termination fee of $719 contingent upon the Lessor's inability to recover the full value of the equipment, as determined from the casualty loss value schedule in the lease agreement. After 120months, the Lessee has the option to: (i) purchase the equipment at fair market value, limited to 10% of the net equipment cost at lease inception; (ii) renew the lease for a period of 36 months; or (iii) return the equipment to the Lessor. Total rent expense for all operating leases, net of rail car mileage credits received from the railroad, was $3,326, $933, $2,717 and $1,945 for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, respectively. Minimum future rental payments due under noncancellable operating leases at August 31, 1999 are as follows: 2000 .......................... $ 3,340 2001 .......................... 3,024 2002 .......................... 2,798 2003 .......................... 2,657 2004 .......................... 2,361 2005 and thereafter ........... 11,825 ------- $26,005 ======= There are various lawsuits and administrative proceedings incidental to the business of the Defined Business Unit. It is impossible, at this time, to estimate what the ultimate legal and financial liability of the Defined Business Unit will be; nevertheless, management believes, based on the information available to date and the resolution of prior proceedings, that the ultimate liability of all litigation and proceedings will not have a material impact on the financial statements of the Defined Business Unit taken as a whole. At August 31, 1999, the operations of the Defined Business Unit had outstanding oilseed purchase contracts of 686,563 bushels at prices ranging from $4.39 per bushel to $5.63 per bushel, and outstanding F-34 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) oil purchase contracts of 533,288,016 pounds at prices ranging from $0.1357per pound to $0.2621 per pound. In addition, the operations of the Defined Business Unit had outstanding sales contracts totaling approximately $125,369. In connection with the Defined Business Unit's proposed construction of a crushing plant in Fairmont, Minnesota, the City of Fairmont paid $897 to the Defined Business Unit. The Defined Business Unit will have to repay this amount to the City of Fairmont in the event it does not meet specified construction target dates. Therefore, this payment has been included in accrued expenses on the balance sheet at August 31, 1999. 11. RELATED PARTY TRANSACTIONS Revenues for the year ended August 31, 1999, the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, include $94,072, $22,908, $101,440 and $110,679, respectively, to related parties, primarily the Company. The Defined Business Unit purchases a portion of its soybeans from the Company. Included in cost of goods sold for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, were $18,180, $5,110, $19,875 and $5,726, respectively, of these purchases. Additionally, the Company performs various direct management services and incurs certain costs for its defined business units and divisions. Such costs, including data processing, office services and insurance, are charged directly to the defined business units and divisions. Indirect expenses, such as publications, board expense, executive management, legal, finance and human resources, are allocated to the defined business units and divisions based on approximate usage. Costs allocated to the Defined Business Unit for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, were $900, $225, $900 and $825, respectively. 12. SUPPLEMENTAL CASH FLOW INFORMATION Additional information concerning supplemental disclosures of cash flow activities are as follows for the year ended August 31, 1999, for the three months ended August 31, 1998 and for the years ended May 31, 1998 and 1997:
AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ ------------ --------- -------- Net cash paid to the Company during the period for: Interest ............................. $557 $251 $380 $ 322 Income taxes ......................... 790 2,300
13. UNAUDITED INTERIM FINANCIAL INFORMATION As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives merged with CENEX, Inc. to form Cenex Harvest States Cooperatives. Prior to the merger, Harvest States Cooperatives' and the Defined Business Unit's year end was May 31 and Cenex's year end was September 30. Subsequent to the merger, the Company and the Defined Business Unit changed their fiscal year end to August 31. F-35 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED) 13. UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED) The transition period for the three months ended August 31, 1998 has been included in the financial statements. Comparable information for the three months ended August 31, 1997 is as follows:
UNAUDITED ------------ Processed oilseed sales ............................ $ 86,349 Cost of goods sold ................................. 62,481 Provision for income taxes ......................... 675 Net income ......................................... 3,160 Net cash provided by operating activities .......... 21,200 Net cash used in investing activities .............. (7,771) Net cash used in financing activities .............. (13,429)
14. SUBSEQUENT EVENT During September 1999, the Boards of Directors of Cenex Harvest States Cooperatives and Farmland Industries, Inc., approved a Transaction Agreement to unify the two cooperatives. The Transaction Agreement has not yet been approved by the members of either cooperative. F-36 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Cenex Harvest States Cooperatives: In our opinion, the accompanying balance sheets and the related statements of operations, defined business unit equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of Oilseed Processing and Refining Defined Business Unit (a Defined Business Unit of Cenex Harvest States Cooperatives) as of August 31, 1999 and 1998, and the results of its operations and its cash flows for the year ended August 31, 1999, and for the three months ended August 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Defined Business Unit's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota October 29, 1999 F-37 INDEPENDENT AUDITORS' REPORT Board of Directors Cenex Harvest States Cooperatives Saint Paul, Minnesota We have audited the balance sheet of the Oilseed Processing and Refining Defined Business Unit (the Defined Business Unit), formerly known as Honeymead Products Company, a defined business unit of Cenex Harvest States Cooperatives as of May 31, 1998 and the related statements of operations, defined business unit equity and comprehensive income, and cash flows for each of the two years in the period ended May 31, 1998. These financial statements are the responsibility of the Defined Business Unit's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Oilseed Processing and Refining Defined Business Unit at May 31, 1998 and the results of its operations and its cash flows for each of the two years in the period ended May 31, 1998, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Minneapolis, MN July 24, 1998 F-38 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) BALANCE SHEETS
AUGUST 31 ----------------------- MAY 31, 1999 1998 1998 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Receivables ...................................... $ 30,960 $ 35,228 $ 35,758 Inventories ...................................... 14,339 18,895 13,785 Other current assets ............................. 210 429 393 -------- -------- -------- Total current assets ........................... 45,509 54,552 49,936 Property, plant and equipment ..................... 110,547 97,428 85,627 Intangible assets ................................. 9,415 10,481 10,748 -------- -------- -------- TOTAL ASSETS ................................... $165,471 $162,461 $146,311 ======== ======== ======== LIABILITIES AND DEFINED BUSINESS UNIT EQUITY CURRENT LIABILITIES: Due to Cenex Harvest States Cooperatives ......... $ 48,938 $ 33,238 $ 16,739 Accounts payable ................................. 7,238 11,003 8,836 Accrued expenses ................................. 4,440 1,667 1,569 Current portion of long-term debt ................ 10,005 10,005 10,005 -------- -------- -------- Total current liabilities ...................... 70,621 55,913 37,149 Long-Term Debt .................................... 28,510 38,515 41,204 Commitments and contingencies Defined business unit equity ...................... 66,340 68,033 67,958 -------- -------- -------- TOTAL LIABILITIES AND DEFINED BUSINESS UNIT EQUITY ................................... $165,471 $162,461 $146,311 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-39 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF OPERATIONS
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ---------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- ----------- ----------- (DOLLARS IN THOUSANDS) REVENUES: Processed grain sales ......................... $ 174,133 $46,914 $205,282 $199,079 Other revenue ................................. 1,820 --------- ------- -------- -------- 174,133 46,914 207,102 199,079 --------- ------- -------- -------- COSTS AND EXPENSES: Cost of goods sold ............................ 170,510 43,733 189,614 181,566 Marketing, general and administrative ......... 10,610 2,071 8,072 6,749 Interest ...................................... 5,184 843 3,122 5,230 Other ......................................... 826 162 2,000 --------- ------- -------- -------- 187,130 46,647 200,970 195,545 --------- ------- -------- -------- (LOSS) INCOME BEFORE INCOME TAXES .............. (12,997) 267 6,132 3,534 PROVISION FOR INCOME TAXES ..................... (1,125) 25 475 300 --------- ------- -------- -------- NET (LOSS) INCOME .......................... $ (11,872) $ 242 $ 5,657 $ 3,234 ========= ======= ======== ========
The accompanying notes are an integral part of the financial statements. F-40 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF DEFINED BUSINESS UNIT EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS ENDED AUGUST 31, 1998, AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997 (DOLLARS IN THOUSANDS) BALANCE, MAY 31, 1996 ............................................ $ 27,797 Net and comprehensive income .................................... 3,234 Defined Business Unit equity distributed to the Company ......... (3,234) --------- BALANCE, MAY 31, 1997 ............................................ 27,797 Capital contributed from Harvest States Cooperatives ............ 38,800 Net and comprehensive income .................................... 5,657 Defined Business Unit equity distributed to the Company ......... (4,296) --------- BALANCE, MAY 31, 1998 ............................................ 67,958 Net and comprehensive income .................................... 242 Defined Business Unit equity distributed to the Company ......... (167) --------- BALANCE, AUGUST 31, 1998 ......................................... 68,033 Net and comprehensive loss ...................................... (11,872) Defined Business Unit equity distributed to the Company ......... 10,179 --------- BALANCE, AUGUST 31, 1999 ......................................... $ 66,340 =========
The accompanying notes are an integral part of the financial statements. F-41 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS
FOR THE FOR THE THREE FOR THE YEARS ENDED YEAR ENDED MONTHS ENDED ---------------------------- AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ -------------- ----------- ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ............................ $ (11,872) $ 242 $ 5,656 $ 3,234 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization .............. 5,928 1,257 4,717 4,137 Provision for doubtful accounts ............ Loss on disposal of property, plant and equipment ................................. 757 162 2,000 Changes in operating assets and liabilities: Receivables ............................. 4,268 530 (8,896) 16,889 Inventories ............................. 4,556 (5,109) (1,513) (2,963) Other current assets .................... 219 (37) 448 (691) Accounts payable and accrued expenses ............................... (992) 2,265 911 (2,987) --------- --------- --------- --------- Net cash provided by (used in) operating activities ..................... 2,864 (852) 1,485 19,619 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment ................................... (18,738) (12,791) (20,310) (14,968) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in due to Cenex Harvest States Cooperatives ................................ 15,700 16,499 (5,674) (8,631) Long-term debt borrowings .................... 15,000 Principal payments on long-term debt ......... (10,005) (2,689) (10,005) (7,786) Capital contributed from Harvest States Cooperatives ................................ 38,800 Defined Business Unit equity distributed to the Company .............................. 10,179 (167) (4,296) (3,234) --------- --------- --------- --------- Net cash provided by (used in) financing activities .................................. 15,874 13,643 18,825 (4,651) --------- --------- --------- --------- INCREASE (DECREASE) IN CASH ................... -- -- -- -- CASH AT BEGINNING OF PERIOD ................... -- -- -- -- --------- --------- --------- --------- CASH AT END OF PERIOD ......................... -- -- -- -- ========= ========= ========= =========
The accompanying notes are an integral part of the financial statements. F-42 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS -- Cenex Harvest States Cooperatives' Wheat Milling Defined Business Unit (the Defined Business Unit) is a defined business unit of Cenex Harvest States Cooperatives (the Company) and is not organized as a separate legal entity. The purpose of the Defined Business Unit is to carry on the operations of the Wheat Milling Division. The assets and liabilities of the Defined Business Unit continue to be 100% owned by the Company. The Defined Business Unit operates commercial bakery and semolina flour milling facilities in Mount Pocono, Pennsylvania; Rush City, Minnesota; Huron, Ohio; Kenosha, Wisconsin; and Houston, Texas. These mills produce semolina and durum flour, which are the primary ingredients in pasta products and wheat flour in the bakery industry. The Defined Business Unit serves customers throughout the United States. Effective June 1, 1998, Harvest States Cooperatives merged with Cenex, Inc. to form Cenex Harvest States Cooperatives. As a result of the merger, the Defined Business Unit became a defined business unit of Cenex Harvest States Cooperatives at that date. CASH MANAGEMENT -- The Defined Business Unit draws all of its cash requirements from and deposits all cash generated with the Company's centralized cash management system. INVENTORIES AND HEDGING -- Grain and processed grain products are stated at market, including adjustments for open purchase, sales and futures contracts and deferral of normal profit on processed grain products. The Defined Business Unit follows the general policy of hedging its grain inventories and unfilled orders for grain products to the extent considered practicable to minimize risk from market price fluctuations. Futures contracts used for hedging are purchased and sold through regulated commodity exchanges. Inventories, purchase commitments and sales commitments, however, may not be completely hedged due, in part, to the absence of satisfactory hedging facilities for certain commodities and geographical areas and, in part, to the Defined Business Unit's assessment of its exposure from expected price fluctuations. Noncommodity exchange purchase and sale contracts may expose the Defined Business Unit to risk in the event that a counterparty to a transaction is unable to fulfill its contractual obligation. The Defined Business Unit manages its risk by entering into purchase contracts with preapproved producers and companies and by establishing appropriate limits for individual suppliers. Sales contracts are entered into with organizations of acceptable creditworthiness, as internally evaluated. In June 1998, Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.133, a new standard related to the accounting for derivative transactions and hedging activities. In July 1999, the FASB issued SFAS No.137 which defers the effective date of SFAS No.133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. While management does not believe this standard will materially impact the financial results of the Defined Business Unit, it is currently evaluating the reporting requirements under this new standard. PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and resulting gains or losses are reflected in operations. INTANGIBLE ASSETS -- Intangible assets, consisting primarily of goodwill and leasehold rights, are amortized using the straight-line method over 15 to 18 years. IMPAIRMENT OF LONG-LIVED ASSETS -- Management periodically reviews the carrying value of property, plant and equipment, and other long-lived assets, for potential impairment by comparing their carrying value to the estimated undiscounted future cash flows expected to result from the use of these assets. F-43 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Should the sum of the related, expected future net cash flows be less than the carrying value, an impairment loss would be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. INCOME TAXES -- Net income generated on grain purchased by the Defined Business Unit from nonmembers is characterized as nonpatronage income and is, therefore, taxable. Net income generated on grain purchased from the Company and holders of Equity Participation Units (EPUs) are considered to be patronage to the extent of the Company's patronage purchase percentage of that particular commodity; the other portion of such income is considered nonpatronage and is, therefore, taxable. Results of operations of the Defined Business Unit are included in the consolidated federal income tax return of the Company. The Company has a policy that provides for the payment of taxes as calculated on an individual company basis for each of its defined business units and divisions. REVENUE RECOGNITION -- Sales of processed grains are recognized upon shipment to customers, net of freight charges. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. RECEIVABLES Receivables at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Trade ........................................ $32,274 $34,825 $35,703 Other ........................................ 454 1,074 738 ------- ------- ------- 32,728 35,899 36,441 Less allowance for doubtful accounts ......... 1,768 671 683 ------- ------- ------- $30,960 $35,228 $35,758 ======= ======= =======
Sales to two customers accounted for 23% of total sales for the three months ended August 31, 1998, and the years ended May 31, 1998 and 1997, respectively. 3. INVENTORIES Inventories at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Grain ............................ $11,915 $17,003 $11,618 Processed grain products ......... 1,815 1,270 1,395 Other ............................ 609 622 772 ------- ------- ------- $14,339 $18,895 $13,785 ======= ======= =======
F-44 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS) 4. LONG-LIVED ASSETS PROPERTY, PLANT AND EQUIPMENT -- Major classes of property, plant and equipment at August 31, 1999 and 1998, and May 31, 1998 are as follows:
ESTIMATED USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31, IN YEARS 1999 1998 1998 ------------- ------------ ------------ ---------- Land .................................. $ 398 $ 398 $ 398 Grain processing plants ............... 15 to 45 56,586 37,378 37,016 Machinery and equipment ............... 5 to 20 67,897 49,743 48,406 Construction in progress .............. 10,615 32,299 21,206 -------- -------- -------- 135,496 119,818 107,026 Less accumulated depreciation ......... 24,949 22,390 21,399 -------- -------- -------- $110,547 $ 97,428 $ 85,627 ======== ======== ========
During the year ended August 31, 1999, the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, the Defined Business Unit capitalized interest of $797, $337, $339 and $589, respectively. INTANGIBLE ASSETS -- Intangible assets at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Goodwill, less accumulated amortization of $2,103, $1,697, $1,595 and $1,188, respectively ......................... $3,997 $ 4,403 $ 4,505 Leasehold rights and other intangibles, less accumulated amortization of $6,496, $5,836, $5,671 and $5,145, respectively ............................................ 5,418 6,078 6,243 ------ ------- ------- $9,415 $10,481 $10,748 ====== ======= =======
5. BORROWINGS DUE TO CENEX HARVEST STATES COOPERATIVES -- The Defined Business Unit satisfies its working capital needs through borrowings, both long-and short-term, from the Company to the extent the Company's borrowing capacity permits. Amounts outstanding under this arrangement at August 31, 1999 and 1998, and May 31, 1998 totaled $48,938, $33,238 and $16,739, respectively. The Company charges the Defined Business Unit interest on its daily average of short-term borrowings at a rate equivalent to the weighted average interest rate on short-term borrowings of the Company. The weighted average borrowing rate of the Company's short-term borrowings was 5.8%, for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997. Amounts due from the Company receive interest in the same manner at the same rate. F-45 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS) 5. BORROWINGS (CONTINUED) LONG-TERM DEBT Long-term debt consisted of the following at August 31, 1999 and 1998, and May 31, 1998:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Cenex Harvest States Cooperatives, with fixed and variable interest rates from 6.41% to 8.75%, due in installments through 2005 ............................................ $37,165 $46,920 $49,359 Industrial Development and Public Grain Elevator Revenue Bonds, payable through July 2004, with an interest rate of 7.4% ................................... 1,350 1,600 1,850 ------- ------- ------- 38,515 48,520 51,209 Less current portion ..................................... 10,005 10,005 10,005 ------- ------- ------- Long-term portion ........................................ $28,510 $38,515 $41,204 ======= ======= =======
The principal maturities of long-term debt outstanding at August 31, 1999 are as follows: 2000 ........... $10,005 2001 ........... 7,410 2002 ........... 7,125 2003 ........... 7,125 2004 ........... 6,850 ------- $38,515 ======= 6. DEFINED BUSINESS UNIT EQUITY On May 31, 1997, the Company completed an offering for the sale of EPUs in its Wheat Milling Defined Business Unit to qualified subscribers. Qualified subscribers are identified as Defined Members or representatives of Defined Members which have been defined as persons or associations of producers actually engaged in the production of agricultural products. The purchasers of EPUs have the right and obligation to deliver annually the number of bushels of wheat equal to the number of units held. Unit holders participate in the net patronage sourced income from operations of the Wheat Milling Defined Business Unit as patronage refunds distributed by the Company. EPUs represent an ownership interest in the Company, not the Defined Business Unit. 7. RETIREMENT PLANS The Company has noncontributory defined benefit retirement plans covering substantially all salaried and full-time hourly employees of the Defined Business Unit. The retirement plan benefits for salaried employees are based on years of service and the participants' total compensation. Benefits for hourly employees are based on various monthly amounts for each year of credited service. The plans are funded by annual contributions to tax-exempt trusts in accordance with federal law and regulations. Plan assets consist principally of corporate obligations, U.S. government bonds, money market funds and immediate participation guarantee contracts. Pension costs billed to the Defined Business Unit for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 were approximately $247, $88, $127 and $136, respectively. F-46 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS) 7. RETIREMENT PLANS (CONTINUED) The Defined Business Unit's portion of the actuarial present value of accumulated benefit obligations and net pension assets available for benefits has not been determined. Selected information at August 31, 1999 and 1998, and May 31, 1998 for the Company's plan is as follows:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Projected benefit obligation for service rendered to date ......... $196,034 $92,854 $94,075 Plan assets at fair value ......................................... 175,376 84,961 86,889
The determination of the actuarial present value of the projected benefit obligation was based on a weighted average discount rate of 7.0% and a rate of increase in future compensation of 5% for all periods. The expected long-term rate of return on plan assets was 9.0% for the year ended August 31, 1999, and 8.5% for all other periods. 8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS The Company provides certain health care benefits for retired employees of the Defined Business Unit. Employees become eligible for these benefits if they meet minimum age and service requirements and are eligible for retirement benefits. The accrued postretirement medical and other benefits costs of the Company that are not funded were as follows at August 31, 1999 and 1998, and May 31, 1998:
AUGUST 31, AUGUST 31, MAY 31, 1999 1998 1998 ------------ ------------ ---------- Total postretirement benefit obligation ........................ $ 23,290 $ 10,408 $ 10,261 Unrecognized transition obligation ............................. (10,158) (7,835) (7,970) Unrecognized net gains and other ............................... 2,026 1,864 1,850 --------- -------- -------- Accrued postretirement medical and other benefit costs ......... $ 15,158 $ 4,437 $ 4,141 ========= ======== ========
The net periodic costs billed to the Defined Business Unit for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 were approximately $78, $18, $72 and $65, respectively. The calculations assumed a discount rate of 7.0% for the year ended August 31, 1999 and for the three months ended August 31, 1998 and 7.75% for the year ended May 31, 1998, and a health care cost trend rate of 8.0% for the year ended August 31, 1999, declining to 6.0% for 2004 and remaining at that level thereafter. F-47 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS) 9. INCOME TAXES A reconciliation of the statutory federal tax rate to the effective rate for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ ------------ --------- ---------- Statutory federal income tax rate ................. 35.0% 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit ..................................... 4.1 4.1 5.0 4.9 Patronage earnings ................................ (30.4) (30.8) (36.5) (31.2) Other, net ........................................ 1.1 4.2 ( 0.2) ----- ----- ----- ----- Effective rate .................................... 8.7% 9.4% 7.7% 8.5% ===== ===== ===== =====
The Defined Business Unit has no significant deferred income tax assets or liabilities. 10. COMMITMENTS AND CONTINGENCIES Noncancellable operating leases for approximately 301 rail cars with remaining lease terms of one to ten years are used by the Defined Business Unit. In addition, leases for a milling facility, grain elevator, certain vehicles and various manufacturing equipment are used by the Defined Business Unit. Total rent expense for all operating leases, net of rail car mileage credits received from the railroad, was $2,261, $576, $2,108 and $2,145 for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, respectively. Mileage credits were $226, $22, $215 and $376 for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, respectively. Minimum rental payments due under these noncancellable operating leases at August 31, 1999 are as follows:
MILLING HOUSTON RAIL CARS FACILITY ELEVATOR OTHER TOTAL ----------- ---------- ---------- ------- --------- 2000 ........................ $2,279 $ 440 $ 33 $33 $ 2,785 2001 ........................ 1,902 440 33 28 2,403 2002 ........................ 1,110 440 33 21 1,604 2003 ........................ 260 467 33 9 769 2004 ........................ 8 480 33 521 2005 and thereafter ......... 1,480 688 2,168 ------ ------ ---- --- ------- $5,559 $3,747 $853 $91 $10,250 ====== ====== ==== === =======
There are various lawsuits and administrative proceedings incidental to the business of the Defined Business Unit. It is impossible, at this time, to estimate what the ultimate legal and financial liability of the Defined Business Unit will be; nevertheless, management believes, based on the information available to date and the resolution of prior proceedings, that the ultimate liability of all litigation and proceedings will not have a material impact on the financial statements of the Defined Business Unit taken as a whole. At August 31, 1999, the operations of the Defined Business Unit had outstanding grain purchase contracts of 14,855,986 bushels at prices for durum ranging from $3.75 per bushel to $4.55 per bushel and prices for spring wheat ranging from $3.40 per bushel to $4.26per bushel and prices for winter wheat ranging from $1.98 per bushel to $3.72 per bushel. In addition, the operations of the Defined Business Unit had outstanding sales contracts of both semolina and commercial baking flour totaling approximately $68,621. F-48 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS) 11. RELATED PARTY TRANSACTIONS Revenues for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, included $67, $29, $99 and $754, respectively, to related parties, primarily the Company. The Defined Business Unit purchases substantially all of its durum and wheat from the Company. Included in cost of goods sold for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, were $115,571, $30,895, $141,454 and $138,000, respectively, of these purchases. Additionally, the Company performs various direct management services and incurs certain costs for its defined business units and divisions. Such costs, including data processing, office services and insurance, are charged directly to the defined business units and divisions. Indirect expenses, such as publications, board expense, executive management, legal, finance and human resources, are allocated to the defined business units and divisions based on approximate usage. Costs allocated to the Defined Business Unit for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, were $1,020, $255, $1,020 and $1,000, respectively. On June 1, 1997, the Company contributed $38,800 in equity to the Defined Business Unit for the purpose of constructing a mill at Mount Pocono, Pennsylvania. 12. SUPPLEMENTAL CASH FLOW INFORMATION Additional information concerning supplemental disclosures of cash flow activities are as follows for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997:
AUGUST 31, AUGUST 31, MAY 31, MAY 31, 1999 1998 1998 1997 ------------ ------------ --------- -------- Net cash paid to the Company during the period for: Interest ......................................... $5,184 $843 $3,122 $5,230 Income taxes ..................................... 475 300
13. UNAUDITED INTERIM INFORMATION As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives merged with CENEX, Inc. to form Cenex Harvest States Cooperatives. Prior to the merger, Harvest States Cooperatives' and the Defined Business Unit's year end was May 31 and Cenex's year end was September 30. Subsequent to the merger, the Company and the Defined Business Unit changed their fiscal year end to August 31. The transition period for the three months ended August 31, 1998 has been included in the financial statements. Comparable information for the three months ended August 31, 1997 is as follows:
UNAUDITED ---------- Processed grain sales .............................. $ 44,420 Cost of goods sold ................................. 40,570 Provision for income taxes ......................... 125 Net income ......................................... 1,291 Net cash used in operating activities .............. (1,275) Net cash used in investing activities .............. (2,293) Net cash provided by financing activities .......... 3,568
14. SUBSEQUENT EVENT During September 1999, the Boards of Directors of Cenex Harvest States Cooperatives and Farmland Industries, Inc., approved a Transaction Agreement to unify the two cooperatives. The Transaction Agreement has not yet been approved by the members of either cooperatives. F-49 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Cenex Harvest States Cooperatives: In our opinion, the accompanying balance sheets and the related statements of operations, defined business unit equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of Wheat Milling Defined Business Unit (a Defined Business Unit of Cenex Harvest States Cooperatives) as of August 31, 1999 and 1998, and the results of its operations and its cash flows for the year ended August 31, 1999 and for the three months ended August 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Defined Business Unit's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota October 29, 1999 F-50 INDEPENDENT AUDITORS' REPORT Board of Directors Cenex Harvest States Cooperatives Saint Paul, Minnesota We have audited the balance sheet of the Wheat Milling Defined Business Unit (the Defined Business Unit), formerly known as Amber Milling Company, a defined business unit of Cenex Harvest States Cooperatives, as of May 31, 1998 and the related statements of operations, defined business unit equity and comprehensive income, and cash flows for each of the two years in the period ended May 31, 1998. These financial statements are the responsibility of the Defined Business Unit's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Wheat Milling Defined Business Unit at May 31, 1998 and the results of its operations and its cash flows for each of the two years in the period ended May 31, 1998, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Minneapolis, MN July 24, 1998 F-51 EX-10.33 2 AMENDED AND RESTATED PARTNERSHIP AGREEMENT EXHIBIT 10.33 TACOMA EXPORT MARKETING COMPANY AMENDED AND RESTATED PARTNERSHIP AGREEMENT BETWEEN CARGILL, INCORPORATED AND CENEX HARVEST STATES COOPERATIVES DATED AS OF JULY 12, 1999 THIS AMENDED AND RESTATED PARTNERSHIP AGREEMENT made as of this 12th day of July, 1999, between CENEX HARVEST STATES COOPERATIVES, a Minnesota corporation ("Cenex Harvest States") and CARGILL, INCORPORATED, a Delaware corporation ("Cargill"). WITNESSETH: WHEREAS, Cenex Harvest States and Continental Grain Company ("Continental") formed this general partnership dated as of September 28, 1992 for the purpose of engaging in the buying, selling, storing and handling of certain feedgrains and oilseeds for export from the Pacific Northwest, United States primarily through Continental's leased facility at Tacoma, Washington (the "Tacoma Facility") and such other business activities as were related thereto; and WHEREAS, the partnership formed thereby subleased the Tacoma Facility from Continental; and WHEREAS, Cenex Harvest States and Continental amended the Partnership Agreement dated September 28, 1992 with that certain Amendment No. 1 dated June 1, 1997; and WHEREAS, Cargill has purchased and taken an assignment of Continental's interest in the partnership, the Tacoma Facility and the sublease between Continental and the partnership; and WHEREAS, the partnership desires to put grain through Cargill's leased facility at Seattle, Washington (the "Seattle Facility"); and WHEREAS, Cenex Harvest States and Cargill, as partners in the partnership, wish to amend certain terms and conditions of the Agreement and to restate the Agreement as amended. NOW, THEREFORE, in consideration of the premises and covenants and agreements hereinafter set forth, the Partners hereby agree as follows: ARTICLE I DEFINITIONS Definitions. The following terms wherever used in this Agreement shall have the meanings hereinafter assigned to them: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. 2 "Agreement" means this Amended and Restated Partnership Agreement as in effect on the date hereof and as the same may be modified or amended by action of the Partners as provided herein. "Control" (including "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person by ownership of more than 50% of the voting securities of a corporation or by contract or otherwise. "Controlling Affiliate" means, with respect to any Person, any Affiliate of such Person that Controls such Person. "Encumbrance" means and includes any mortgage, pledge, lien, charge, encumbrance, lease, sublease, security interest or trust interest; and to "Encumber" an asset is to create an Encumbrance thereon. "Feedgrains" means the corn and sorghum as provided in Section 7.1. "Fundamental Issues" means those issues which require the vote of both of the Partners or the approval of the Management Committee, as provided in Section 5.3. "Management Committee" means the Management Committee constituted as provided in Section 5.2. "Net Income" and "Net Loss" shall mean the income and losses of the Partnership, determined on an accrual basis in accordance with generally accepted accounting principles consistently applied, after all expenses of the Partnership have been taken into account (including allowances for depreciation or amortization of Partnership assets) and shall include gain or loss realized by the Partnership on the sale or the disposition of assets in connection with a dissolution of the Partnership pursuant to Article XI. "Oilseeds" means soybeans as provided in Section 7.1. "Partner" or "Partners" means Cargill or Cenex Harvest States or both Cargill and Cenex Harvest States, as the case may be, and their permitted successors and assigns. "Partner Account" means, with respect to each Partner, the account maintained for such Partner in accordance with Section 10.10. "Partner Interest" means the interest of a Partner in the Partnership. 3 "Partnership Law" means the Washington Uniform Partnership Act, Ch. 25.04 RCW as amended from time to time. "Person" means any natural person, firm, trust, partnership, joint venture, unincorporated association, corporation, government or governmental agency. "Prime Rate" means the prime or base rate announced from time to time by the Chase Manhattan Bank, N.A. The Prime Rate shall be adjusted on a [daily] basis. "Secretary" means the Secretary of the Partnership as provided in Section 6.2. "Share", when used with respect to either Partner means fifty percent (50%) unless and until such percentage shall be changed by a vote of the Partners. "Treasurer" means the Treasurer of the Partnership as provided in Section 6.3. ARTICLE II 2.1 The Partnership. The Partners hereby form and constitute a partnership as a general partnership (the "Partnership") under the Partnership Law of the State of Washington upon the terms and conditions set forth in this Agreement. Except as otherwise provided in this Agreement, the rights and liabilities of the Partners shall be governed by the Partnership Law. 2.2 Name. The Partnership shall operate under the name of Tacoma Export Marketing Company ("TEMCO"). 2.3 Principal Office. The principal office of the Partnership shall be located at 5500 Cenex Drive, Inver Grove Heights, Minnesota 55077 or at such other place as may be designated by the Management Committee as hereinafter defined. 2.4 Duration. The Partnership commenced on or about September 15, 1992 and shall continue for a term of five years after the date of this Agreement, unless sooner terminated as provided herein. In the event Cargill and Cenex Harvest States reach a written, executed agreement regarding additional areas of potential synergies within twelve months of the date of this Agreement, the term of the Partnership shall be extended automatically until the expiration or termination of Cargill's lease of either the Tacoma Facility or the Seattle Facility, as from time to time extended, whichever shall first occur, unless sooner terminated as provided herein. 2.5 Purpose. The purpose of the Partnership is to engage in the business of buying, trading, selling, handling and transporting for export and exporting Feedgrains 4 and Oilseeds, as defined in Section 7.1, from the Pacific Northwest, United States through the Tacoma Facility and through the Seattle Facility pursuant to a put through agreement with the operator of the Seattle Facilityto Pacific Basin destinations and engaging in such other activities and business as may be incidental or related thereto or necessary or desirable in furtherance of such purpose. The Partnership shall establish or cause to be established such business organizations and shall own, directly or indirectly, such assets as the Partners shall agree are appropriate to achieve the purpose of the Partnership. 2.6 Scope. The Partnership is and shall be a partnership only for the purposes specified in this Agreement and nothing contained in this Agreement shall be deemed to create a general partnership between the Partners with respect to any activities whatsoever other than activities within the proper business purposes of the Partnership. Neither of the Partners shall have the power to bind the other Partner or the Partnership except as specifically provided in this Agreement. Neither of the Partners or the Partnership shall be responsible or liable for any indebtedness, liability or obligation of the other Partner incurred either before or after the execution of this Agreement except for indebtedness, liabilities, and obligations incurred after the execution of this Agreement in connection with authorized activities within the proper business purposes of the Partnership. Each Partner, respectively, hereby indemnifies and agrees to hold the other Partner, and its Affiliates and directors and officers, and the Partnership harmless from and against all such indebtedness, liabilities and obligations incurred by it which are not authorized and within the proper business purposes of the Partnership. ARTICLE III 3.1 Initial Capital Contributions. The initial capital of the Partnership shall consist of $100.00 cash, contributed by the Partners in proportion to their Shares. Each Partner shall make its initial capital contribution contemporaneous with the execution of this Agreement. 3.2 Additional Capital Contributions. (a) The Partners agree that the Partnership shall meet its capital needs through the borrowing of funds as provided in Section 10.3 and that unless specifically agreed to by the Partners and except as set forth in this Section 3.2, the Partners shall not be obligated to make any additional capital contributions to the Partnership. If the Partners agree to make additional capital contributions, the contributions shall be made at such times, in such amounts and under such conditions as shall be determined by the Partners in accordance with the provisions of this Agreement. (b) No interest shall accrue on any Partner's Partner Account. A Partner shall not be entitled to withdraw any part of its capital in the Partnership or to receive any capital distribution from the Partnership except as part of a distribution of capital agreed to by the Management Committee as hereinafter defined or as provided in Article XI. 5 (c) All capital contributions and other payments required or permitted to be made by a Partner under this Agreement shall be either in cash or, at the request of any Partner and if agreed to by the Management Committee, on such conditions and for such fair value as the Management Committee as hereinafter defined shall so determine, in kind. (d) If a Partner (a "Delinquent Partner") shall fail to make when due a contribution required pursuant to this Agreement, the other Partner (the "Contributing Partner") may, in its sole discretion, advance all or part of that amount to the Partnership. Such advance shall be deemed to be a demand loan by the contributing Partner to the Delinquent Partner at an interest rate equal to 2% in excess of the Prime Rate for the period during which the advance is outstanding. This loan shall be repaid, together with such interest, by the Delinquent Partner promptly upon demand from any funds of the Delinquent Partner, including, without limitation, any distribution from the Partnership which would otherwise be payable to the Delinquent Partner. Unless and until the Delinquent Partner makes such repayment, the Partnership shall make no cash distribution to such Partner (except that a cash distribution shall be applied to make such repayment and the balance then made to the formerly Delinquent Partner) The Contributing Partner to which such debt is due (or to which a debt pursuant to Article VIII is due) shall have a security interest in the Partner Interest of the Delinquent Partner to secure such amounts owed to it, and such security interest is hereby granted by each Partner. To the extent that the principal amount of the delinquency is repaid, the principal amount of such repayment (excluding any interest) shall be deemed a contribution to the capital of the Partnership by the Delinquent Partner and shall be reflected as such in the Partner Account of the Delinquent Partner. ARTICLE IV 4.1 Allocation of Profits and Losses. Except as otherwise specifically provided in Section 10.10; all items of Net Income and Net Loss shall be allocated to the Partners in accordance with their respective Shares. ARTICLE V 5.1 Voting and Meeting of the Partners. Each Partner shall have an equal vote in the management of the Partnership. Meetings of the Partners may be called by either Partner on ten (10) Business Days prior notice to discuss any matter including, without limitation, any matter related to the finances, operations, management, policies, or personnel of the Partnership. Notice of meetings may be waived by the Partner entitled to such notice. 6 5.2 Management Committee. (a) The conduct of the business and affairs of the Partnership shall be managed by a standing Management Committee consisting of four (4) members, with each Partner appointing two (2) regular members and such alternate members as such Partner deems advisable. Each of the Partners may initially appoint or replace any or all of its members or alternate members of the Management Committee by written notice to the Partnership and the other Partner. Each of the Partners shall at all times maintain in effect the appointment of at least one (1) member of the Management Committee. Each member of the Management Committee shall serve for indefinite terms at the pleasure of the appointing Partner. (b) The Management Committee shall meet not less than quarterly at such times and places as it may determine. Meetings of the Management Committee may be called by one (1) member of the Management Committee. The General Manager shall have the right to attend all meetings of the Management Committee but shall not be entitled to participate in the voting on any decision or other matter before the Management Committee. Notice of each meeting of the Management Committee shall be telexed, telecopied, sent by mail or delivered personally, or by telephone, to each regular and alternate member not later than ten (10) Business Days before the date on which the meeting is to be held. Notice of meetings may be waived by the member or members entitled to such notice. (c) The attendance of one (1) member from each Partner shall constitute a quorum for the transaction of business of the management Committee. Each member at the meeting shall be entitled to one vote for each matter to be voted upon by the Management Committee. Any decision or approval before the Management Committee shall be taken by majority vote of those of the Management Committee present or participating in a meeting at which a quorum is present; provided, however, no action shall be authorized unless at least one (1) member appointed by each Partner votes affirmatively on such action. The failure of the Management Committee to authorize action with respect to any matter pursuant to the foregoing sentence shall constitute a Deadlocked Matter pursuant to Section 5.4. (d) Any decision or approval of the Management Committee may be made without a meeting if either (i) such decision is first approved in writing by one of the members or alternates of each of the Partners or (ii) such meeting is held by means of a conference telephone or similar communications equipment allowing all Persons participating in the meeting to hear each other at the same time. (e) The regular members of the Management Committee shall alternately act as chairman of meetings of the Management Committee. Minutes of all meeting shall be prepared by the Secretary and shall be distributed to all regular members (and alternate members if present at a meeting) within thirty (30) days following any meeting. 7 5.3 Fundamental Issues. No action may be taken or decision made which binds the Partnership by the General Manager, any Partner on behalf of the Partnership, or the Partnership, with regard to any of the Fundamental Issues without the vote (or written consent) of the Management Committee in accordance with Section 5.2(c). Fundamental Issues shall include decisions and actions on the following matters, and such other matters as may be deemed Fundamental Issues, from time to time, by the Management Committee: (a) calls for additional capital or guarantees hereunder; (b) the issuance of any notes, bonds, debentures or other obligations by the Partnership, or the incurrence of or assumption of any indebtedness if, after giving effect thereto, the aggregate principal amount of all such indebtedness of the Partnership, other than indebtedness previously approved by the Management Committee (including, without limitation, the utilization by the Partnership of lines of credit previously approved by the Management Committee for the purpose of financing the business of the Partnership in the ordinary course), would either (i) exceed the amounts specifically provided therefor and sufficiently identified in the Partnership's current annual budgets referred to in Sections 5.3(p) and 10.1, or (ii) result in direct or indirect liability on either or both of the Partners for repayment of such indebtedness; (c) any acquisition, disposition, sale, conveyance, lease, sublease, exchange or other disposition of any interest in the Tacoma Facility other than the subleases contemplated by Section 7.2 hereof; (d) the acquisition, disposition, sale, conveyance, lease, sublease, exchange or other disposition of real property having a value greater than a threshold amount to be determined by the Management Committee; (e) the acquisition, disposition, sale, conveyance, lease, sublease, exchange or other disposition of personal property, other than agricultural commodities traded in the ordinary course of business, with a value greater than a threshold amount to be determined by the Management Committee; (f) investing in any Person; (g) the establishment of trading position limits for agricultural commodities traded by the Partnership; (h) the making of loans or provision of guaranties, or the extension or pledge of credit to others, except endorsements and extensions of credit in the ordinary course of business; (i) the sale of any equity interests (or operation, warrant, conversion in similar rights with respect thereto) in the Partnership; 8 (j) the selection, appointment, remuneration, removal and determination of the terms and conditions of employment agreements of officers, executives and key employees of the Partnership; (k) the payment of bonuses and perquisites to officers, executives and key employees of the Partnership; (l) the confession of any judgment against the Partnership or the creation, assumption, incurrence, or suffering to be created, assumed or incurred or to exist of, any encumbrance upon any of the assets or property of the Partnership, or the acquisition or holding or agreement to acquire or hold such property or assets subject to any encumbrance other than (i) liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, and (ii) other minor encumbrances incidental to the conduct of the business of the Partnership or the ownership of its property and assets which are not incurred in connection with the borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Partnership; (m) the compromise or submission to arbitration (other than contract specifically providing for arbitration) or litigation of any claim due, or any dispute or controversy involving the Partnership for any claim, dispute or controversy in excess of any amount to be determined by the Management Committee; (n) the entering into of any contract or commitment (other than those contracts made in the ordinary course of business) involving aggregate expenditures in excess of an amount to be determined by the Management Committee; (o) the entering into any contract or commitment (other than those commodity, sales and purchase contracts made in the ordinary course of the Partnership's grain merchandising business) involving either Partner, or any of their Affiliates; (p) the approval of the annual business operating budget, capital expenditure budget and business plan and the amount of cash for distribution and adoption of other major financial policies of the Partnership; (q) the approval of the opening financial statements of the Partnership as referred to in Section 10.7; (r) the appointment and removal of the independent accountants for the Partnership; (s) the appointment and removal of the Liquidator of the Partnership pursuant to Section 11.2; 9 (t) any material changes in the purposes of the Partnership beyond that expressly contemplated by this Agreement as provided in Section 2.5; (u) the voluntary dissolution and winding-up of the Partnership, provided, however, that this provision shall in no way limit the rights of the Partners under Article XI. (v) any changes in the scope or method of operations or business policies of the Partnership which is likely to materially increase the working capital or cash requirements of the Partnership. (w) approval of the credit policy applicable to export sales and any material deviation therefrom. 5.4 Deadlock. If the Management Committee cannot agree on any Fundamental Issue within thirty (30) days following the Management Committee meeting at which a decision on such Fundamental Issue was sought, or within thirty (30) days of any such Fundamental Issue being submitted to the members of the Management Committee for approval, then such matter shall be submitted to the Chief Executive Officer of Cenex Harvest States and the Sector President of Cargill to resolve. If the above mentioned executives of the Partners are unable to resolve such deadlocked Fundamental Issue within thirty (30) days following submission of the matter to them for resolution, and such Fundamental Issue has or will have a material adverse effect on the business of the Partnership, then the matter shall be submitted to arbitration in accordance with Section 12.2 of this Agreement. 5.5 Subcommittees. The Management Committee may appoint such subcommittees as it deems advisable, each with an equal number of representatives from each Partner. ARTICLE VI OFFICERS AND EMPLOYEES 6.1 The General Manager. (a) The General Manager shall be a Cargill employee so long as the administration and trading functions of the Partnership are predominantly operated out of Cenex Harvest States' facilities. If the Partnership's administration and trading functions are moved to any Cargill facility, the General Manager shall be an employee of Cenex Harvest States. The General Manager is hereby vested with such executive and financial authority as to enable him to direct the business and affairs of the Partnership, subject to the directions of the Management Committee and in accordance 10 with this Agreement and the annual budget adopted by the Management Committee. The General Manager shall be authorized to execute documents within the scope of his authority on behalf of the Partnership which will bind the Partnership without the necessity of obtaining the signature of either of the Partners. The General Manager shall be responsible for the implementation of the various decisions of the Management Committee and for the day to day management and operation of the Partnership. The General Manager shall regularly inform the Management Committee of the Partnership's ongoing activities. The General Manager shall report to and take direction from the Management Committee. The General Manager shall enter into transactions on behalf of the Partnership except that the General Manager is not authorized to take any action on a Fundamental Issue unless such action shall have been approved by the Management Committee pursuant to Section 5.2(c). (b) The General Manager shall provide the following reports to the Management Committee: (i) daily position reports; (ii) a weekly management report; (iii) a monthly report on the financial condition and the business prospects of the Partnership; (iv) a monthly report summarizing all claims made and suits filed against the Partnership, all potential claims and suits, and the final settlement or other resolution of claims and suits; and (v) other reports requested by the Management Committee or one of the Partners. 6.2 Secretary. The Secretary shall be appointed by the Management Committee and shall report to the General Manager. The Secretary shall act as Secretary of all meetings of the Management Committee, shall keep the minutes thereof in the proper book or books to be provided for that purpose, shall see that all notices required to be given by the Partnership are duly given and served, shall have charge of the books, records and papers of the Partnership relating to its organization and management as a Partnership, and shall see that the reports, statements and other documents required by law are properly kept and filed; and shall, in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Management Committee and the General Manager. 6.3 Treasurer. The Treasurer shall be appointed by the Management Committee. The Treasurer shall report to the Management Committee. The Treasurer shall perform all the duties assigned to him by this Agreement including, without limitation, (a) arranging for the Partnership to borrow funds pursuant to Section 10.3; (b) 11 submission to each Partner of quarterly comparisons pursuant to Section 10.1(b), current cash estimates pursuant to Section 10.2, and statements relating to Emergency Needs pursuant to Section 10.2(b); (c) determination of the amount of Cash for Distribution and the distribution of such Cash for Distribution pursuant to Section 10.4; (d) causing to be prepared and given to each Partner unaudited financial statements pursuant to Section 10.8(b); (e) having charge of, and being responsible for, all funds, securities and notes of the Partnership; (f) receiving and giving receipts for moneys due and payable to the Partnership from any sources whatsoever; (g) depositing all such moneys in the name of the Partnership in such banks, trust companies or other depositaries as shall be selected by the Management Committee; (h) against proper vouchers, causing such funds to be disbursed by checks or drafts on the authorized depositaries of the Partnership, and being responsible for accuracy of the amounts of all moneys so disbursed; (i) regularly entering or causing to be entered into books to be kept by him or under his discretion full and adequate account of all moneys received or paid by him for the account of the Partnership; (j) having the right to require, from time to time, reports or statements giving such information as he may desire with respect to any and all financial transactions of the Partnership from the officers or agents transacting the same; and, (k) in general, all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Management Committee or the General Manager. 6.4 Other Persons. The Management Committee may appoint such other executive and management employees, including Persons employed by Cargill or Cenex Harvest States, as it shall from time to time deem appropriate, and may approve a plan for hiring of other salaried employees including employees from Cargill and Cenex Harvest States. 6.5 Appointment and Removal of Officers and Employees. The appointment and removal of officers and employees of the Partnership shall be made by the Management Committee. Either Partner may request the removal of any officer or employee. 6.6 Affiliations. The officers, executives and other employees of the Partnership may also be employees of the Partners or their Affiliates, and shall not be required (except as may be determined by the Management Committee) to be full-time employees of the Partnership. The Management Committee and the Partners will agree on the designation of employees of the respective Partners to be made available by the respective Partners for the purpose of providing marketing, transportation, logistics, export administration, grain settlements, accounting and other services, for and on behalf of the Partnership. Such designated employees shall at all times remain employees of the respective Partners. The duties performed by such designated employees for and on behalf of the Partnership in conducting and performing Partnership business shall be Partnership business activities. In consideration of each of the Partner's making such employees available to the Partnership, the Partnership shall pay to each of the Partners the charges for services by and other expenses 12 incurred by such designated employees in performing Partnership business and agreed by the Management Committee as reflected in the operating budget. The Partnership shall have the right to direct the action of such designated employees in performance of their duties for and on behalf of the Partnership. If the Partnership does not desire to maintain the services of any such designated employee, the Partnership may so advise the respective Partner employing such designated employee and such Partner shall cause the designated employee to cease performing such services for and on behalf of the Partnership. Each Partner retains the right to fire its employees even if designated to the Partnership or to transfer any such employee to other duties within the business of such Partner; provided, however, that such Partner will cooperate with the Partnership to provide a suitable replacement so that the services of like kind provided by such dismissed or transferred employee will continue to be provided to the Partnership. 6.7 Exculpation. Any regular or alternate member of the Management Committee, the officers, executives and employees' of the Partnership which are employed by either Partner or its Affiliate shall not be liable to the Partnership or to the Partners for any action taken or omitted to be taken by him with respect to the Partnership, except to the extent any such act or omission was attributable to the willful misconduct, gross negligence or bad faith of such member of the Management Committee, officer, executive or employee. ARTICLE VII 7.1 The Partnership business shall be limited to corn and sorghum ("Feedgrains") and soybeans ("Oilseeds") destined primarily for export from the Pacific Northwest, United States. The Partnership intends to source Feedgrains and Oilseeds from its Partners and its Partners intend to supply Feedgrains and Oilseeds on market terms from their grain originating facilities and, in the case of Cenex Harvest States, its affiliated cooperatives from which it purchases such Feedgrains and Oilseeds, customarily tributary to the Pacific Northwest export market. 7.2 In order to facilitate the ability of the Partnership to transport and handle the Feedgrains and Oilseeds which it intends to market into export channels, the Partnership desires to utilize the Tacoma Facility and has entered into the Sublease Agreement between Continental and the Partnership dated September 28, 1992 and amended by that certain Amendment No. 1 to Sublease dated June 1, 1997 and amended and restated in that certain Amended and Restated Sublease executed concurrently with the execution of this Agreement (the "Tacoma Facility Sublease"). The Tacoma Facility Sublease shall terminate on the termination, expiration or dissolution of the Partnership. 7.3 Each Partner agrees to commit all of its Feedgrains and Oilseeds origination which is tributary to the Pacific Northwest United States (not to include California) ("PNW") for export to the Partnership. Whether origination is tributary to the 13 PNW for export shall be based upon what is the best market (i.e., what is the best net value to the Partner originating and selling the grain) for such grain at the time the grain is to be liquidated. If markets offer equal value, origination shall be split equally between the markets, unless doing so negatively impacts the net value to the Partner. Grain shall be transferred to the Partnership by the Partners at the Partnership's bid price for such grain. The Partners further agree that the Partnership shall be the exclusive export marketing vehicle for each of them and their Affiliates for Feedgrains and Oilseeds exported through the PNW. Upon request of either Partner, the other Partner shall provide information reasonably requested to the requesting Partner to verify compliance with the terms of this section. 7.4 The Partnership shall also provide throughput services for wheat, barley or other commodities at the Tacoma Facility for either Partner from time to time at market rates as determined by the parties. ARTICLE VIII NATURE OF OBLIGATIONS; INDEMNITIES; CHARGES 8.1 Obligations. As between the Partners, no Partner shall be liable or bear responsibility for more than its Share of each and all of the costs, expenses, liabilities and charges incurred or accrued by the Partnership. If any Partner shall pay or be required to pay, discharge or otherwise bear responsibility for any amount in excess of its share of the costs, expenses, liabilities and charges incurred or accrued by the Partnership, (i) such payment shall be deemed a demand loan by the advancing Partner to the other Partner, and shall be treated in the same manner as a loan pursuant to Section 3.2(d), and (ii) the other Partner covenants and agrees to indemnify, hold harmless and reimburse such Partner against and for the amount of such excess. 8.2 Indemnities. Each Partner covenants and agrees to indemnify and hold harmless the Partnership and the other Partner from and against any and all damage, losses and expenses caused by or arising out of any and all of the following: (i) any failure to perform any obligation required to be performed by such Partner hereunder and (ii) any wrongful or negligent act or omission by such Partner in connection with the Partnership's property or the ownership or operation thereof. 8.3 Charges. Upon the request of the General Manager or the Management Committee, either Partner, without charge, shall provide to the Partnership basic management and administrative advice and consultation of the kind generally provided by corporate staff to operating line functions and, including but not limited to, legal services, loss prevention and safety counseling, transportation and human resources 14 counseling, and insurance counseling (but excluding management information services), so long as that Partner is providing those services to its other business segments. 8.4 Nature of Obligations; Indemnities; Charges. The expenses incurred by Cargill in its Portland, Oregon office to provide the Partnership with export administration support shall be provided at no cost to the Partnership. Similarly, the expenses incurred by Cenex Harvest States in its St. Paul, Minnesota office to provide the Partnership with accounting and trading administration support shall be provided at no cost to the Partnership. The Management Committee shall oversee the provision of these services as well as those covered by Section 8.3, and in the event the contribution by the Partners is not generally equal, the Management Committee shall take such action as it deems necessary, such as having the Partnership pay one or both Partners for some or all of such services. 8.5 Insurance. The Partnership shall purchase and maintain commercial general liability and property insurance on the Tacoma Facility and other insurance coverages, with deductibles and limits, as established and approved by the Management Committee. Initially, the Management Committee establishes and approves the insurance with the coverages, limits and deductibles set forth on the Certificates of Insurance attached hereto as Exhibit A. The coverages, limits and deductibles shall not be changed without the approval of the Management Committee. ARTICLE IX TRANSFER OF INTERESTS 9.1 No Transfer of Interest. Except as hereinafter otherwise provided in this Article IX, during the term of this Agreement, no Partner (or any successor) shall, directly or indirectly in any manner, sell, transfer, assign, encumber or otherwise dispose of any interest in the Partnership, nor shall any such interest be subject, in whole or in part, directly or indirectly, to sale, transfer, assignment, encumbrance or other disposition by operation of law or agreement, without the prior written consent of the other Partner, and any attempt so to do shall be void. 9.2 Transfer to Affiliates. Notwithstanding anything in Section 9.1 to the contrary, any Partner may sell, transfer or otherwise dispose of its Partner Interest to any entity which is an Affiliate of such Partner or of the ultimate Controlling Affiliate of such Partner, subject, however, to the conditions that (i) in the opinion of counsel to the Partnership, such sale, transfer or other disposition would not (a) constitute a default under any material agreement to which the Partnership is a party or (b) result in the termination of the Partnership for Federal income tax purposes, (ii) the transferee may not be a debtor subject to any proceeding under Title 7 or 11 of the United States Bankruptcy Code or any successor legislation or similar state legislation (unless otherwise consented to in writing by the other Partner) , and (iii) the transferor and its 15 Affiliates shall not be released from any of its or their obligations under this Agreement or the Subleases. 9.3 Reasonableness of Restrictions. Each Partner acknowledges and agrees that the restrictions on the transfer of interests herein are reasonable in view of the purpose and intent of the Partners. 9.4 Certain Encumbrances Permitted. Anything in this Agreement to the contrary notwithstanding, any Partner (and the Affiliates of any Partner) may encumber all or part of such Partner's Partner Interest to the extent and in the manner which may be required pursuant to financing agreements contemplated by Section 10.3. ARTICLE X FINANCIAL MATTERS 10.1 Programs and Budgets. (a) The General Manager shall, not later than one (1) month prior to the commencement of the next succeeding fiscal year of the Partnership, prepare and submit to the Management Committee for its review and approval a business operating budget and a capital expenditure budget for such fiscal year. (b) Not later than the 25th calendar day after the close of each fiscal quarter, the Controller shall submit to each Partner a comparison, for the immediately preceding quarter and for the year to date, of the results of operations of the Partnership with the applicable fiscal year budget. 10.2 Estimates on Cash Needs. (a) Based on the budgets referred to in Section 10.1(a) and the quarterly comparisons referred to in Section 10.1(b), the Treasurer will, at such time and for such periods as requested by the Management Committee, submit to the Management Committee a current cash estimate showing: (i) the estimated cash disbursements which the Partnership will be required to make during the next succeeding calendar period for operating costs; (ii) estimated receipts; (iii) amounts needed for additional working capital; and (iv) the amount of funds ("Cash Needs") that will be required to cover the amount, if any, by which estimated cash disbursements and amounts needed for additional working capital exceed estimated receipts available to cover such cash disbursements and additional working capital. The current cash estimate shall also specify the dates on which the Partnership must receive the necessary funds. (b) In the event an emergency requires cash payments ("Emergency Needs") not provided for by such current cash estimates, the General Manager or the Treasurer, may at any time furnish a statement thereof to the Management Committee, giving the maximum period of notice for any such additional cash payments as is practicable in 16 the circumstances, specifying in detail the reasons for such emergency cash payment and the amount thereof. Upon receipt of such emergency cash statement, the Management Committee shall promptly decide, taking into account the circumstances, how the Emergency Needs shall be met. (c) Unless otherwise agreed by the Management Committee, the Cash Needs and the Emergency Needs shall be made through borrowings of the Partnership in accordance with Section 10.3. 10.3 Partnership Borrowings and Partner Loans. In the event that the Management Committee decides at any time during the term of this Agreement that it is desirable for the Partnership to borrow funds to acquire significant inventories or to meet the Cash Needs, Emergency Needs or other requirements of the Partnership, the Treasurer shall, within the limits of his authority as defined by the Management Committee, negotiate on behalf of the Partnership to borrow such funds from financial institutions. The Management Committee may approve, reject, or modify the terms negotiated by the Treasurer and may negotiate or authorize others to negotiate borrowings on behalf of the Partnership in order to find terms more beneficial to the Partnership. The Partnership may, upon approval of the Management Committee, also borrow from the Partners, based on their respective Shares, on terms to be separately agreed. The parties agree to use their best efforts to obtain Partnership borrowings from financing institutions who will agree to limit recourse to each Partner to 50% of any sums financed. 10.4 Cash for Distribution. The Treasurer shall determine, at such times as requested by the Management Committee, the amount of cash for distribution and shall distribute such cash for distribution, if any, to the Partners, in accordance with their Shares; provided, however, that (a) if any Partner has advanced loans to a Delinquent Partner, the distributions otherwise payable to the Delinquent Partner shall be made to the other Partner up to an amount sufficient to repay such loans in full with interest, and (b) if any Partner is in default or delinquent in respect of an obligation to the Partnership, no distribution shall be made to such Partner until such default is cured or such delinquent obligation is paid. 10.5 Deposits and Investments. The funds of the Partnership shall be deposited in the name of the Partnership in accounts designated by the Management Committee in banks or banking institutions to be selected by the Management Committed or invested in such manner as shall be authorized by the Management Committee. The Management Committee shall prescribe such procedures as its shall deem necessary with respect to making such investments. 10.6 Fiscal Year. The fiscal year of the Partnership shall end on August 31 in each year. 17 10.7 Books of Account. (a) The Management Committee shall approve the opening financial statements for the Partnership as of the date hereof. (b) Accurate books of account of the Partnership shall be maintained in accordance with generally accepted accounting principles consistently applied. In those instances in which more than one generally accepted accounting principle can be applied, the Management Committee shall determine, in consultation with the Partnership's independent accountants, which principle will be adopted by the Partnership. Such books shall at any reasonable time be available for examination by either Partner or Persons acting on its behalf at the sole expense of such Partner. 10.8 Financial Statements. (a) Within ninety (90) days after the close of each fiscal year of the Partnership there shall be prepared and submitted to each Partner the following financial statements, accompanied by the report thereon of the independent accountants for the Partnership: (1) a balance sheet of the Partnership as at the end of such fiscal year; (2) a statement of profit and loss for such fiscal year; (3) a statement of changes in financial position; and (4) a statement of the respective Partner Accounts and changes therein for such fiscal year. (b) Within twenty (20) Business Days after the close of each fiscal month the Treasurer will cause to be prepared and given to each Partner unaudited financial statements comparable to those referred to in Section 10.8(a)(1) and (2). 10.9 Tax Matters. (a) The Partners hereby agree that the Partnership shall be treated as a partnership for purposes of United States, Federal, state and local income tax or other taxes, and further agree not to take any position or make any election, in a tax return or otherwise, inconsistent therewith. (b) The Management Committee shall cause all required United States Federal, state and local partnership income, franchise, property or other tax returns, including information returns, to be filed with the appropriate office of the Internal Revenue Service or any other relevant taxing jurisdiction, as the case may be. As promptly as practicable, and in any event in sufficient time to permit timely preparation and filing by 18 each Partner of its respective state and Federal tax returns, the Partnership shall deliver to each Partner a copy of each state and Federal tax return or tax report filed by the Partnership. (c) All elections for Federal income tax purposes, except as stated in Section 10.9(a), required or permitted to be made by the Partnership, and all material decisions with respect to the calculation of its income or loss for tax purposes, shall be made in such manner as the Management Committee shall determine. 10.10 Partner Accounts. (a) An individual partner account ("Partner Account") shall be maintained for each Partner and shall be adjusted as set forth herein. (b) The Partner Account maintained for each Partner (X) shall be credited with the sum of (a) the fair market value at the time of contribution of all capital contributions made by such Partner to the Partnership and the amount of all Net Income credited to the Partner account of such Partner pursuant to Section 4 and decreased by the sum of (i) the amount of all distributions made to such Partner and (ii) the amount of Net Loss charged to the Partner Account of such Partner pursuant to Section 4.1; (c) Partnership income, gains, losses and deductions shall, solely for income tax purposes, be allocated among the Partners in accordance with Section 704(c) of the Internal Revenue Code of 1986, as amended. ARTICLE XI DISSOLUTION AND WINDING UP 11.1 Dissolution Events. The Partnership shall be dissolved in case any of the following events shall occur: (a) The term of the Partnership shall expire pursuant to Section 2.4 of this Agreement. (b) The sale, abandonment or disposal by the Partnership of all or substantially all of its assets not in the ordinary course of business. (c) If the Partnership incurs a net loss for any fiscal year in excess of $10 million, and either Partner requests dissolution in writing within thirty (30) days of receipt of the financial statements referred to in Section 10.8(a) of this Agreement. (d) If Cargill assigns, subleases or in any manner transfers its rights under its lease of the Seattle Facility to Cenex Harvest States. 19 (e) If Cargill assigns, subleases or in any manner transfers its rights under its lease of the Seattle Facility to Tomen, Marubeni, Mitsui, Zennoh, Itochu, KFA (Korean Feed Assoc) or COFCO (Chinese Oil) (such parties are hereafter referred to collectively as the "First Tier Third Parties") and executes a put through agreement with such party giving Cargill access to 40% or more of the capacity of the Seattle Facility on an annual basis, and (i) Cargill, Cenex Harvest States and the Partnership cannot agree upon the terms and conditions under which said put through agreement will be assigned to the Partnership, or (ii) the terms and conditions of such put through agreement are unacceptable to Cenex Harvest States. (f) If Cargill assigns, subleases or in any manner transfers its rights under its lease of the Seattle Facility to one of the First Tier Third Parties but does not execute a put through agreement with such party giving Cargill access to 40% or more of the capacity of the Seattle Facility on an annual basis, then either Cargill or Cenex Harvest States can elect to dissolve the Partnership within thirty (30) days of such assignment, sublease or transfer. (g) If Cargill assigns, subleases or in any manner transfers its rights under its lease of the Seattle Facility to any third party other than the First Tier Third Parties or Cenex Harvest States, and (i) Cargill executes a put through agreement with such party giving Cargill access to 40% or more of the capacity of the Seattle Facility on an annual basis and (aa) Cargill, Cenex Harvest States and the Partnership cannot agree upon the terms and conditions under which said put through agreement will be assigned to the Partnership, or (bb) the terms and conditions of such put through agreement are unacceptable to Cenex Harvest States, or (ii) Cargill does not execute a put through agreement with such party giving Cargill access to 40% or more of the capacity of the Seattle Facility on an annual basis, then either Cargill or Cenex Harvest States can elect to dissolve the Partnership within thirty (30) days of such assignment, sublease or transfer. (h) The Partnership or either Partner shall (i) file a petition in bankruptcy, (ii) petition or apply to any tribunal for the appointment of a receiver or any trustee for it or a substantial part of its assets, (iii) commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) make an assignment for the benefit of creditors or take any other similar action for the protection or benefit of creditors; or if there shall have been filed any such petition or application, or any such petition shall have been commenced against it, in which an order for relief is entered or which remains undismissed for a period of forty-five (45) days or more; or the Partnership or either Partner by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a receiver or any trustee for it or any substantial part of any of its properties, or shall suffer any such receivership or trusteeship to continue undischarged for a period of forty-five (45) days or more. 20 No Partner shall have the right to dissolve or terminate the Partnership for any reason other than as set forth above or to withdraw from the Partnership other than as set forth in Article IX, and each Partner hereby waives any other right it may have with respect thereto. 11.2 Winding Up. Upon dissolution of the Partnership pursuant to Section 11.1, the Partnership shall be wound up and liquidated in accordance with law and the following provisions: (a) Each Partner shall pay to the Partnership all amounts owing by it to the Partnership. (b) The Partnership shall continue with the business necessary to complete and perform existing contracts until the distribution of the Partnership's assets as hereinafter provided. No new business or contracts shall be undertaken except as necessary to wind up and liquidate the Partnership. (c) The property and business of the Partnership shall be wound up and liquidated under the direction of the Management Committee or a Person duly appointed by the Management Committee (in any such case, the "Liquidator"). Upon the dissolution of the Partnership, the Liquidator shall cause a statement setting forth the assets and liabilities of the Partnership as of the date of dissolution of the Partnership (the "Dissolution Date") (including the fair market value of all of the assets of the Partnership) to be prepared promptly and furnished to each of the Partners, or upon the written request of either Partner, by the independent auditors of the Partnership. In preparing such a statement, the Liquidator may retain such independent appraisers or other advisors as the Liquidator deems advisable. All fees, costs, and expenses incurred in connection therewith shall be borne by the Partnership. (d) Following the preparation and distribution of such statement, the Liquidator shall distribute all the assets and assign all the liabilities of the Partnership to the Partners in the ratio of the Partner Account balances of the Partners after adjustment of the Partner Accounts for any profit or loss in the year of liquidation, any profit or loss realized or to be realized on any property sold or disposed of as part of the liquidation, and any profit which would be realized if any property distributed in kind had been sold at its fair market value by the Partnership. (e) In conjunction with dissolution and liquidation of the Partnership, Cargill shall pay to the Partnership the then book value (net of accumulated depreciation) of all capital improvements and/or repairs made by the Partnership to the Tacoma Facility during the term of the Partnership and which have been authorized to be made by the Management Committee. (f) In conjunction with dissolution and liquidation of the Partnership, the shares of the Bank of Cooperatives (the "COBANK") held by the Partnership shall be 21 distributed equally to the Partners; provided, however, that in the even that COBANK will not transfer the Partnership's shares in COBANK stock to Cargill, then Cenex Harvest States will purchase all of the COBANK shares owned by the Partnership from the Partnership at the Net Present Value (NPV) of the stated carrying value of such shares as expressed on the Partnership's financial statements. It being understood that the NPV would be computed based upon the cash payout formula for stock redemption in use by COBANK at the date of the dissolution. The discount factor to be used for calculating the NPV would be 100 basis points over the applicable United States Treasury Note rate for the cash payout period. 11.3 Put-through Agreement. Upon dissolution of the Partnership pursuant to Section 11.01(g), Cargill and Cenex Harvest States shall enter into a put-through agreement giving Cenex Harvest States the right to access the Tacoma Facility for put-through of Feedgrains and Oilseeds until May 31, 2000 at market put-through rates. The put-through agreement shall be substantially in accordance with the terms of the Put-Through Agreement attached hereto as Exhibit B. The term of the put-through agreement shall be likewise extended for any extensions which Cargill receives from the United States Department of Justice beyond six (6) months to divest its operation of the Seattle Facility. 11.4 Put-through Agreement. Upon dissolution of the Partnership pursuant to Section 11.01(a), (b), (c), (e), (f) or (h), Cargill and Cenex Harvest States shall enter into a put-through agreement giving Cenex Harvest States the right to access the Tacoma Facility for put-through of Feedgrains and Oilseeds for the balance of the term of Cargill's lease of the Tacoma Facility (including any extensions, renewals or amendments thereof) at market put-through rates. The put-through agreement shall be substantially in accordance with the terms of the Put-Through Agreement attached hereto as Exhibit C. ARTICLE XII DISPUTES; ARBITRATION 12.1 Resolution of Controversies. Any dispute, controversy or claim between the Partners arising from this Agreement or the performance thereof shall be settled solely by arbitration in accordance with the provisions of Section 12.2. 12.2 Method of Arbitration. The arbitration shall be effected by arbitrators selected as hereinafter provided and shall be conducted by the American Arbitration Association in Minneapolis, Minnesota applying the Commercial Arbitration Rules in effect on the date thereof. The dispute shall be submitted to three arbitrators, each of who shall have had at least five (5) years' experience in connection with the business of the Partnership, one arbitrator being selected by the Partner submitting the controversy or dispute to arbitration, the second arbitrator being selected by the other Partner and the third arbitrator being selected by the two arbitrators so selected. Conditions of any such arbitration shall include (a) that the arbitrators shall not have the authority to 22 modify, amend or supplement the terms of this Agreement, and shall interpret this Agreement strictly in accordance with its terms; (b) that the amount of capital required to be contributed by a Partner to the partnership shall not be increased; and (c) that the Partner submitting such controversy or dispute to arbitration shall appoint its arbitrator within fifteen (15) Business Days after the date of such submission. The failure of the Partner requesting arbitration to timely appoint such arbitrator shall void the effectiveness of the notice of submission of the matter to arbitration. The second arbitrator to be selected by the other Partner as hereinbefore provided shall be selected within fifteen (15) Business Days after receipt of notice by such Partner of the selection of the submitting arbitrator and, if the second arbitrator is not so selected, the determination of the single arbitrator selected by the submitting Partner shall be binding and conclusive. If the non-submitting Partner shall have timely selected the second arbitrator, then the two selected arbitrators shall select the third arbitrator within five (5) Business Days following the selection of the second arbitrator. The meetings of the arbitrators shall be held at such place or places as may be agreed upon by the arbitrators, and each Partner shall bear the cost of the fees and expenses of the arbitrator selected by or for it, with the fees and expenses of the third arbitrator to be borne equally. Upon making any order or award, which order may include an order to dissolve the Partnership pursuant to the provisions of Article X, the arbitrators shall retain jurisdiction to determine any subsequent claim that a defaulting Partner has failed to comply with terms of any such order or award. The arbitrators shall have no authority to impose a fine or penalty. ARTICLE XIII CONFIDENTIAL INFORMATION 13.1 Confidential Information. During the continuance of the Partnership and for a period of three (3) years after its termination, no Partner or its Affiliates or any officer or employee thereof shall divulge to any Person (except an Affiliate of such Person which shall undertake to be bound to the provisions of this Article XIII) any trade secret, or secret process, method or means or any other confidential information concerning the business or properties of the Partnership, the Partners or their Affiliates, or the manufacture, sale or licensing of products, processes and designs made or owned by the Partnership, the Partners, or their Affiliates, that come to the knowledge of such Partner, Affiliate, officer or employee by reason of the relationship of such Partner, Affiliate, officer or employee with the Partnership. The obligations under this Article XIII shall not apply to any information to the extent that (a) such information is or shall become part of the public domain, by publication or otherwise, through no fault of the Partner seeking to use or disclose such information, or (b) the receiving Partner, Affiliate, officer or employee shall be able to show such information to have been in its or his possession prior to the receipt thereof from the Partnership or other Partner or Affiliate or to have been received from a third party which shall not itself have received such information on a confidential basis from the Partnership or any Partner or Affiliate of a Partner. 23 13.2 Non-Solicitation Clause. During the duration of this Agreement each Partner represents that it will not initiate employment discussions with personnel employed by the other Partner by direct contact or through executive search firms, employment agencies, or other indirect means, for so long as such personnel is employed by the Partner and for an additional six (6) months after such personnel leaves that Partner's employ. It being understood that this would not apply in instances where personnel from either Partner are responding to general advertisements of job openings. ARTICLE XIV SECURITY INTEREST 14.1 Security for Indemnity. To secure their respective indemnity obligations hereunder, each Partner hereby grants to the partnership and to the other Partner, pursuant to Article IX of the Uniform Commercial Code, a security interest in their respective right, title and interest in and to the Partnership, and under the Partnership Agreement, including all present and future rights to any profits, payments, distributions, or other rights to payment arising under or in connection with the Partnership Agreement (the "Collateral"); provided, however, that for so long as a Partner is not in default of any of its indemnity obligations hereunder, that Partner may receive all payments or distributions to which its is entitled as Partner of the Partnership. In the event a Partner is in default under its indemnity obligation, to the extent such default may be cured by the payment of money, the Partnership may, at the request of the non-defaulting Partner, make such payment and pay to the non-defaulting Partner the next available funds which would otherwise have been distributed to the defaulting Partner, up to an amount which will make the non-defaulting Partner whole, together with interest thereon from the date paid by the Partnership until reimbursed to the other Partner at the rate of 2% in excess of the Prime Rate. Alternatively, if such loss is incurred by the other Partner, such other Partner shall be entitled to receive all subsequent distributions otherwise payable to the defaulting Partner until the non-defaulting Partner has recovered the full amount of its loss together with interest at the rate of 2% in excess of the Prime Rate. Neither Partner will transfer or assign, grant a security interest in or otherwise dispose of its respective interests as debtor in and to the Collateral and will maintain the Collateral free and clear of all other liens, claims and security interests whatsoever. Provided that a Partner has discharged its respective obligations under and is not otherwise in default of its obligations hereunder, and is not the subject of any bankruptcy or insolvency proceeding, this security interest shall terminate only upon the settlement of all debts and claims outstanding with respect to the dissolution of the Partnership. Each Partner shall furnish to the Partnership and the other Partner, upon request, duly executed UCC1 financing statements covering the Collateral and such other documents, certifications and instruments as requested by the Partnership or the 24 other Partner, to evidence, grant, perfect and prioritize the security interest granted in the Collateral. ARTICLE XV GOVERNING LAW 15.1 Governing Law. The Partnership is formed pursuant to and shall be governed by and construed in accordance with the Partnership Law and laws of the State of Washington, exclusive of Washington's conflict of laws rules. ARTICLE XVI AMENDMENTS 16.1 Amendments. The terms of this Agreement cannot be modified, varied or amended orally but only by a written instrument executed by all the Partners. ARTICLE XVII NOTICES 17.1 Notices. (a) All notices, consents, demands, requests, reports and other documents authorized or required to be given pursuant to this Agreement shall be given in writing and either personally served to an officer or a member of the Management Committee of the Partner to whom it is given or mailed by registered or certified first class mail, postage prepaid, or sent by facsimile or telegram, addressed as follows: If to Cargill: CARGILL, INCORPORATED North American Grain/Lake 15615 McGinty Road West Wayzata, MN 55391-2398 Attn: President Facsimile No: (612) 404-6025 With a copy to: CARGILL, INCORPORATED Law Department/24 15407 McGinty Road West Wayzata, MN 55391-2399 Attn: North American Grain Attorney Facsimile No: (612) 742-6349 25 If to Cenex Harvest States: CENEX HARVEST STATES COOPERATIVES 5500 Cenex Drive Inver Grove Heights, MN 55077 Attention: Legal Department Facsimile No.: (651) 451-4554 (b) Any Partner may change the address to which notices and other communications to it shall be sent by giving to the other Partner written notice of such change, in which case notices and other communications to the Partner giving the notice of the change of address shall not be deemed to have been sufficiently given or delivered unless addressed to it at the new address as stated in said notice. Notices shall be deemed to have been given (except as otherwise expressly set forth in this Agreement) (i) when delivered, if given by personal delivery or actual delivery during normal business hours, (ii) three (3) Business Days after posting, if given by registered or certified mail, return receipt requested, (iii) two (2) Business Days after dispatch if given by telegram, or (iv) upon receipt, if given by facsimile. ARTICLE XVIII SUCCESSORS AND ASSIGNS 18.1 Successors and Assigns. Subject to the provisions of Article IX, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of the respective parties hereto in all respects as if they were mentioned throughout by words of proper designation. ARTICLE XIX MISCELLANEOUS 19.1 Entire Agreement. This Agreement sets forth the entire agreement and understanding of the Partners with respect to the formation and operation of the Partnership and related transactions contemplated by this Agreement, and supersedes all prior agreements and understandings, written or oral, between the Partners with respect thereto. 19.2 Severability. The unenforceability, invalidity, or illegality of any provision of this Agreement shall not affect or impair any other provision hereof or render it unenforceable, invalid or illegal. 19.3 Interpretation. Wherever used in this Agreement, unless the context clearly indicates otherwise, the use of the singular includes the plural, and vice versa; and the use of any gender is applicable to any other gender. 26 19.4 Captions. Captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. 19.5 Partition Waived. The Partners agree that the Partnership's interest, properties and investments are not and will not be suitable for partition. Accordingly, each of the Partners hereby irrevocable waives any and all rights that it may have to maintain any action for partition of any of such interests, properties or investments. 19.6 Waiver and Consent. No consent or waiver, express or implied, by any Partner to or of any breach or default by any other Partner in the performance by such other Partner of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such other Partner of the same or any other obligations of such Partner hereunder. Failure on the part of any Partner to complain of any act or failure to act of the other Partner or to declare such other Partner in default, irrespective of how long such failure continues, shall not constitute a waiver by such Partner of its right hereunder. 19.7 Commercial Efficacy. The Partners shall take all reasonable actions to give commercial efficacy to the terms and conditions of this Agreement and to promote the business of the Partnership, including, but not limited to, taking or causing the members of the Management Committee appointed by them to take all necessary actions in a timely fashion, in order for the Partnership to pursue the business contemplated by this Agreement, entering into all the agreements contemplated hereby and any additional agreements or instruments of further assurance, as on advice from legal counsel, the Partners shall reasonably deem necessary, and seeking all necessary governmental approvals. 19.8 Counterparts. This Agreement may be executed in any number of counterpart copies, each of which shall constitute an original and all of which shall constitute one agreement. 19.9 GAAP Basis. In the event the auditors of the Partnership are required hereunder to determine the values, accounts, give opinions or make, any other valuation of any nature, the auditors shall employ generally accepted accounting principles consistently applied unless the context otherwise requires the application of the principles of tax accounting (or differing regulatory rules). 19.10 First Right on Tacoma Facility. In the event Cargill wishes to sell, transfer or assign its lease of the Tacoma Facility to a third party during the term of the Partnership, Cargill shall provide Cenex Harvest States with thirty (30) days prior written notice of its desire to do so. During such thirty day period Cenex Harvest States shall have the first right to acquire the Tacoma Facility, and the Partners shall negotiate in good faith the terms and conditions of such proposed transaction. In the event the Partners cannot reach a mutually acceptable agreement for such transaction in the 27 thirty day period, Cargill shall be free to pursue and consummate the sale, transfer or assignment of the Tacoma Facility to and with any third party, provided that such sale, transfer or assignment is on no less favorable terms and conditions to Cargill than the last offer of Cenex Harvest States to Cargill for same and Cenex Harvest States is still willing to agree to such terms and conditions (i.e., Cargill cannot sell, transfer or assign the Tacoma Facility to a third party on terms and conditions less favorable to Cargill than the last offer of Cenex Harvest States to Cargill for same). This section 19.10 shall not apply in the event Cargill is also transferring its interest in the Partnership to a third party. IN WITNESS WHEREOF, the Partners have executed this Agreement as of the date first above written. CARGILL, INCORPORATED By: /s/ Frank L. Sims ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- CENEX HARVEST STATES COOPERATIVES By: /s/ Mark L. Palmquist ------------------------------------- Name: Mark L. Palmquist ----------------------------------- Title: Senior Vice President ---------------------------------- 28 EXHIBIT B PUT-THROUGH AGREEMENT THIS Put-Through Agreement, dated ______________________ by and between CENEX HARVEST STATES COOPERATIVES ("CHS"), a Minnesota corporation; and CARGILL, INCORPORATED ("Cargill"), a Delaware corporation is made with reference to the following: WITNESSETH: WHEREAS, CHS desires to enter into a put through agreement with respect to various commodities to be stored and handled at Cargill's Tacoma, Washington grain elevator ("Facility") all as described herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreement set forth herein, the parties hereto, intending to be legally bound, mutually agree as follows: 1. SERVICES PROVIDED. Cargill agrees to use its elevator facility, office space, personnel and support equipment currently located at the Facility to provide put through services for CHS in accordance with the terms of this Agreement for corn, sorghum and soybeans. CHS and Cargill may, but shall not be obligated to, agree to the put through of other commodities from time to time. 2. PAYMENT FOR SERVICES. As consideration for providing the put through services and necessary elevator facilities, office space, personnel and support equipment, Cargill will be paid a put through fee equal to the fair market put through fee charged by elevators similarly situated for the applicable commodities. The fee shall be established upon commencement of this Agreement. If the parties are unable to agree upon what is the fair market put through fee at the time such fee is to be established, either party may submit the matter to the American Arbitration Association in Minneapolis, Minnesota. The decision of the arbitrators shall be binding upon the parties and enforceable in a court of law having jurisdiction over the parties. 3. OPERATING EXPENSES. In consideration of payment received hereunder, Cargill will be responsible for all fixed and variable operating expenses with regard to the Facility (including labor), including, without limitation, depreciation, taxes, insurance, repairs and utilities. 4. CARGILL FUNCTIONS. Cargill will be responsible for performing the normal day-to-day functions of the grain elevator business, including, without limitation, weighing, grading and binning inbound grain deliveries and loading outbound shipments. 5. INSURANCE. Cargill will maintain the property and casualty insurance on the Facility as it sees fit. CHS shall be responsible for insuring its inventory. 6. INDEMNITY. CHS, its respective affiliates, officers, directors and employees, successors and assigns shall be indemnified and held harmless by Cargill from any and all liabilities, losses, damages, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable legal costs and expenses) actually suffered or incurred by it to the extent arising out of or resulting from the negligent acts of any of Cargill, its employees or agents hereunder. In no event shall Cargill be liable under this paragraph for CHS's lost profits, lost business or damage to the goodwill or reputation of CHS; provided, however, that nothing herein shall be construed as limiting Cargill's liability for, and the preceding limitations shall not apply to, breach of this Agreement. 7. TERM. [LENGTH OF TERM DETERMINED IN ACCORDANCE WITH PARAGRAPH 11.3 OF THE TEMCO PARTNERSHIP AGREEMENT BETWEEN CHS AND CARGILL]. Cargill covenants and agrees to keep such lease in full force and effect for the term of this Agreement and covenants and agrees not to voluntarily terminate such lease before expiration or termination of this Agreement without the prior written consent of CHS. If Cargill sells or otherwise transfers its interest in the Facility during the term of this Agreement, Cargill shall obtain the written agreement of the transferee to be bound by the terms of this Agreement. 8. MISCELLANEOUS PROVISIONS. 8.1 BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties and their heirs, personal representatives, successors, and, to the extent permitted by Section 8.2, assigns. 8.2 ASSIGNMENT. Except with the other party's prior written consent, a party may not assign any rights or delegate any duties under this Agreement. 8.3 NOTICES. Any notice or other communication required or permitted to be given under this Agreement shall be in writing and shall be mailed by certified mail, return receipt requested, postage prepaid, addressed to the parties as follows: (a) To CHS: Cenex Harvest States Cooperatives Attention: Senior Vice President, Grain Marketing 5500 Cenex Drive Inver Grove Heights, MN 55077 with a copy to: Cenex Harvest States Cooperatives Attention: Legal Department 5500 Cenex Drive Inver Grove Heights, MN 55077 (b) To Cargill: Cargill, Incorporated Attention: N.A. Grain President/Lake 15615 McGinty Road West Wayzata, MN 55391-2398 with copies to: Cargill, Incorporated Attention: Law Department/N.A. Grain Attorney P.O. Box 5624 Minneapolis, MN 55440-5624 Any notice or other communication shall be deemed to be given at the expiration of the day after the date of deposit in the United States mail. The addresses to which notices or other communications shall be mailed may be changed from time to time by giving written notice to the other party as provided in this Section. 2 8.4 ATTORNEY FEES. If any suit, action or arbitration proceeding is filed by any party to enforce this Agreement or otherwise with respect to the subject matter of this Agreement, the prevailing party shall be entitled to recover reasonable attorney fees incurred in preparation or in prosecution or defense of such suit, action or arbitration proceeding as fixed by the trial court, or the arbitrator(s) and if any appeal is taken from the decision of the trial court or the arbitrator(s), reasonable attorney fees as fixed by the appellate court. 8.5 AMENDMENTS. This Agreement may be amended only by an instrument in writing executed by all the parties. 8.6 HEADINGS. The headings used in this Agreement are solely for convenience of reference, are not part of this Agreement, and are not to be considered in construing or interpreting this Agreement. 8.7 ENTIRE AGREEMENT. This Agreement (including the exhibits) sets forth the entire understanding of the parties with respect to the subject matter of this Agreement and supersedes any and all prior understandings and agreements, whether written or oral, between the parties with respect to such subject matter. 8.8 COUNTERPARTS. This Agreement may be executed by the parties in separate counterparts, each of which when executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 8.9 SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any respect for any reason, the validity and enforceability of any such provision in any other respect and of the remaining provisions of this Agreement shall not be in any way impaired. 8.10 WAIVER. A provision of this Agreement may be waived only by a written instrument executed by the party waiving compliance. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Failure to enforce any provision of this Agreement shall not operate as a waiver of such provision or any other provision. 8.11 GENDER. Any indication of gender of a party in this Agreement shall be modified, as required, to fit the gender of the party or parties in question. 8.12 FURTHER ASSURANCES. From time to time, each of the parties shall execute, acknowledge, and deliver any instruments or documents necessary to carry out the purposes of this Agreement. 8.13 TIME OF ESSENCE. Time is of the essence for each and every provision of this Agreement. 8.14 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or implied, is intended to confer on any person, other than the parties to this Agreement, any right or remedy of any nature whatsoever. 8.15 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Washington. 3 8.16 ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, including, without limitation, the making, performance, or interpretation of this Agreement, shall be settled by arbitration before the American Arbitration Association in Minneapolis, Minnesota. 8.17 FORCE MAJEURE. Neither party shall be liable to the other for failure or delay in performance of its obligations by a cause not within its reasonable control, including, but not limited to, acts of God, acts of public disturbance, riots, war, fire, windstorm, flood, strikes, destruction of facilities, or other labor disputes or government intervention, provided, however, that the party experiencing the force majeure condition shall use commercially reasonable efforts to remove such condition as soon as possible, and upon such removal, the terms of this Agreement shall become fully in effect. IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date and year first above written. CENEX HARVEST STATES COOPERATIVES, a Minnesota corporation By: ----------------------------------------- Its CARGILL, INCORPORATED, a Delaware corporation By: ----------------------------------------- Its 4 EXHIBIT C PUT-THROUGH AGREEMENT THIS Put-Through Agreement, dated ___________________________ by and between CENEX HARVEST STATES COOPERATIVES ("CHS"), a Minnesota corporation; and CARGILL, INCORPORATED ("Cargill"), a Delaware corporation is made with reference to the following: WITNESSETH: WHEREAS, CHS desires to enter into a put through agreement with respect to various commodities to be stored and handled at Cargill's Tacoma, Washington grain elevator ("Facility") all as described herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreement set forth herein, the parties hereto, intending to be legally bound, mutually agree as follows: 1. SERVICES PROVIDED. Cargill agrees to use its elevator facility, office space, personnel and support equipment currently located at the Facility to provide put through services for CHS in accordance with the terms of this Agreement for corn, sorghum and soybeans. CHS and Cargill may, but shall not be obligated to, agree to the put through of other commodities from time to time. 2. PAYMENT FOR SERVICES. As consideration for providing the put through services and necessary elevator facilities, office space, personnel and support equipment, Cargill will be paid a put through fee equal to the fair market put through fee charged by elevators similarly situated for the applicable commodities. The fee shall be established upon commencement of this Agreement and shall be adjusted annually during the term of this Agreement to reflect the then current fair market put through fee. If the parties are unable to agree upon what is the fair market put through fee at the time such fee is to be established or adjusted, either party may submit the matter to the American Arbitration Association in Minneapolis, Minnesota. The decision of the arbitrators shall be binding upon the parties and enforceable in a court of law having jurisdiction over the parties. 3. OPERATING EXPENSES. In consideration of payment received hereunder, Cargill will be responsible for all fixed and variable operating expenses with regard to the Facility (including labor), including, without limitation, depreciation, taxes, insurance, repairs and utilities. 4. CARGILL FUNCTIONS. Cargill will be responsible for performing the normal day-to-day functions of the grain elevator business, including, without limitation, weighing, grading and binning inbound grain deliveries and loading outbound shipments. 5. INSURANCE. Cargill will maintain the property and casualty insurance on the Facility as it sees fit. CHS shall be responsible for insuring its inventory. 6. INDEMNITY. CHS, its respective affiliates, officers, directors and employees, successors and assigns shall be indemnified and held harmless by Cargill from any and all liabilities, losses, damages, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable legal costs and expenses) actually suffered or incurred by it to the extent arising out of or resulting from the negligent acts of any of Cargill, its employees or agents hereunder. In no event shall Cargill be liable under this paragraph for CHS's lost profits, lost business or damage to the goodwill or reputation of CHS; provided, however, that nothing herein shall be construed as limiting Cargill's liability for, and the preceding limitations shall not apply to, breach of this Agreement. 7. TERM. The term of this Agreement shall continue until expiration of the term of the Cargill's lease of the Facility, including any extensions, renewals or amendments thereof. Cargill covenants and agrees to keep such lease in full force and effect for the term thereof and covenants and agrees not to voluntarily terminate such lease before its expiration without the prior written consent of CHS. If Cargill sells or otherwise transfers its interest in the Facility, Cargill shall obtain the written agreement of the transferee to be bound by the terms of this Agreement. 8. MISCELLANEOUS PROVISIONS. 8.1 BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties and their heirs, personal representatives, successors, and, to the extent permitted by Section 8.2, assigns. 8.2 ASSIGNMENT. Except with the other party's prior written consent, a party may not assign any rights or delegate any duties under this Agreement. 8.3 NOTICES. Any notice or other communication required or permitted to be given under this Agreement shall be in writing and shall be mailed by certified mail, return receipt requested, postage prepaid, addressed to the parties as follows: (a) To CHS: Cenex Harvest States Cooperatives Attention: Senior Vice President, Grain Marketing 5500 Cenex Drive Inver Grove Heights, MN 55077 with a copy to: Cenex Harvest States Cooperatives Attention: Legal Department 5500 Cenex Drive Inver Grove Heights, MN 55077 (b) To Cargill: Cargill, Incorporated Attention: N.A. Grain President/Lake 15615 McGinty Road West Wayzata, MN 55391-2398 with copies to: Cargill, Incorporated Attention: Law Department/N.A. Grain Attorney P.O. Box 5624 Minneapolis, MN 55440-5624 Any notice or other communication shall be deemed to be given at the expiration of the day after the date of deposit in the United States mail. The addresses to which notices or other communications shall be mailed may be changed from time to time by giving written notice to the other party as provided in this section. 2 8.4 ATTORNEY FEES. If any suit, action or arbitration proceeding is filed by any party to enforce this Agreement or otherwise with respect to the subject matter of this Agreement, the prevailing party shall be entitled to recover reasonable attorney fees incurred in preparation or in prosecution or defense of such suit, action or arbitration proceeding as fixed by the trial court, or the arbitrator(s) and if any appeal is taken from the decision of the trial court or the arbitrator(s), reasonable attorney fees as fixed by the appellate court. 8.5 AMENDMENTS. This Agreement may be amended only by an instrument in writing executed by all the parties. 8.6 HEADINGS. The headings used in this Agreement are solely for convenience of reference, are not part of this Agreement, and are not to be considered in construing or interpreting this Agreement. 8.7 ENTIRE AGREEMENT. This Agreement (including the exhibits) sets forth the entire understanding of the parties with respect to the subject matter of this Agreement and supersedes any and all prior understandings and agreements, whether written or oral, between the parties with respect to such subject matter. 8.8 COUNTERPARTS. This Agreement may be executed by the parties in separate counterparts, each of which when executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 8.9 SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any respect for any reason, the validity and enforceability of any such provision in any other respect and of the remaining provisions of this Agreement shall not be in any way impaired. 8.10 WAIVER. A provision of this Agreement may be waived only by a written instrument executed by the party waiving compliance. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Failure to enforce any provision of this Agreement shall not operate as a waiver of such provision or any other provision. 8.11 GENDER. Any indication of gender of a party in this Agreement shall be modified, as required, to fit the gender of the party or parties in question. 8.12 FURTHER ASSURANCES. From time to time, each of the parties shall execute, acknowledge, and deliver any instruments or documents necessary to carry out the purposes of this Agreement. 8.13 TIME OF ESSENCE. Time is of the essence for each and every provision of this Agreement. 8.14 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or implied, is intended to confer on any person, other than the parties to this Agreement, any right or remedy of any nature whatsoever. 8.15 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Washington. 3 8.16 ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, including, without limitation, the making, performance, or interpretation of this Agreement, shall be settled by arbitration before the American Arbitration Association in Minneapolis, Minnesota. 8.17 FORCE MAJEURE. Neither party shall be liable to the other for failure or delay in performance of its obligations by a cause not within its reasonable control, including, but not limited to, acts of God, acts of public disturbance, riots, war, fire, windstorm, flood, strikes, destruction of facilities, or other labor disputes or government intervention, provided, however, that the party experiencing the force majeure condition shall use commercially reasonable efforts to remove such condition as soon as possible, and upon such removal, the terms of this Agreement shall become fully in effect. IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date and year first above written. CENEX HARVEST STATES COOPERATIVES, a Minnesota corporation By: ----------------------------------------- Its CARGILL, INCORPORATED, a Delaware corporation By: ----------------------------------------- Its 4 EX-10.34 3 LIMITED LIABILITY COMPANY AGREEMENT EXHIBIT 10.34 COOPERATIVE REFINING, LLC LIMITED LIABILITY COMPANY AGREEMENT SEPTEMBER 1, 1999 LIMITED LIABILITY COMPANY AGREEMENT OF COOPERATIVE REFINING, LLC THIS LIMITED LIABILITY COMPANY AGREEMENT made and entered into as of this 1st day of September, 1999, by and between the persons named on Schedule A attached hereto (hereinafter, such persons are referred to collectively as the "Members" and individually as a "Member"); WITNESSETH THAT: WHEREAS, the undersigned have caused the formation of Cooperative Refining, LLC, a Delaware limited liability company (the "Company"), of which the undersigned constitute all of the initial Members; and WHEREAS, the undersigned have received and approved the business plan of the Company; NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Members agree as follows: ARTICLE I. GENERAL The parties hereto hereby agree that this Agreement constitutes the "limited liability company agreement" of the Company within the meaning of Section 18-101(7) of the Delaware Limited Liability Company Act, as amended (the "Act"), and hereby adopt, approve and ratify the execution and filing in the office of the Secretary of State of the State of Delaware of the certificate of formation of the Company by Theodore D. Herzog, an individual resident of the State of Minnesota, on August 6, 1999 (the "Certificate of Formation") in the form attached hereto as Exhibit 1 and acknowledge, approve and ratify his designation as an "authorized person" of the Company in the Certificate of Formation as contemplated by Section 18-201(a) of the Act. The parties agree that the Agreement shall be effective as of the date hereof and that they shall comply with the provisions and requirements of the Act and that the Act shall govern the rights, duties and obligations of the Members, except as otherwise expressly stated herein. SECTION 1.1. NAME. The name of the Company shall be and the business shall be conducted under the name of "Cooperative Refining, LLC." SECTION 1.2. PRINCIPAL PLACE OF BUSINESS. The location of the principal place of business of the Company shall be 1391 Iron Horse Road, P.O. Box 1404, McPherson, Kansas 67460 or such other place as the Board of Managers may from time to time determine (the "Principal Office"). SECTION 1.3. NAMES AND ADDRESSES OF MEMBERS. The names and addresses of the Members are as set forth in Schedule A. SECTION 1.4. TERM OF EXISTENCE. The Company shall be formed as of the time of the filing of the Certificate of Formation in the Office of the Secretary of State of Delaware and its term of existence shall be perpetual, unless earlier terminated, dissolved or liquidated in accordance with the provisions of this Agreement or the Refinery Agreement. SECTION 1.5. AGENT FOR SERVICE OF PROCESS. The name and address of the agent for service of process is, until changed by the Board of Managers, The Corporate Trust Company, located at Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. SECTION 1.6. DUTIES OF MEMBERS. The only duties of the Members to the Company or to each other in respect of the Company shall be those expressly set forth in this Agreement, and there shall be no other express or implied duties of the Members to the Company or to each other in respect of the Company. SECTION 1.7. DUTIES OF MANAGERS. Each Manager shall owe duties of care and loyalty to the Company and the Members equivalent to those duties owed by a director of a Delaware corporation to the corporation and its stockholders. A Manager shall not be personally liable to the Company or the Members for monetary damages for breach of fiduciary duty as a Manager except (a) for any breach of the Manager's duty of loyalty to the Company or the Members; (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; or (c) for any transaction from which such Manager derived an improper personal benefit. Notwithstanding the foregoing, each Manager shall have the right to take action in a manner such Manager believes to be in the best interest of the entity by whom such Manager was designated in accordance with Section 6.3. ARTICLE II. DEFINITIONS Unless the context otherwise specifies or requires, the terms defined in this Article II shall, for the purposes of this Agreement, have the meanings herein specified. "Act" means the Delaware Limited Liability Company Act, as amended from time to time. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal 2 Year, after giving effect to the following adjustments: (i) credit to such Capital Account any amounts which such Member is obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) debit to such Capital Account the items describe in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be interpreted consistently therewith. "Agreement" means this Limited Liability Company Agreement, as it may be amended or supplemented from time to time. "Approval Date" is defined in Section 5.2. "Assets" shall have the meaning assigned to such term in the Refinery Agreement. "Board of Managers" means the Board of Managers of the Company established pursuant to Article VI. "Capital Account" is defined in Section 11.7 below. "Capital Contribution" means the amount of money or the fair market value of any property (as agreed by the Members as of the date of contribution) contributed to the Company by any Member or such Member's predecessor in interest. "CHS" means Cenex Harvest States Cooperatives, a cooperative corporation organized under the laws of Minnesota. "Code" means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. Any reference in this Agreement to a Section of the Code or the Treasury Regulations shall be considered also to include any subsequent amendment or replacement of that Section. "Company" means Cooperative Refining, LLC, the Delaware limited liability company formed pursuant to the filing of the Certificate of Formation in Delaware. "Deadlock" is defined in Section 6.19. "Depreciation" means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year bears to such beginning 3 adjusted tax basis; PROVIDED, HOWEVER, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Fiscal Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Members. "Farmland" means Farmland Industries, Inc., a cooperative corporation organized under the laws of Kansas. "Fiscal Year" means the 12-month accounting period of the Company ending on August 31 of each year, or such other date as the Board of Managers may determine from time to time. "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the contributing Member and the other Member; (ii) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking into account Section 7701(g) of the Code), as determined by the Members, as of the following times: (a) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for an interest in the Company; and (c) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g); PROVIDED HOWEVER, that adjustments pursuant to clauses (a) and (b) above shall be made only if the Board of Managers by vote of a Manager Supermajority determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company; (iii) The Gross Asset Value of any Company asset distributed to any Member shall be adjusted to equal the gross fair market value (taking into account Section 7701(g) of the Code) of such asset on the date of distribution as determined by the distributee and the other Member; and (iv) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); PROVIDED, HOWEVER, that Gross Asset Values shall not be adjusted pursuant to this paragraph to the extent the Members determine that an adjustment pursuant to 4 paragraph (ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraphs (i), (ii), or (iv) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing income, gains, profits and losses of the Company. "Growmark" means Growmark, Inc., a Delaware corporation. "Indemnitee" is defined in Section 8.1. "Manager" is defined in Section 6.3. "Manager Supermajority" means 5/6 of the total number of Managers specified in Section 6.3; provided, however, that if any Manager is disqualified from voting according to the terms of this Agreement, "Manager Supermajority" shall mean a unanimous vote of all Managers not so disqualified. "Membership Interest" means the entire ownership interest of a Member in the Company at any particular time, including, without limitation, the right of such Member to any and all benefits to which a Member may be entitled as provided in this Agreement and under law, together with the obligations of such Member to comply with all of the terms and provisions set forth in this Agreement and under law. "Members" means the Persons executing this Agreement and the Persons that are hereafter admitted to the Company and designated as Members in accordance with this Agreement until such Persons shall cease to be members of the Company pursuant to this Agreement. "MFA" means MFA Oil Company, a Missouri farm marketing cooperative association. "NCRA" means National Cooperative Refinery Association, a cooperative marketing association organized under the laws of Kansas. "Named Officer" is defined in Section 7.1. "Net Cash Flow" means the gross cash proceeds from Company operations (including sales and dispositions of property), including, dividends, interest and royalties, if any, less the portion thereof used to pay or establish reserves for all Company expenses, debt payments, replacements, and contingencies, all as determined by the Board of Managers by vote of a Manager Supermajority. 5 "Person" means any natural person, cooperative association, cooperative marketing association, corporation, limited liability company, association, partnership (whether general or limited), joint venture, proprietorship, governmental agency, trust, estate, association, custodian, nominee or any other individual or entity, whether acting in an individual, fiduciary, representative or other capacity. "Personnel Lease Agreement" means that certain Personnel Lease Agreement of even date herewith by and among NCRA, Farmland and the Company, as amended or supplanted from time to time. "Principal Office" is defined in Section 1.2. "Profits" or "Losses" mean, for each Fiscal Year, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the adjustments indicated in the Tax Matters Exhibit or otherwise specifically allocated under Article XII hereof. "Refinery Agreement" means that certain Refinery Operating and Product Output Purchase Agreement of even date herewith by and among NCRA, Farmland and the Company, as amended or supplemented from time to time. "Regulatory Allocation" is defined in Section 12.3. "Reorganization" means (x) any consolidation or merger of the Company with or into any other Person, whether or not the Company is the surviving entity, (y) any exchange or other transaction pursuant to which outstanding Units are converted into other securities, property or money or (z) any sale, transfer or other disposition of all or substantially all of the Company's assets in a single transaction or a series of related transactions. A dissolution or liquidation of the Company pursuant to Article XIV will not constitute a "Reorganization" within the meaning of this Agreement. "Securities Act" is defined in Section 16.1. "Successor" is defined in Section 6.3. "Tax Matters Exhibit" means Exhibit 2 to this Agreement. "Tax Matters Partner" or "TMP" shall mean NCRA. 6 "Transfer" means the sale, assignment, transfer, withdrawal, mortgage, pledge, hypothecation, exchange or other disposition of any part or all of a Member's Membership Interest, whether or not for value and whether voluntarily, by operation of law or otherwise. "Transferee" is defined in Section 9.2. "Treasury Regulations" or "Treas. Reg." refers to the regulations promulgated by the United States Treasury Department under the Code. "Unit" means an ownership interest of a Member or a Transferee in the Company representing a fractional part of the ownership interests of all Members and Transferees. ARTICLE III. PURPOSE AND CHARACTER OF THE BUSINESS The purpose and character of the business of the Company shall be the management and operation of the Assets and any lawful business or activity ancillary thereto permitted under the Act and approved by the Board of Managers. ARTICLE IV. MEMBERS The Members shall have no voting rights under this Agreement, and instead all voting rights shall be vested in the Board of Managers. Members shall have the power and authority, as set out in the terms of Section 11.3 of this Agreement, to require the Members to contribute to the capital of the Company upon the unanimous agreement of the Members. ARTICLE V. NEW MEMBERS; UNITS; CERTIFICATES SECTION 5.1. ADMISSION OF NEW MEMBERS; UNITS. The Managers by vote of a Manager Supermajority may from time to time admit additional Members to the Company upon the issuance of new Units pursuant to Section 5.2 or upon a transfer in compliance with Section 9.2. All Members shall be required to have an interest in the Company represented by one or more Units. Unless otherwise authorized by vote of a Manager Supermajority in accordance with this Article V, all Units shall be of one class and series and with equal rights and preferences in all matters, and the Profits and Losses, and distributions of cash or other assets, of the Company shall be allocated among the Members of the Company in proportion to the number of Units held by the Members except as otherwise provided herein. The Managers, by amendment to this Agreement as provided in Article XV of this Agreement, (i) may fix the relative rights and preferences of different classes and series of the Units and (ii) may authorize the issuance of securities convertible into, or exchangeable for, and options, warrants and rights to purchase Units. 7 SECTION 5.2. ISSUANCE OF UNITS. The Company shall have the authority to issue 100,000 Units. The Company shall initially issue a total of 100,000 Units to NCRA and Farmland according to the terms set forth in Schedule A and in Section 11.1. The Managers by vote of a Manager Supermajority may issue additional Units from time to time to existing or new Members. Units may be issued for any consideration, including, without limitation, cash or other property, tangible or intangible, received or to be received by the Company or services rendered or to be rendered to the Company. At the time of authorization of the issuance of additional Units, the Managers shall state, by resolution, their determination of the fair value to the Company in monetary terms of any consideration other than cash for which Units are to be issued. Unless otherwise determined by a vote of a Manager Supermajority, in the event the Company proposes to issue and subsequently issues additional Units, securities convertible into or exchangeable for Units or options, warrants and rights to purchase Units, then each of the Members as of the date on which the Board of Manager approved such issuance (the "Approval Date") shall have the preemptive right to subscribe for and purchase at the same issue price fixed therefor by the Board of Managers that number of Units or other securities that bears the same proportion to the total amount of Units or other securities proposed to be issued as the number of Units held by such Member on the Approval Date bears to the total number of Units outstanding on the Approval Date. Upon any proposed issuance of additional Units or other securities, the Board of Managers shall give notice of the proposed issuance and the issue price fixed therefor to all Members, and the Members shall have thirty (30) days from the date of such notice to exercise the preemptive rights granted to the Members pursuant to this Section 5.2. In the event that a portion of the Units or other securities with respect to which the Members have preemptive rights pursuant to this Section 5.2 remain unsubscribed after thirty (30) days, then each of the Members that fully exercised their preemptive rights with respect to the additional Units or other securities pursuant to this Section 5.2 shall have the right for a period of 10 days thereafter to subscribe for and purchase at the issue price therefor that number of additional Units or other securities that bears the same proportion to the total amount of Units or other securities that remained unsubscribed as the number of Units held by such Member on the Approval Date bears to the total number of Units held on the Approval Date by Members that fully exercised their preemptive rights with respect to the additional Units or other securities pursuant to this Section 5.2. Any Units or other securities remaining unsubscribed after such 10 day period may be sold by the Company at a purchase price that is not less than the issue price fixed by the Board of Managers. SECTION 5.3. NO CERTIFICATES FOR UNITS. The Units of the Company shall not be certificated Units unless otherwise determined by the Board of Managers. 8 ARTICLE VI. MANAGEMENT AND OPERATION OF COMPANY BUSINESS SECTION 6.1. AUTHORITY OF THE MEMBERS. Except as otherwise expressly provided herein, no Member shall have any authority to act for, or to assume any obligations or responsibility on behalf of, or to bind any other Member or the Company. SECTION 6.2. BOARD OF MANAGERS. The business and affairs of the Company shall be managed by or under the authority of the Board of Managers, except as otherwise required by the Act or this Agreement. SECTION 6.3. NUMBER, QUALIFICATION; TERM OF OFFICE; VOTE. The number of members of the Board of Managers shall be six (each a "Manager"). The Managers shall be designated from time to time as follows: two Managers shall be designated by Farmland, two Managers shall be designated by CHS, one Manager shall be designated by Growmark, and one Manager shall be designated by MFA. Each of the Managers shall hold office until such Manager's successor has been designated by the entity by whom such Manager was designated, or until the earlier death, resignation, removal or disqualification of such Manager. In the event that any of CHS, Growmark or MFA sell, assign, transfer or convey their respective ownership interests in NCRA, the transferee of such ownership interest (the "Successor") shall thereafter have the right to designate that number of Managers that were previously designated by CHS, Growmark or MFA, as applicable. Each Manager shall have one vote in all matters to come before the Board of Managers. SECTION 6.4. INITIAL BOARD. The initial Board of Managers shall be comprised of the following individuals: Robert W. Honse, as Farmland Representative; Stanley A. Riemann, as Farmland Representative; John Johnson, as CHS Representative; Leon Westbrock, as CHS Representative; Dale H. Creach, as MFA Representative; and D. William Davisson, as Growmark Representative. SECTION 6.5. PLACE OF MEETINGS. Meetings of the Board of Managers shall be held at the Principal Office of the Company or at such other place as may be agreed by the members of such Board from time to time. SECTION 6.6. SPECIAL MEETINGS. A special meeting of the Board of Managers may be called for any purpose or purposes at any time by the Chair or by any two Managers who shall demand such special meeting by written notice given to the Chair specifying the purposes of such meeting. 9 SECTION 6.7. MEETINGS HELD UPON MANAGER DEMAND. Within five (5) business days after the Chair receives a valid demand for a meeting of the Board of Managers from two Managers, it shall be the duty of the Chair to cause a special or regular meeting of Board of Managers, as the case may be, to be duly called and held on notice given no later than five (5) business days after receipt of such demand. If the Chair fails to cause such a meeting to be called and held as required by this Section 6.7, the Managers making the demand may call the meeting by giving notice as provided in Section 6.9 at the expense of the Company. SECTION 6.8. ADJOURNMENTS. Any meeting of the Board of Managers may be adjourned from time to time to another date, time and place. If any meeting of the Board of Managers is so adjourned, no notice as to such adjourned meeting need be given if the date, time and place at which the meeting will be reconvened are announced at the time of adjournment. SECTION 6.9. NOTICE OF MEETINGS. Unless otherwise required by law, written notice of each meeting of the Board of Managers, stating the date, time and place and, in the case of a special meeting, the purpose or purposes, shall be given at least five (5) days and not more than ninety (90) days prior to the meeting to every member of the Board of Managers. A member of the Board of Managers may waive notice of the date, time, place and purpose or purposes of a meeting of the Board of Managers. A waiver of notice is effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a member of the Board of Managers at a meeting is a waiver of notice of that meeting, unless the member objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. SECTION 6.10. QUORUM. A majority of the members of the Board of Managers constitutes a quorum for the transaction of business at each meeting of the Board of Managers. SECTION 6.11. ABSENT MEMBERS. A member of the Board of Managers may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Managers. If such member is not present at the meeting, such consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but such consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the member has consented or objected. SECTION 6.12. CONFERENCE COMMUNICATIONS. Any or all of the members of the Board of Managers may participate in any meeting of the Board of Managers by any means of communication through which such members may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, 10 members of the Board of Managers participating pursuant to this Section 6.12 shall be deemed present in person at the meeting; and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique. SECTION 6.13. REMOVAL; VACANCIES. Any member of the Board of Managers may be removed from office at any time, with or without cause, by the entity by whom such Manager was designated in accordance with Section 6.3 by giving notice of such removal to the Company. A vacancy among the Managers by death, resignation, removal or otherwise shall be filled by the designation of the entity by whom such Manager was designated in accordance with Section 6.3. SECTION 6.14. ACTS OF MANAGERS. Except as otherwise provided herein, the Board of Managers shall take action by the affirmative vote of a majority of the total number of Managers, and any such act shall be deemed to be the action of the Board of Managers for all purposes of this Agreement and the Act. SECTION 6.15. WRITTEN ACTION. Any action which might be taken at a meeting of the Board of Managers may be taken without a meeting if done in writing and signed by a number of the members of the Board of Managers, or committee members, whose approval would be sufficient to approve the action at a meeting at which all of the members of the Board of Managers were present. SECTION 6.16. PROXIES. A member of the Board of Managers may cast or authorize the casting of a vote by filing a written appointment of a proxy with the Chair at or before the meeting at which the appointment is to be effective. The member may sign or authorize the written appointment by telegram, cablegram or other means of electronic transmission setting forth or submitted with information sufficient to determine that the member authorized such transmission. Any copy, facsimile, telecommunication or other reproduction of the original of either the writing or transmission may be used in lieu of the original, provided that it is a complete and legible reproduction of the entire original. SECTION 6.17. VOTING. Each member of the Board of Managers entitled to vote at a meeting of the Board of Managers or entitled to express consent in writing to action without a meeting shall have one vote. All questions at a meeting shall be decided by a majority vote of the total number of Managers except where otherwise required by the Act or this Agreement. SECTION 6.18. CERTAIN ACTIONS. The following actions shall require the approval or authorization of a Manager Supermajority: (a) The approval of any Reorganization, any other merger, consolidation or sale of substantially all Company assets to which the Company or a Subsidiary is a party or the acquisition of another business by the Company; 11 (b) The authorization or issuance of any additional Units; (c) The purchase by the Company of any Unit or an agreement to do so; PROVIDED, HOWEVER, that the board member or members of the Board of Managers designated by the Member whose Units are subject to purchase, if such is the case, shall have no vote in such matter; (d) The making of any distributions to the Members, except as permitted according to Section 13.1; (e) The termination, assignment or material amendment of the Refinery Agreement; (f) The approval of the transfer of Units by any Member; (g) Recommendations to the Members to incur capital expenditures with respect to the Assets as described in Section 6 of the Refinery Agreement; (h) The appointment or removal of the President of the Company; (i) The commencement of any Reorganization or other proceedings or the filing of any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other federal or state bankruptcy, insolvency or similar law; (j) The execution by the TMP of a settlement agreement binding any Member without obtaining the written concurrence of the Member who would be bound by such agreement; (k) The approval and adoption of a business plan for each fiscal year of the Company (other than the initial fiscal year of the Company) pursuant to Section 9.1 of the Refinery Agreement, and any material modifications to or deviations from such business plan; (l) The disposition of any assets in excess of $250,000 other than in the ordinary course of business, except as authorized in the then current approved business plan; (m) The entering into, or the amendment or modification of, any agreement between the Company and any Member, Manager or Named Officer (or any entity in which a Member, Manager or Named Officer has a financial interest); PROVIDED, HOWEVER, that any member of the Board Managers that is a party to, has a financial interest in a 12 party to, or was designated by a Member who is a party to, such agreement shall not be entitled to vote with respect to such matter; (n) The determination of whether to repair or replace any Asset in excess of $2,000,000 in the event that such Asset is subject to a Casualty Occurrence (as that term is defined in Section 5.3 of the Refinery Agreement) as described in Section 5.3 of the Refinery Agreement. SECTION 6.19. DISPUTES; GOVERNING LAW. (a) Management Escalation. In the event that a dispute among the Members shall arise during the term of this Agreement regarding the interpretation of this Agreement, the Refinery Agreement or the Personnel Lease Agreement, the Board of Managers shall first make a good faith effort to promptly resolve such dispute. If the Board of Managers is unable to reach agreement with respect to such dispute within thirty (30) days, then the dispute shall be submitted to officers of Farmland, MFA, Growmark and CHS selected by such parties, or, if applicable, of the Successor or Successors thereof, who shall meet within thirty (30) days to attempt in good faith to resolve the dispute. If the above mentioned officers have not resolved the dispute within thirty (30) days of the submission of the dispute to such officers, then the dispute shall be resolved in accordance with the provisions of Sections 6.19(b). (b) Mediation and Arbitration. In the event that the Members are unable to resolve any dispute pursuant to the provisions of Section 6.19(a) hereof, such dispute shall be submitted to non-binding mediation administered by the American Arbitration Association in accordance with its Commercial Mediation Rules. If the Member initiating the mediation is NCRA, the mediation shall take place in Kansas City, Missouri, and if the Member initiating the mediation is Farmland, the mediation shall take place in Wichita, Kansas. The Members shall share the expenses of the mediation on an equal basis. If such dispute is not resolved by non-binding mediation, the dispute shall be resolved by binding arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules (as modified hereby). If the Member initiating the arbitration proceeding is NCRA, the arbitration shall be conducted in Kansas City, Missouri, and if the Member initiating the arbitration proceeding is Farmland, the arbitration shall be conducted in Wichita, Kansas. Any award rendered in the arbitration proceeding shall be final and binding upon the Members and a judgment thereon may be entered in any court having competent jurisdiction. The Member initiating the arbitration shall request, and the American Arbitration Association shall: (i) appoint as the arbitrator a single retired trial judge in the state where the arbitration takes place who is familiar with the business conducted by the Company; (ii) direct the arbitrator to follow substantive rules of law and the Federal Rules of Evidence; (iii) allow the parties to conduct discovery pursuant to the rules then in effect under the Federal Rules of Civil Procedure (excluding confidential records of NCRA or Farmland that are not relevant to the issues being arbitrated) for a period not to exceed 60 days; (iv) require the testimony to be transcribed; and (v) require the award to be accompanied by findings of fact and a statement of reasons for the 13 decision. If a Member is determined to be liable in any dispute that is determined and/or settled by arbitration pursuant to this Section 6.19(b), then all costs and expenses, including reasonable attorney's fees and expert's fees, of all parties incurred with respect to such dispute shall be borne by the Member determined to be liable in respect of such dispute; PROVIDED, HOWEVER, that if complete liability is not assessed against only one member, the Members shall share the expenses in proportion to their respective amounts of liability so determined. In the event that no Member is determined to be liable in a dispute that is determined and/or settled by arbitration pursuant to this Section 6.19(b), then the expenses of arbitration shall be shared equally by the parties unless otherwise decided by the arbitrator(s). The Members agree to continue performing their respective obligations under this Agreement while the dispute is being resolved, except to the extent such obligations are clearly the subject of the dispute. Notwithstanding any provision of this Section 6.19(b), any Member may seek injunctive relief from any judicial or administrative authority of competent jurisdiction to enjoin the other Member from breaching any provision of this Agreement, the Refinery Agreement or the Personnel Lease Agreement pending resolution of a dispute by mediation or arbitration pursuant to this Section 6.19(b). (c) This Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of Delaware, which shall be the proper law of this Agreement notwithstanding any rules of conflict of laws therein contained under which any other law would be made applicable. SECTION 6.20. COMPENSATION. Members of the Board of Managers shall not be compensated by the Company for serving in such capacity. The Company shall bear the expenses, if any, incurred by each Member's respective representatives in attending meetings of the Board of Managers. ARTICLE VII. OFFICERS SECTION 7.1. NUMBER. The officers of the Company, all of whom shall be natural persons, shall consist of a Chair, a President, a Secretary and a Chief Financial Officer ("Named Officers"), and any other officers and agents as the Board of Managers by a majority vote of all Managers may designate from time to time upon recommendation of the President. Any person may hold two or more offices. SECTION 7.2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The President shall be elected by a vote of a Manager Supermajority and all other officers shall be elected by a vote of the majority of the Managers. All officers shall serve at the pleasure of the Board of Managers and shall hold office until their successors are elected and qualified, or until such office is eliminated by amendment of this Agreement, in the case of the Named Officers, or a vote of the Board of Managers, in the case of officers other than Named Officers. An officer who is a Manager shall hold office until the election and qualification of his or her successor even though he or she may cease to be a Manager. 14 SECTION 7.3. REMOVAL AND VACANCIES. Any officer may be removed from his or her office with or without cause upon a vote of the Board of Managers, subject to the provisions of Section 6.18. Such removal shall be without prejudice to the contract rights of the person so removed. A vacancy among the officers by death, resignation, removal or otherwise shall be filled for the unexpired term by the Board of Managers, unless such office is eliminated or held vacant at the discretion of the Board of Managers. SECTION 7.4. CHAIR. The Chair shall preside at all meetings of the Managers and shall have such other duties as may be prescribed, from time to time, by the Board of Managers. The Chair shall be a Manager and shall be elected by the Board of Managers. SECTION 7.5. PRESIDENT. (a) Day-to-Day Operations. The day-to-day operations and affairs of the Company shall be managed by a President. The Board of Managers delegates to the President the authority to oversee and supervise the Company's business. Except as otherwise provided in this Agreement, the President shall be authorized to determine all questions relating to the day-to-day conduct, operation and management of the business of the Company within the authority granted under the business plan then in effect. The President shall be responsible to the Board of Managers. (b) General. The President shall be entitled to delegate such part of his or her duties as he or she may deem reasonable or necessary in the conduct of the business of the Company to one or more employees of the Company, who shall each have such duties and authority as shall be determined from time to time by the President or as may be set forth in any agreement between such employee and the Company. (c) Election. The President shall be elected by the Board of Managers and shall receive such compensation as may be determined from time to time by the Board of Managers or as shall be set forth in any written agreement approved by the Board of Managers. SECTION 7.6. SECRETARY. The Secretary shall be secretary of and shall attend all meetings of the Members and Board of Managers and shall record all proceedings of such meetings in the minute book of the Company. He or she shall give proper notice of meetings of Members and the Board of Managers. He or she shall perform such other duties as may from time to time be prescribed by the Board of Managers. SECTION 7.7. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept accurate accounts of all moneys of the Company received or disbursed. He or she shall deposit or cause to be deposited all moneys, drafts and checks in the name of and to the credit of the Company in such banks and depositaries as the Board of Managers shall from time to time designate. He or she shall have power to endorse or cause to be endorsed for deposit 15 or collection all notes, checks and drafts received by the Company. He or she shall disburse or cause to be disbursed the funds of the Company as ordered by the President, making proper vouchers therefor. He or she shall render to the Board of Managers whenever required an account of all his or her transactions as Chief Financial Officer and of the financial condition of the Company and shall perform such other duties as may from time to time be prescribed by the Board of Managers. SECTION 7.8. DUTIES OF OTHER OFFICERS. The duties of such other officers and agents as the Board of Managers may designate shall be set forth in the resolution creating such office or agency or by subsequent resolution. SECTION 7.9. COMPENSATION. The officers, agents and employees of the Company shall receive such compensation for their services as may be determined from time to time by the Board of Managers or as shall be set forth in a written agreement. ARTICLE VIII. INDEMNIFICATION SECTION 8.1. INDEMNIFICATION. (a) To the fullest extent permitted by law, each Manager, Named Officer, officer and employee of the Company (individually, an "Indemnitee") shall be indemnified, held harmless and defended by the Company from and against any and all losses, claims, damages, liabilities, whether joint or several, expenses (including legal fees and expenses), judgments, fines and other amounts paid in settlement, incurred or suffered by such Indemnitee, as a party or otherwise, in connection with any threatened, pending or completed claim, demand, action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal, arising out of or in connection with the business or the operation of the Company and by reason of the Indemnitee's status as a Manager, Named Officer, officer or employee of the Company regardless of whether the Indemnitee continues to be a Manager, Named Officer, officer or employee of the Company at the time any such loss, claim, damage, liability or other expense is paid or incurred if (i) the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in the best interests of the Company and, with respect to any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful, (ii) the Indemnitee's conduct did not constitute intentional misconduct or a material breach of the terms of this Agreement and (iii) the Indemnitee's conduct did not involve a transaction from which the Manager, Named Officer, officer or employee of the Company derived an improper personal benefit. The termination of any action, suit or proceeding by judgment, order, settlement or upon a plea of NOLO CONTENDERE, or its equivalent, shall not, of itself, create a presumption that the Indemnitee acted in a manner contrary to the standards specified in clauses (i), (ii) or (iii) of this Section 8.1(a). 16 (b) To the fullest extent permitted by law, expenses incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding subject to this Section 8.1 shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Indemnitee to repay such amount unless it is determined that such Indemnitee is entitled to be indemnified therefor pursuant to this Section 8.1. (c) The indemnification provided by this Section 8.1 shall be in addition to any other rights to which any Indemnitee may be entitled under any other agreement, pursuant to any vote of the Managers, as a matter of law or otherwise, and shall inure to the benefit of the heirs, legal representatives, successors, assigns and administrators of the Indemnities. (d) Any indemnification under this Section 8.1 shall be satisfied solely out of the assets of the Company and no Indemnitee shall have any recourse against any Member with respect to such indemnification. (e) An Indemnitee shall not be denied indemnification in whole or in part under this Section 8.1 merely because the Indemnitee had an interest in the transaction with respect to which the indemnification applies, if the transaction was not otherwise prohibited by the terms of this Agreement and the conduct of the Indemnitee satisfied the conditions set forth in Section 8.1(a). (f) The Company may, but shall have no obligation to, purchase and maintain insurance covering any potential liability of the Indemnitees for any actions or omissions for which indemnification is permitted hereunder, including such types of insurance (including extended coverage liability and casualty and workers' compensation) as would be customary for any person engaged in a similar business, and may name the Indemnitees as additional insured parties thereunder. SECTION 8.2. INDEMNIFICATION PROCEDURES; SURVIVAL. (a) Promptly after receipt by an Indemnitee of notice of the commencement of any action that may result in a claim for indemnification pursuant to Section 8.1, the Indemnitee shall notify the Company in writing within thirty (30) days thereafter; PROVIDED, HOWEVER, that any omission so to notify the Company will not relieve it of any liability for indemnification hereunder as to the particular item for which indemnification may then be sought (except to the extent that the failure to give notice shall have been materially prejudicial to the Company) nor from any other liability that it may have to any Indemnitee. The Company shall have the right to assume sole and exclusive control of the defense of any claim for indemnification pursuant to Section 8.1, including the choice and direction of any legal counsel. 17 (b) An Indemnitee shall have the right to employ separate counsel in any action as to which indemnification may be sought under any provision of this Agreement and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnitee unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company has failed to assume the defense thereof and employ counsel within a reasonable period of time after being given the notice required above or (iii) the Indemnitee shall have been advised by its counsel that representation of such Indemnitee and other parties by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them. It is understood, however, that to the extent more than one Indemnitee is entitled to employ separate counsel at the Company's expense pursuant to clause (iii) above, the Company shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys at any time for all such Indemnitees having actual or potential differing interests with the Company, unless but only to the extent the Indemnitees have actual or potential differing interests with each other. (c) The Company shall not be liable for any settlement of any such action effected without its written consent, but if settled with such written consent, or if there is a final judgment against the Indemnitee in any such action, the Company agrees to indemnify and hold harmless the Indemnitee to the extent provided above from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (d) The indemnification obligations set forth in Section 8.1 and this Section 8.2 shall survive the termination of this Agreement. ARTICLE IX. TRANSFERS SECTION 9.1. REGISTRATION, TRANSFER AND EXCHANGE. (a) The Company shall keep at the Principal Office a register in which shall be entered the names and addresses of the Members, the number of Units owned by each Member and all Transfers of outstanding Units. (b) Subject to this Article IX, each Unit, whether originally or in substitution for, or upon transfer, exchange or other issuance of any Unit shall be registered in the register on the effective date of the Transfer, exchange or other issuance of such Unit; PROVIDED, HOWEVER, that no registration of any Transfer not made in compliance with this Article IX shall be made in the register. 18 (c) Transfer of Units on the books of the Company may be authorized only by the person or persons in whose name Units are registered on the books of the Company named in the certificate, such person's legal representative or such person's duly authorized attorney-in-fact. SECTION 9.2. RESTRICTION ON TRANSFERS. In addition to any restrictions imposed by the federal securities laws and any applicable state securities or "blue-sky" laws, no Member may sell, assign, pledge, transfer, convey or otherwise dispose of (including through any merger, share exchange or consolidation) (collectively, "Transfer") all or any part of any Unit, whether for consideration or not, to any Person who is not a Member at the time of such Transfer. No recipient of such Transfer to a Person other than a Member (each such nonMember recipient, a "Transferee") shall have any rights in the Company or be or have any rights as a Member with respect to all or any part of any such Unit attempted to be Transferred, and any such attempted Transfer of all or any part of a Unit shall be entirely null and void, unless the Board of Managers by vote of a Manager Supermajority consents to the Transfer and the admission of such Transferee as a Member if such Transfer is to a Person, other than the Company, who is not then a Member. The appropriate Company records and any certificates representing the Units shall be noted to prevent any Transfers in violation of this Section 9.2. Notwithstanding anything to the contrary contained in this Section 9.2, in the event that the proposed merger between Farmland and CHS is consummated, Farmland shall have the right to transfer all or any part of its Units to the resulting merged entity, and such merged entity shall, automatically upon such transfer, be admitted as a Member and have all the rights of a Member with respect to such transferred Units, including, but not limited to, rights of appointment to the Board of Managers. Further, in the event that CHS, Growmark or MFA transfers its respective interest in NCRA to a Person other than a corporation doing business as a cooperative or effects such transfer without the prior written consent of Farmland, the successor to the transferee's interest shall have no right to appoint a Manager to the Board of Managers pursuant to Section 6.3 of this Agreement. SECTION 9.3. TRANSFER BY LEGAL PROCESS. Upon any involuntary Transfer of all or any portion of the Units of a Member pursuant to a levy of execution, foreclosure of pledge, garnishment, attachment, divorce decree, bankruptcy or other legal process (or by operation of law resulting from the death, disability, liquidation, dissolution or winding-up of a Member), such Member shall cease to be a Member, but any successor in title to the transferred Units shall have no right to become a Member or vote in any Company matters unless admitted as a Member by affirmative vote of a Manager Supermajority, subject to the provisions of Section 9.4. If such successor does not become a Member, such successor shall be merely an assignee within the meaning of Section 18-702(b) of the Act. SECTION 9.4. CONDITIONS TO PERMITTED TRANSFERS. No Transfer otherwise permitted by any provisions of this Agreement shall be valid unless and until the following conditions are satisfied (any of which may be waived by the Board of Managers in its discretion): 19 (a) The transferor and Transferee shall execute and deliver to the Company such documents and instruments of conveyance as may be necessary or appropriate in the opinion of counsel to the Company to effect such Transfer and confirm the agreement of the Transferee to be bound by the provisions of this Agreement; PROVIDED, HOWEVER, that in the case of a Transfer of Units at death or involuntarily by operation of law, the Transfer shall be confirmed by presentation to the Company of legal evidence of such Transfer, in form and substance satisfactory to counsel of the Company. (b) Except in the case of a Transfer of Units involuntarily by operation of law in which case no opinion of counsel is required, the transferor shall furnish to the Company an opinion of counsel, which counsel and opinion shall be satisfactory to the Company, to the effect that: (i) The Transfer will not cause the Company to terminate for federal income tax purposes under Section 708 of the Code; (ii) The Transfer is either exempt from all applicable registration requirements and such Transfer will not violate any applicable federal and state laws regulating the Transfer of securities, or the Company Units to be transferred are duly and properly registered under all applicable federal and state securities laws; and (iii) The Transfer will not cause the Company to be deemed to be an "investment company" under the Investment Company Act of 1940. (c) The transferor and Transferee shall furnish the Company with the Transferee's taxpayer identification number, sufficient information to determine the Transferee's initial tax basis in the Units transferred and any other information reasonably necessary to permit the Company to file all required federal and state tax returns and other legally required information statements or returns. The Company shall not be required to make any distribution otherwise provided for in this Agreement with respect to any Transferred Units until it has received such information. SECTION 9.5. WITHDRAWAL. No Member shall be entitled to withdraw from the Company prior to the dissolution and winding up of the Company pursuant to Article XIV hereof without the unanimous consent of the other Members of the Company. ARTICLE X. BOOKS OF ACCOUNT; REPORTS AND FISCAL MATTERS SECTION 10.1. BOOKS; PLACE; ACCESS. The Chief Financial Officer shall maintain books of account on behalf of the Company at the Principal Office or such other place as may be designated by the Board of Managers. The Chief Financial Officer shall account for all inventories on the books and records of the Company using the LIFO method of accounting, 20 as such term is understood according to generally accepted accounting principles. All Members shall at all reasonable times have access to and the right to inspect the books and records of the Company. SECTION 10.2. FINANCIAL INFORMATION. The Chief Financial Officer shall cause to be prepared and delivered to each of the Members summary financial information with respect to each of the first eleven months of each Fiscal Year. Such monthly financial information shall be provided to the Members not later than twenty (20) days following the end of each month of the Fiscal Year. The Chief Financial Officer also shall cause to be prepared and delivered to each of the Members an annual financial report that shall describe in reasonable detail the financial and business activities of the Company and include the financial statements of the Company for the previous Fiscal Year. Such annual financial report shall be provided to the Members not later than one hundred twenty (120) days following each Fiscal Year-end and shall be audited by a nationally recognized public accounting firm. SECTION 10.3. TAX INFORMATION. Within one hundred twenty (120) days after the close of each Fiscal Year, all necessary tax information shall be transmitted to all Members. SECTION 10.4. TAX ELECTIONS. All elections required or permitted to be made by the Company under the Code, shall be made by the TMP. In the event of a transfer of all or part of the Membership Interest of any Member, the Company may, by vote of a Manager Supermajority, elect pursuant to Section 754 of the Code to adjust the basis of the assets of the Company. SECTION 10.5. TAX MATTERS PARTNER. For as long as the TMP is a Member, the TMP shall act as the tax matters partner, as such term is defined in Section 6231(a)(7) of the Code, and the TMP is hereby authorized to and shall represent the Company in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and judicial proceedings. The Members and the TMP shall use all reasonable efforts to comply with the responsibilities outlined in the Tax Matters Exhibit and in Sections 6222 through 6231 of the Code (including any Treasury Regulations thereunder and any successor or amendatory provisions thereto for which a tax matters partner is designated). ARTICLE XI. CAPITAL SECTION 11.1. INITIAL CAPITAL CONTRIBUTIONS. On the date of the execution of this Agreement, the Members shall make the Capital Contributions or contributions of inventory that reflect the ownership interest indicated opposite their respective names on Schedule A. SECTION 11.2. NO RIGHT TO RETURN OF CONTRIBUTION. No Member shall have the right to the withdrawal or to the return of his, her or its Capital Contribution, except upon the dissolution and liquidation of the Company pursuant to Article XIV. 21 SECTION 11.3. ADDITIONAL CAPITAL CONTRIBUTIONS. In the event that the Members unanimously determine that additional contributions to the capital of the Company are necessary to the conduct of the Company's activities, each of the Members shall promptly make a cash contribution to the capital of the Company equal to his share (determined in proportion to the number of Units held by each Member) of such additional funds, which contribution shall constitute a Capital Contribution. If one Member fails to contribute its share of such funds to the Company, then (i) the funds advanced by the other Members shall be regarded as a loan in accordance with Section 11.4, and (ii) in the event that such failure is not cured within thirty (30) days after the date upon which such capital contribution was to be made pursuant to the determination of the Members, each of such other Members shall have the right to cause the dissolution of the Company upon giving thirty (30) days' notice to the other Members. Members shall be required to contribute in proportion to the number of Units held in the event that the Company is unable to meet any obligation arising from environmental liabilities under the Refinery Agreement. SECTION 11.4. LOANS TO THE COMPANY; NO INTEREST ON CAPITAL; LOANS TO MEMBERS. (a) The Members may, but are not obligated to, make loans to the Company from time to time, as authorized by the Board of Managers in accordance with Section 6.18(m). Any such loans shall not be treated as Capital Contributions to the Company for any purpose hereunder nor entitle such Member to any increase in its share of the Profits and Losses and cash distributions of the Company, but the Company shall be obligated to such Member for the amount of any such loans pursuant to the terms thereof, as the same are determined by the Board of Managers and such Member. The outstanding amount of any loans made by a Member to the Company shall accrue interest at the applicable semi-annual, short-term federal interest rate on the date of such loan, which interest shall be payable at such times as shall be determined by the Board of Managers and such Member. All scheduled principal and interest payments with respect to any loans from a Member to the Company pursuant to this Section 11.4 shall be repaid prior to any distributions to any Members pursuant to Sections 13.1, 13.2 or 14.3(d). No interest shall be paid on any Capital Contribution to the Company or on any balance in any Capital Account. (b) The Company may extend loans to Members according to terms and conditions approved by the Board of Managers in accordance with Section 6.18(m). SECTION 11.5. CREDITOR'S INTEREST IN THE COMPANY. No creditor who makes a loan to the Company shall have or acquire at any time as a result of making the loan any direct or indirect interest in the profits, capital or property of the Company, other than such interest as may be accorded to a secured creditor. Notwithstanding the foregoing, this provision shall not prohibit in any manner whatsoever a secured creditor from participating in the profits of operation or gross or net sales of the Company or in the gain on sale or refinancing of the Company, all as may be provided in its loan or security agreements. 22 SECTION 11.6. LIABILITY OF MEMBERS. Except as otherwise provided in the Act, no Member, as such, shall have any personal liability whatsoever for the debts, liabilities, contracts or other obligations of the Company, for any of the Company's losses or for the acts or omissions of any other Member, Manager or employee of the Company beyond, with respect to a Member, such Member's Capital Contribution and, solely to the extent and for the period required by applicable law, the amount of such Member's Capital Contribution which is returned to it. Each Unit, on issuance, shall be fully paid and, except as set forth in Section 11.3, not subject to assessment for additional Capital Contributions. No Member shall be required to lend any funds to the Company as a condition to admission or continued membership of such Member in the Company. It is the intent of the Members that (i) no distribution to any Member (other than a distribution upon the dissolution and liquidation of the Company) shall be deemed a withdrawal of capital, even if such distribution represents, for Federal income tax purposes or otherwise (in full or in part), a distribution of depreciation or any other non-cash item accounted for as a loss or deduction from or offset to the Company's income, and (ii) no Member shall be obligated to pay any such amount to or for the account of the Company or any creditor of the Company. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any distribution made by the Company to a Member constitutes a withdrawal of capital, any obligation under applicable law to return the same or any portion thereof to or for the account of the Company or its creditors shall be the obligation of such Member. SECTION 11.7. CAPITAL ACCOUNTS. A separate capital account ("Capital Account") shall be maintained by the Company for each Member as described in the Tax Matters Exhibit. SECTION 11.8. NCRA LEASE ADJUSTMENTS. NCRA shall remain responsible for all lease, residual and other payments (excluding operating, maintenance and repair payments) under all applicable leases thereof and incur all expenses necessary to allow the Company the continued use of the leased assets listed on Schedule B hereto (the "Leased Assets") during and beyond terms of all such leases (the "Lease Expenses"). Within thirty (30) days of delivery of proof of payment of any of the Lease Expenses (other than any residual payments or other payments made to purchase the Leased Assets), the Company shall reimburse NCRA for 100% of all such Lease Expenses (such reimbursement, the "Lease Reimbursement"); PROVIDED, HOWEVER, that NCRA shall upon receipt of any Lease Reimbursement direct a portion of such Lease Reimbursement to all Members in proportion to the Members' respective ownership interests indicated opposite their respective names on Schedule A. Any other assets under lease shall be handled in like manner. 23 ARTICLE XII. ALLOCATION OF PROFITS AND LOSSES SECTION 12.1. ALLOCATION OF PROFITS AND LOSSES. After giving effect to the special allocations set forth in Sections 12.3, 12.4 and 12.5 hereof, and subject to Section 12.2 hereof, all Profits and Losses shall be allocated to each of the Members in proportion to their respective Units. SECTION 12.2. LIMITATION ON LOSS ALLOCATION. Notwithstanding anything in Section 12.1 above, Losses allocated pursuant to Section 12.1 shall not exceed the maximum amount of Losses that can be so allocated without causing a Member to have an Adjusted Capital Account Deficit at the end of any Fiscal Year. In the event one of the Members would have an Adjusted Capital Account Deficit as a consequence of an allocation of Losses pursuant to Section 12.1, the limitation set forth herein shall be applied on a Member by Member basis so as to allocate the maximum permissible Losses to each Member under Section 1.704-1(b)(2)(ii)(D) of the Regulations. All Losses in excess of the foregoing limitation shall be allocated to the Members in proportion to their Units. SECTION 12.3. REGULATORY ALLOCATIONS. Notwithstanding anything to the contrary contained in Section 12.1 or 12.2 or elsewhere in this Agreement, it is the intention of the Members that Profits and Losses be allocated in accordance with the "partnership minimum gain chargeback" (Treasury Regulations Sections 1.704-2(f) and 1.704-2(g)(2)), "partner minimum gain chargeback" (Treasury Regulations Sections 1.704-2(f)(5), 1.704-2(i)(4), 1.704- 2(i)(5) and 1.704-2(j)(2)), "qualified income offset" and "alternate test for economic effect" (Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), "partnership nonrecourse deductions" (Treasury Regulations Section 1.704-2(b)(1)) and "partner non-recourse deductions" (Treasury Regulations Section 1.704-2(i)(1)) provisions of Treasury Regulations Section 1.704-1(b) and Section 1.704-2 and any successor regulations (collectively, the "Regulatory Allocations") and, to the extent any provisions of this Agreement do not comply therewith, the Members desire and intend that such provisions be modified or stricken in such respects as are necessary in order to cause compliance therewith. The Regulatory Allocations that shall govern this Agreement are set forth in the Tax Matters Exhibit. SECTION 12.4. TAX ALLOCATIONS: SECTION 704(C) OF THE CODE. In accordance with Section 704(c) of the Code, income, gain, loss and deduction with respect to any property contributed to the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for income tax purposes and its book value, in the same manner as such variations are treated under Section 704(c) of the Code. Any elections or other decisions related to such allocations shall be made by the Board of Managers in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 12.4 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any 24 Member's Capital Account or share of income, gain, loss or deduction pursuant to any provision of this Agreement. SECTION 12.5. SPECIAL ALLOCATIONS. The Company shall allocate to Farmland as income or loss, as the case may be, an amount equal to 73.72% of the amount of NCRA's share of all net income or loss of those NCRA subsidiaries listed on Schedule C hereto. Such allocations shall not be limited to the net income of the Company and, notwithstanding the provisions of Sections 12.2 and 12.3 hereof, may create an Adjusted Capital Account Deficit to the extent of such allocation. SECTION 12.6. OTHER ALLOCATION RULES. In the event of any changes in Units during a Fiscal Year, all Profits and Losses from operations of the Company during such Fiscal Year, using such methods of accounting for depreciation and other items as the Board of Managers determines to use for federal income tax purposes, shall be allocated to each Member based on its varying interest in the Company during such operating year in accordance with Section 706 of the Code. The Board of Managers shall determine in accordance with Section 706 of the Code whether to prorate items of income and deduction according to the portion of the Fiscal Year for which a Member held Units or whether to close the books on an interim basis and divide such operating year into two or more segments. All tax credits shall be allocated among the Members in accordance with applicable law. ARTICLE XIII. DISTRIBUTIONS SECTION 13.1. DISTRIBUTIONS. The Board of Managers shall, unless otherwise prohibited by vote of a Manager Supermajority and provided the Company has Net Cash Flow (i) distribute monthly one percent (1%) of the gross revenue received from sales to Members of gasoline and distillate, to the Members in proportion to such Member's ownership interest in the Company, (ii) distribute to Farmland, to the extent of any undistributed special income allocation under Section 12.5, an amount equal to 73.72% of the cash received by NCRA as a result of its ownership interest in the NCRA subsidiaries listed on Schedule C, such distribution to be made promptly following NCRA's receipt of such cash, and (iii) distribute to NCRA, to the extent not previously distributed under this clause (iii), an amount equal to 73.72% of the cash invested by NCRA in such NCRA subsidiaries to cover net losses of such NCRA subsidiaries, such distribution to be made promptly following such investment by NCRA. After taking into account the distributions described in clauses (i) through (iii) of this Section 13.1, the Board of Managers may distribute Net Cash Flow to the Members at such times and in such amounts as it may determine by vote of a Manager Supermajority. All distributions of Net Cash Flow shall be distributed to the Members in proportion to such Members' respective ownership interests in the Company. SECTION 13.2. LIMITATIONS ON DISTRIBUTIONS. Notwithstanding any provision to the contrary in this Article XIII: 25 (a) All distributions made in connection with the liquidation and winding up of the Company shall be made in the manner provided in Section 14.3 hereof. (b) No distribution shall be made that would result in a violation of Section 18-607 of the Act. SECTION 13.3. SETOFF. All distributions to a Member made pursuant to Section 13.1 shall be subject to setoff by the Company for any past due obligations of such Member (or its predecessor in interest) to the Company. ARTICLE XIV. DISSOLUTION AND LIQUIDATION SECTION 14.1. EVENTS CAUSING DISSOLUTION. The Company shall be dissolved only upon the occurrence of any of the following events: (a) The sale, exchange or other disposition of all or substantially all of the assets and properties of the Company; (b) The written agreement of a Manager Supermajority; (c) The entry of a decree of judicial dissolution under Section 18-802 of the Act; (d) Upon notice given by a Member to the other Members pursuant to Section 11.3 in the event of a failure of a Member to make a required capital contribution; PROVIDED, HOWEVER, that the Company shall be dissolved on the date specified in such notice, which date shall be at least thirty (30) days after the date of such notice; or (e) The termination or expiration of the Refinery Agreement. SECTION 14.2. CONTINUATION OF BUSINESS. Upon the expulsion, bankruptcy, retirement, resignation or dissolution of a Member or the occurrence of any other event which terminates the continued membership of a Member in the Company as provided in Section 18-801 of the Act, the Company shall not be dissolved and its business shall continue. SECTION 14.3. LIQUIDATION AND WINDING UP. If dissolution of the Company should be caused by reason of the events set forth in Section 14.1, the Company shall be liquidated and the Managers (or other person or persons designated by a decree of court) shall wind up the affairs of the Company. The Managers or other persons winding up the affairs of the Company shall promptly proceed to the liquidation of the Company and, in settling the accounts of the Company, the assets and the property of the Company shall be distributed in the following order of priority: 26 (a) To the payment of all debts and liabilities of the Company in the order of priority as provided by law (other than outstanding loans from a Member); (b) To the establishment of any reserves deemed necessary by the Managers or the person winding up the affairs of the Company for any contingent liabilities or obligations of the Company; (c) To the repayment of any outstanding loans from a Member to the Company; (d) To the Members in proportion to and to the extent of their respective Capital Account balances, after giving effect to all contributions, distributions, and allocations for all periods; and (e) The balance, if any, to the Members pro rata in accordance with the number of Units owned by each Member. SECTION 14.4. COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS. In the event the Company is liquidated within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article XIV to the Members who have positive Capital Account balances in compliance with Treasury Regulations Section 1.704- 1(b)(2)(ii)(b)(2), and (b) if a Member has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years), such Member shall have no obligation to contribute to the capital of the Company and such deficit shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever. ARTICLE XV. AMENDMENT The Certificate of Formation and this Agreement may be amended by a unanimous vote of the Managers; PROVIDED, HOWEVER, that the Managers may not amend this Agreement to modify the requirement that the unanimous agreement of the Members be obtained in order to require additional contributions to the capital of the Company. ARTICLE XVI. REPRESENTATIONS, WARRANTIES OF THE MEMBERS SECTION 16.1. REPRESENTATIONS AND WARRANTIES OF THE MEMBERS. Each of the Members represents and warrants as of the date of this Agreement to each of the other Members and the Company as follows: 27 (a) The Units being acquired by such Member are being purchased for such Member's own account and not with a view to, or for sale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Such Member understands that such Units have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration and prospectus delivery requirements thereof and that the reliance of the Company and others upon such exemptions is predicated in part by the representations and warranties of such Member contained herein. (b) Such Member has the requisite power and authority (whether corporate or otherwise) and legal capacity to enter into, and to carry out its obligations under, this Agreement. (c) The execution and delivery by such Member of this Agreement and the consummation by such Member of the transactions contemplated hereby have been duly authorized prior to the date of this Agreement by all necessary action on the part of such Member. (d) This Agreement has been duly executed and delivered by such Member and constitutes a valid and binding obligation enforceable against such Member in accordance with its terms. (e) Such Member is not subject to, or obligated under, any provision of (i) any agreement, arrangement or understanding, (ii) any license, franchise or permit or (iii) any law, regulation, order, judgment or decree that would be breached or violated, or in respect of which a right of termination or acceleration or any encumbrance on any of such Member's assets would be created, by such Member's execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except for such agreements as to which a Member has previously obtained the consent of the other party or parties thereto. (f) No authorization, consent or approval of, waiver or exemption by, or filing or registration with, any public body, court, third party or authority is necessary on such Member's part, which has not previously been obtained by such Member for the consummation of the transactions contemplated by this Agreement. (g) No person or entity has or will have, as a result of any act or omission by such Member any right, interest or valid claim against the Company or any other Member for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. (h) Such Member has, and will transfer to the Company, good and marketable title to the assets being contributed to the Company by such Member pursuant to the provisions of Section 11.1, free and clear of all liens, pledges, charges, claims, leases, restrictions, obligations and encumbrances of any nature whatsoever. 28 ARTICLE XVII. MISCELLANEOUS PROVISIONS SECTION 17.1. ADDITIONAL ACTIONS AND DOCUMENTS. Each of the Members hereby agrees to take or cause to be taken such further actions, to execute, acknowledge, deliver and file, or cause to be executed, acknowledged, delivered and filed such further documents and instruments, and to use all reasonable efforts to obtain such consents, as may be necessary or as may be reasonably requested in order to fully effectuate the purposes, terms and conditions of this Agreement. SECTION 17.2. NOTICE. Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed, if to the Company, to the Principal Office of the Company set forth in Section 1.2 hereof or to such other address as the Company shall notify the Members in writing; and if to the Members, to their respective addresses set forth in Schedule A hereof or to such other address as any such Member may hereafter designate by notice in writing to the Chair and Company. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. SECTION 17.3. SEVERABILITY. The invalidity of any one or more provisions hereof or of any other agreement or instrument given pursuant to or in connection with this Agreement shall not affect the remaining portions of this Agreement or any such other agreement or instrument or any part thereof; and in the event that one or more of the provisions contained herein or therein should be invalid, or should operate to render this Agreement or any such other agreement or instrument invalid, this Agreement and such other agreements and instruments shall be construed as if such invalid provisions had not been inserted. SECTION 17.4. SURVIVAL. It is the express intention and agreement of the Members that all covenants, agreements, statements, representations, warranties and indemnities made in this Agreement shall survive the execution and delivery of this Agreement. SECTION 17.5. WAIVERS; EXERCISE OF RIGHTS. Neither the waiver by a Member of a breach of or a default under any of the provisions of this Agreement, nor the failure or delay on the part of a Member or the Company in exercising any right, power or privilege hereunder and no course of dealing between the Members or between a Member and the Company shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and 29 not exclusive of any other rights or remedies which a Member or the Company would otherwise have at law or in equity or otherwise. SECTION 17.6. BINDING EFFECT. Subject to any provisions hereof restricting assignment, this Agreement shall be binding upon and shall inure to the benefit of the Members and their respective successors and permitted assigns. SECTION 17.7. LIMITATION ON BENEFITS OF THIS AGREEMENT. It is the explicit intention of the Members that no person or entity other than the Members and the Company is or shall be entitled to bring any action to enforce any provision of this Agreement against any Member or the Company, and that the covenants, undertakings and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the Members (or their respective heirs, legal representatives, successors and assigns as permitted hereunder) and the Company; PROVIDED, HOWEVER, that the Indemnitees shall, as intended third-party beneficiaries thereof, be entitled to the enforcement of Sections 8.1 and 8.2 hereof, but only as insofar as the obligations sought to be enforced thereunder are those of the Company. SECTION 17.8. WAIVER OF PARTITION. The Members agree that the assets of the Company are not and will not be suitable for partition. The Members hereby waive any right of partition or any right to take any action that otherwise might be available to them for the purpose of severing their relationship with the Company or interest in assets held by the Company from the interest of the other Members. SECTION 17.9. ENTIRE AGREEMENT. This Agreement, together with the Refinery Agreement and the Personnel Lease Agreement, contains the entire agreement among the Members with respect to the matters contained herein, and supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein. SECTION 17.10. PRONOUNS. All pronouns shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the antecedent may require. SECTION 17.11. HEADINGS. Article and Section headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof. 30 SECTION 17.12. EXECUTION IN COUNTERPARTS. To facilitate execution, this Agreement may be executed in as many counterparts as may be required; and it shall not be necessary that the signatures of, or on behalf of, each party, or that the signatures of all Persons required to bind any party, appear on each counterpart; but it shall be sufficient that the signature of, or on behalf of, each party, or that the signatures of the Persons required to bind any party, appear on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in making proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of, or on behalf of, all of the parties hereto. SECTION 17.13. LIMITATION OF MEMBER LIABILITIES. The aggregate of any and all liabilities and obligations of any Member to any other Member or Members or the Company under this Agreement, the Refinery Agreement an the Personnel Lease Agreement shall in no event exceed $150 million per Member. 31 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. FARMLAND INDUSTRIES, INC. By: John W. Fuehring --------------------------------------------- Name: John W. Fuehring ----------------------------------------- Title: Controller - Crop Production ---------------------------------------- NATIONAL COOPERATIVE REFINERY ASSOCIATION By: James S. Loving --------------------------------------------- Name: James S. Loving ----------------------------------------- Title: President ---------------------------------------- 32 Exhibit 1 CERTIFICATE OF FORMATION OF COOPERATIVE REFINING, LLC This Certificate of Formation of Cooperative Refining, LLC (the "Company") is executed and filed by the undersigned, as authorized person, to form a limited liability company under the Delaware Limited Liability Company Act (the "Act"). 1. The name of the Company is Cooperative Refining, LLC. 2. The address of the registered office of the Company in the State of Delaware is The Corporation Trust Company, located at Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. 3. The name and address of the registered agent for service of process on the Company in the State of Delaware is The Corporation Trust Company, located at Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Formation this 6th day of August, 1999. /s/ Theodore D. Herzog ------------------------------------------- Theodore D. Herzog Authorized Person Exhibit 2 TAX MATTERS EXHIBIT SECTION 1. CAPITAL ACCOUNT MAINTENANCE. It is intended that the Capital Account of each Member will be maintained in accordance with the capital accounting rules of Treasury Regulations Section 1.704-1(b)(2)(iv) and the provisions of this Agreement relating to the maintenance of Capital Accounts shall be interpreted and applied in a manner consistent therewith. In the event the Members shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with such Treasury Regulations, the TMP may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Member pursuant to Article XIII hereof. In general, the Capital Account of each Member shall be initially credited with the amount of such Member's initial Capital Contribution. The Capital Account of each Member shall further be credited by the amount of any additional Capital Contribution made by such Member from time to time, shall be debited by the amount of any cash distributions made by the Company or the fair market value of any property distributed in kind to such Member and shall be credited with the amount of income and gains and debited with the amount of losses of the Company allocated to such Member. In all instances the capital accounting rules in Treasury Regulations Section 1.704-1(b)(2)(iv) will determine the proper debits or credits to each Member's Capital Account. The Members may, at their option, increase or decrease the Capital Accounts of the Members to reflect a revaluation of Company property on the Company's books at the times when, pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv), such adjustments may occur. The adjustments, if made, will be made in accordance with such Treasury Regulation, including allocating taxable items, as computed for book purposes, to the Capital Accounts as prescribed in such Treasury Regulation, with appropriate adjustments as contemplated by Section 12.4 of the Agreement. In the case of the transfer of all or a part of an interest in the Company, the Capital Account of the transferor Member attributable to the transferred interest will carry over to the transferee Member. In the case of termination of the Company pursuant to Section 708 of the Code, the rules of Treasury Regulations Section 1.704-1(b)(2)(iv) shall govern adjustments to the Capital Accounts. If there are any adjustments to Company property as a result of Sections 732, 734 or 743 of the Code, the Capital Accounts of the Members shall be adjusted as provided in Treasury Regulations Section 1.704-1(b)(2)(iv)(m). SECTION 2. ADJUSTMENTS TO PROFITS AND LOSSES. In the determination of Profits and Losses with respect to any period, the Company's taxable income or loss for such period shall be adjusted as follows: (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses pursuant to this paragraph shall be added to such taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits and Losses pursuant to this paragraph shall be subtracted from such taxable income or loss; 1 (iii) In the event the Gross Asset Value of any Company asset is adjusted pursuant to sub paragraphs (ii) or (iii) under the definition "Gross Asset Value" below, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits and Losses; (iv) Gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year; (vi) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Sections 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member's interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits and Losses; (vii) Notwithstanding any other provision of this paragraph, any items which are specially allocated pursuant to Section 3 hereof shall not be taken into account in computing Profits and Losses. The amounts of the items of Company income, gain, loss, or deduction available to be specially allocated pursuant to Section 3 hereof shall be determined by applying rules analogous to those set forth in subparagraphs (i) through (vi) above. SECTION 3. REGULATORY ALLOCATIONS. The following Regulatory Allocations shall be made in the following order: (a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, notwithstanding any other provision of these Regulatory Allocations, if there is a net decrease in Company minimum gain during any Company Fiscal Year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Member's share of the net decrease in Company minimum gain (within the meaning of Treasury Regulations Sections 1.704-2(b)(2) and 1.704-2(d)) determined in accordance with Treasury Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Paragraph (a) is intended to comply with the minimum gain chargeback 2 requirement in Treasury Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (b) Member Minimum Gain Chargeback. Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4), notwithstanding any other provision of these Regulatory Allocations, if there is a net decrease in Member nonrecourse debt minimum gain, as defined in Treasury Regulations Section 1.704-2(i)(2) and determined pursuant to Treasury Regulations Section 1.704-2(i)(3), attributable to a Member nonrecourse debt, as defined in Treasury Regulations Section 1.704-2(b)(4), during any Company Fiscal Year, each Member who has a share of the Member nonrecourse debt minimum gain attributable to such Member nonrecourse debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such year (and if necessary, subsequent years) in an amount equal to such Member's share of the net decrease in Member nonrecourse debt minimum gain attributable to such Member nonrecourse debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations 1.704-2(i)(4) and 1.704-2(j)(2). This Paragraph (b) is intended to comply with the minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. (c) Qualified Income Offset. If a Member unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), and such unexpected adjustment, allocation or distribution puts such Member's Capital Account into a deficit balance or increases such deficit balance determined after such account is credited by any amounts which the Member is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and debited by the items described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) and for all other allocations tentatively made pursuant to these Regulatory Allocations as if this Paragraph (c) were not in this Agreement, such Member shall be allocated items of Company income and gain in an amount and manner sufficient to eliminate such deficit or increase as quickly as possible. It is intended that this Paragraph (c) shall meet the requirement that this Agreement contain a "qualified income offset" as defined in Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and this Section shall be interpreted and applied consistently therewith. (d) Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement, and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph (d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in these Regulatory Allocations have been made as if Paragraph (c) and this Paragraph (d) were not in the Agreement. 3 (e) Nonrecourse Deductions. Nonrecourse deductions, within the meaning of Treasury Regulations Section 1.704-2(b)(1), for any Fiscal Year or other period shall be specially allocated to the Members in proportion to their Units. (f) Member Nonrecourse Deductions. Any Member nonrecourse deductions, within the meaning of Treasury Regulations Sections 1.704-2(i)(1) and 1.704-2(i)(2), for any Fiscal Year or other period shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member nonrecourse debt to which such Member nonrecourse deductions are attributable in accordance with Treasury Regulations Section 1.704-2(i). (g) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Sections 732, 734(b) or 743(b) is required, pursuant to Treasury Regulations Sections 1.704-1(b)(2)(iv)(m)(2) or (4), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Sections of the Treasury Regulations. The Regulatory Allocations are intended to comply with certain requirements of the Treasury Regulations. It is the intent of the Members that to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss, or deduction pursuant to this paragraph. Therefore, notwithstanding any other provision of this Exhibit or Article XII (other than the Regulatory Allocations), the Board of Managers shall make such offsetting special allocations of Company income, gain, loss, or deduction in whatever manner they determine appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Section 12.1 and Section 12.2. In exercising their discretion under this paragraph, the Board of Managers shall take into account future Regulatory Allocations under Sections Paragraphs (a) and (b) that, although not yet made, are likely to offset other Regulatory Allocations previously made under Paragraphs (e) and (f). SECTION 4. TAX MATTERS PARTNER. (a) TMP Notices. Each Member shall furnish the TMP with such information (including information specified in Section 6230(e) of the Code) as the TMP may reasonably request to permit the TMP to provide the Internal Revenue Service with sufficient information to allow proper notice to the Members in accordance with Section 6223 of the Code. The TMP shall keep each Member informed of those administrative and judicial proceedings for the adjustment at the Company level of Company items required by Section 6223(g) of the Code and the Treasury Regulations thereunder, and such other matters as the TMP, in its sole discretion, deems appropriate. 4 (b) Inconsistent Tax Treatment. Each Member shall notify the TMP in the event its treatment of any Company item on its federal income tax return is inconsistent with the treatment of that item on any return filed by or in any records of the Company within thirty (30) days of the date such Member's return is filed. (c) Requests for Tax Adjustments. No Member shall file, pursuant to Section 6227 of the Code, a request for an administrative adjustment of limited liability company items for any Company taxable year without first notifying each other Member. If each other Member agrees with the requested adjustment, the TMP shall file the request for administrative adjustment on behalf of the Company. If unanimous consent of the Members is not obtained within thirty (30) days, or within the period required to file timely the request for administrative adjustment, if shorter, any Member, including the TMP (on behalf of the Company), may file a request for administrative adjustment on its own behalf. (d) Tax Proceedings. The TMP, in its sole discretion, shall negotiate with the Internal Revenue Service on behalf of the Company during all aspects of the tax proceeding, including without limitation the examination, appeals and litigation process. Any Member who intends to file a petition under Sections 6226, 6228, or other sections of the Code with respect to any Company item, or other tax matters involving the Company, shall give reasonable notice to each of the other Members of such intention and the nature of the contemplated proceeding. In the case where the TMP is the Member intending to file such petition, the TMP, in its sole discretion, shall choose the forum in which such petition will be filed. If any Member intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding part of this paragraph (d) of Section 4, such Member shall notify each of the other Members of such intended action. In accordance with its duty to act in good faith, the TMP may choose to pursue or forego settlement, litigation or any other proceedings. (e) Tax Settlements. The TMP may bind a Member to a settlement agreement without obtaining the written concurrence of such Member who would be bound by such agreement only upon the approval of such settlement agreement by vote of a Manager Supermajority. Any Member who enters into a settlement agreement with the Secretary of the Treasury with respect to any partnership items, as defined by Section 6231(a)(3) of the Code, shall notify the Members of such settlement agreement and its terms within ninety (90) days from the date of settlement. (f) TMP Expenditures, Fees and Indemnification. The TMP may engage such legal counsel, certified public accountants, or others (including, without limitation, experts) on behalf of the Company as it may determine to be necessary and appropriate. Any other Member may engage other legal counsel, certified public accountants, or others on such other Member's own behalf and at such other Member's sole cost and expense. Any reasonable item of expense, including but not limited to fees and expenses for legal counsel, certified public accountants, and others (including, without limitation, experts) that the TMP incurs on behalf of the Company in connection with any audit, assessment, litigation, or other proceeding regarding any partnership item, shall constitute expenses of the Company. In the event that the Company does not have adequate cash or other assets to pay such items of expense, the TMP shall not be obligated to make capital contributions or loans to fund such expenses, and the TMP shall be free to resign as 5 the tax matters partner of the Company pursuant to Section 4(g) hereof. The Company shall indemnify the TMP pursuant to Article VIII hereof. (g) Resignation of TMP. The TMP may resign as tax matters partner at any time upon the filing of a signed statement with the Internal Revenue Service in accordance with Temp. Treas. Reg. ss. 301.6231(a)(7)-1T(i) (or any successor provision thereto). The successor tax matters partner shall be determined pursuant to Temp. Treas. Reg. ss.ss. 301.6231(a)(7)-1T (or any successor provision thereto). (h) Survival of TMP Provisions. The provisions of this Section 4, including without limitation the obligation to pay fees and expenses and the indemnification obligations described in Section 4 hereof, shall survive the termination of the Company or the termination of any Member's interest in the Company and shall remain binding on the Company for a period of time necessary to resolve with the Internal Revenue Service, the Department of the Treasury or any state taxing authority any and all matters regarding the federal or state income taxation of the Company for the applicable tax year(s). SECTION 5. DEFINITIONS. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) credit to such Capital Account any amounts which such Member is obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) debit to such Capital Account the items describe in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be interpreted consistently therewith. "Depreciation" means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year bears to such beginning adjusted tax basis; PROVIDED, HOWEVER, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Fiscal Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Members. "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the contributing Member and the other Member; 6 (ii) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking into account Section 7701(g) of the Code), as determined by the Members, as of the following times: (a) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for an interest in the Company; and (c) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g); PROVIDED, HOWEVER, that adjustments pursuant to clauses (a) and (b) above shall be made only if the TMP reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company; (iii) The Gross Asset Value of any Company asset distributed to any Member shall be adjusted to equal the gross fair market value (taking into account Section 7701(g) of the Code) of such asset on the date of distribution as determined by the distributee and the other Member; and (iv) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); PROVIDED, HOWEVER, that Gross Asset Values shall not be adjusted pursuant to this paragraph to the extent the Members determine that an adjustment pursuant to paragraph (ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraphs (i), (ii), or (iv) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing income, gains, profits and losses of the Company. 7 SCHEDULE A MEMBERS OF COOPERATIVE REFINING, LLC Name and Address of Member Units - ------ ----- Farmland Industries, Inc. 42,435 NCRA 57,565 1 SCHEDULE B LEASED ASSETS As enumerated in the Operating Lease between NCRA and General Electric dated October 12, 1983: Coker Unit Revamp Equipment As enumerated in the Operating Lease between NCRA and Beatrice dated August 1, 1984: Sour Crude Unit Equipment Sour Water Stripper Equipment Kerley ATS Plant Equipment Amine Unit Equipment Diesel Hydrotreater Equipment 2 SCHEDULE C NCRA SUBSIDIARIES Clear Creek Transportation, LLC Jayhawk Pipeline, L.L.C. Kaw Pipeline Company Osage Pipeline Company 3 EX-10.35 4 TRANSACTION AGREEMENT EXHIBIT 10.35 APPENDIX A =============================== TRANSACTION AGREEMENT between CENEX HARVEST STATES COOPERATIVES, a Minnesota cooperative association and FARMLAND INDUSTRIES, INC., a Kansas cooperative corporation Dated as of September 23, 1999 =============================== TABLE OF CONTENTS ARTICLE I THE TRANSACTION............................................................1 Section 1.01 Overview of Transaction.....................................1 Section 1.02 The Closing.................................................2 Section 1.03 Actions at the Closing......................................2 Section 1.04 Effect of Transaction.......................................3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF CHSC.....................................5 Section 2.01 Organization and Good Standing..............................6 Section 2.02 Financial Statements........................................6 Section 2.03 Absence of Liabilities......................................6 Section 2.04 Title to Property...........................................6 Section 2.05 Intellectual Property.......................................7 Section 2.06 Compliance with Laws, etc...................................7 Section 2.07 Pending Litigation, Claims, Actions, Proceedings or Investigations..............................................7 Section 2.08 Absence of Defaults.........................................7 Section 2.09 Authorization...............................................8 Section 2.10 Insurance...................................................8 Section 2.11 Governmental Authorization..................................8 Section 2.12 Subsidiaries................................................8 Section 2.13 SEC Filings.................................................9 Section 2.14 Absence of Certain Changes..................................9 Section 2.15 Taxes.......................................................9 Section 2.16 Employee Benefit Plans.....................................10 Section 2.17 Environmental Matters......................................11 Section 2.18 Pooling; Tax Treatment.....................................12 Section 2.19 No Dissenters' Rights......................................12 Section 2.20 Acquisition Co.............................................12 Section 2.21 Full Disclosure............................................13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF FARMLAND................................13 Section 3.01 Organization and Good Standing.............................13 Section 3.02 Financial Statements.......................................14 Section 3.03 Absence of Liabilities.....................................14 Section 3.04 Title to Property..........................................14 Section 3.05 Intellectual Property......................................14 Section 3.06 Compliance with Laws, etc..................................15 -i- Section 3.07 Pending Litigation, Claims, Actions, Proceedings or Investigations.............................................15 Section 3.08 Absence of Defaults........................................15 Section 3.09 Authorization..............................................15 Section 3.10 Insurance..................................................16 Section 3.11 Governmental Authorization.................................16 Section 3.12 Subsidiaries...............................................16 Section 3.13 SEC Filings................................................16 Section 3.14 Absence of Certain Changes.................................17 Section 3.15 Taxes......................................................17 Section 3.16 Employee Benefit Plans.....................................18 Section 3.17 Environmental Matters......................................19 Section 3.18 Pooling; Tax Treatment.....................................19 Section 3.19 No Dissenters' Rights......................................19 Section 3.20 Full Disclosure............................................20 ARTICLE IV PRE-CLOSING COVENANTS.....................................................20 Section 4.01 Selection of Structure.....................................20 Section 4.02 Good Faith Efforts.........................................20 Section 4.03 Preservation of Business...................................21 Section 4.04 Conduct of Business........................................21 Section 4.05 Meetings of Members........................................22 Section 4.06 Full Access................................................22 Section 4.07 Notice of Developments.....................................23 Section 4.08 Exclusive..................................................23 Section 4.09 Hart-Scott-Rodino Filings..................................23 Section 4.10 Tax and Accounting Treatment...............................23 ARTICLE V CLOSING CONDITIONS........................................................23 Section 5.01 Conditions to Obligations of Each Party....................24 Section 5.02 Additional Conditions to Obligation of CHSC................24 Section 5.03 Additional Conditions to Obligation of Farmland............25 ARTICLE VI POST-CLOSING AGREEMENTS...................................................26 Section 6.01 Consolidation of Benefit Plans.............................26 Section 6.02 Patronage Distributions....................................26 Section 6.03 Indemnification of Former Officers; Insurance..............26 ARTICLE VII TERMINATION...............................................................27 Section 7.01 Termination of Agreement...................................27 -ii- Section 7.02 Effect of Termination......................................27 ARTICLE VIII MISCELLANEOUS.............................................................28 Section 8.01 Waiver of Conditions.......................................28 Section 8.02 Amendment..................................................28 Section 8.03 Binding Nature.............................................28 Section 8.04 Counterparts...............................................28 Section 8.05 Entire Agreement...........................................28 Section 8.06 Notices....................................................28 Section 8.07 Non-Survival of Representations and Warranties.............29 Section 8.08 Captions...................................................29 Exhibits Exhibit A-1 - Structure A Plan of Merger Exhibit A-2 - Structure A Surviving Entity Bylaws Exhibit B-1 - Structure B Plans of Merger Exhibit B-2 - Structure B Surviving Entity Bylaws Exhibit C - Senior Management Reporting Relationships Exhibit D - Capital Plan CHSC Disclosure Schedule Farmland Disclosure Schedule -iii- TRANSACTION AGREEMENT THIS TRANSACTION AGREEMENT (this "Agreement") is made and entered into as of September 23, 1999, by and between CENEX HARVEST STATES COOPERATIVES, a Minnesota cooperative association ("CHSC"), and FARMLAND INDUSTRIES, INC., a Kansas cooperative corporation ("Farmland"). WHEREAS, each of CHSC and Farmland is an agricultural cooperative organized for the purposes of benefitting and serving its members and patrons; and WHEREAS, the parties believe that the unification of their respective business operations and assets will be in the best interest of their respective members; and WHEREAS, on May 6, 1999, the parties entered into a Memorandum of Intent pursuant to which both parties agreed to negotiate in good faith to reach agreement on the principal terms of a transaction pursuant to which they would combine their respective assets and business operations into a single entity, through a form of business combination to be determined by the parties, and WHEREAS, the parties have now reached agreement as to the final terms and conditions of such business combination, and wish to reduce such agreement to writing as more particularly described herein. NOW THEREFORE, in consideration of the foregoing and the mutual representations, warranties and covenants herein contained, the parties hereto agree as follows: ARTICLE I THE TRANSACTION SECTION 1.01 OVERVIEW OF TRANSACTION. At the Effective Time (as such term is defined in section 1.04 hereof), CHSC and Farmland will combine into a single entity named "United Country Brands, Inc." (the "Surviving Entity"). The combination will be in the form of either (a) Structure A, which will be a merger of Farmland with and into CHSC, with CHSC as the Surviving Entity, such merger to become effective at the Effective Time ("Structure A"), or (b) a merger, prior to the Effective Time, of CHSC into UCB Acquisition Co., an Ohio cooperative corporation and wholly-owned subsidiary of CHSC ("Acquisition Co."), with Acquisition Co. as the survivor in such merger (the "CHSC/Acquisition Co. Merger"), and immediately thereafter, the merger of Farmland into Acquisition Co., with Acquisition Co. as the Surviving Entity ("Structure B"). The parties anticipate and agree that Structure A constitutes the structure that is preferred by the parties and the default structure to accomplish the combination, and agree that Structure A shall be used (and that the parties will use their best efforts to resolve any issues relating to the use of Structure A) unless, prior to the Closing (as defined herein), either party obtains an opinion of counsel to the effect that use of such Structure A would have a Material Adverse Effect (as defined herein) on the Surviving Entity. If Structure A is used to accomplish the combination, then (i) the parties shall execute, deliver and file the Agreement and Plan of Merger attached hereto as Exhibit A-1 to effectuate the merger therein contemplated; and (ii) effective as of the Effective Time, the Surviving Entity will be governed by Articles of Incorporation in the form attached hereto as Schedule I to such Plan of Merger and Bylaws in the form attached hereto as Exhibit A-2, and will otherwise continue to operate and exist as a cooperative association organized under the laws of the State of Minnesota. If Structure B is used to accomplish the combination, then (i) CHSC shall take appropriate action to effectuate the CHSC/Acquisition Co. Merger, and in connection therewith, shall execute, deliver and file the appropriate Agreement and Plan of Merger attached hereto as Exhibit B-1 and shall redeem all of its outstanding Equity Participation Units in the Defined Business Units; (ii) thereafter the parties shall execute, deliver and file the appropriate Agreement and Plan of Merger attached hereto as Exhibit B-1 as required by law to effectuate the merger of Farmland into Acquisition Co.; and (iii) effective as of the Effective Time, the Surviving Entity will be governed by Articles of Incorporation in the form attached hereto as Schedule I to such Plan of Merger and Bylaws in the form attached hereto as Exhibit B-2, and will (subject to Section 4.01 hereof) continue to operate and exist as a cooperative association organized under the laws of the State of Ohio. The Agreement and Plan of Merger so used and executed, delivered and filed as hereinabove provided is referred to herein as the "Plan of Merger", the Articles of Incorporation which serve as the Articles of Incorporation of the Surviving Entity are referred to herein as the "Surviving Entity Articles", the Bylaws which serve as the Bylaws of the Surviving Entity are referred to herein as the "Surviving Entity Bylaws", and the merger transaction therein contemplated, together with all actions, consents, agreements and transactions described herein or otherwise necessary or desirable in connection therewith, are referred to collectively herein as the "Transaction." SECTION 1.02 THE CLOSING. Unless this Agreement is terminated and the Transaction is abandoned as provided in Article VII hereof, the closing for the Transaction (the "Closing") shall take place on or before February 29, 2000, or such other date as the parties may mutually determine (the "Closing Date"), subject to the satisfaction or waiver of all conditions to the obligations of each of the parties to consummate the Transaction (other than conditions with respect to actions which the respective parties will take at the Closing itself). SECTION 1.03 ACTIONS AT THE CLOSING. At the Closing, the parties shall (a) execute and deliver the Agreement and Plan of Merger pursuant to Section 1.01 above, (b) deliver the various certificates, instruments and documents referred to in the Plan of Merger or in Article V of this Agreement, and (c) cause to be filed with the Secretary of State of the appropriate states the Plan of Merger, certificate of merger or such other documents as may be required by the applicable laws to effectuate the Transaction pursuant to the terms of the Plan of Merger and this Agreement. -2- SECTION 1.04 EFFECT OF TRANSACTION. The Transaction shall become fully effective at 12:02 a.m. Central Time on March 1, 2000 (the "Effective Time"). The Transaction shall have the effect set forth in the Plan of Merger, this Agreement and applicable state law. At any time after the Effective Time, the Surviving Entity may take any action (including executing and delivering any document) in the name and on behalf of either party to this Agreement in order to carry out and effectuate the Transaction contemplated by this Agreement. At the Effective Time, without any further action on the part of the members or the boards of directors of either CHSC or Farmland: (a) ARTICLES AND BYLAWS. The Surviving Entity Articles and the Surviving Entity Bylaws shall become the articles of incorporation and bylaws of the Surviving Entity, as provided in the Plan of Merger. (b) BOARD OF DIRECTORS. (i) TRANSITION BOARD. Each of the then current directors of Farmland and the then current directors of CHSC will become directors of the Surviving Entity, to serve according to the Surviving Entity Bylaws, so that the board of directors of the Surviving Entity as of the Effective Time will consist of all of the then current directors of both Farmland and CHSC. Each party agrees to take all actions necessary to reduce, as of the Effective Time, the number of directors on the Board of Directors of such party to seventeen (17). (ii) PRODUCER DIRECTORS AFTER DECEMBER 2001. Effective for and after the annual meeting of the members of the Surviving Entity to be held in December 2001, for purposes of Section 4.4(b) of the Surviving Entity Bylaws and subject to review and reapportionment by the Board of Directors of the Surviving Entity pursuant to Section 4.4(c) of the Surviving Entity Bylaws from time to time, the numbers of producer directors in each director district shall be as follows: District 1 -- one (1) producer director; District 2 -- two (2) producer directors; District 3 -- four (4) producer directors; District 4 -- five (5) producer directors; District 5 -- two (2) producer directors; District 6 -- one (1) producer director; and District 7 -- three (3) producer directors. (c) BOARD OFFICERS. For the period from the Effective Time to the annual meeting of the members of the Surviving Entity to be held in December 2000 (the "Transition Period"), Elroy Webster will serve as Chairman of the Board and Albert Shivley will serve as the Vice Chairman of the Board. In addition, effective as of the Effective Time, there shall be established an Executive Committee of the Board, and the following Standing Committees of the Board: Capital, Finance/Audit, Governance and Corporate Responsibility (including compensation). For the Transition Period the Capital Committee will be chaired -3- by Merlin Van Walleghen, the Finance/Audit Committee of the Board will be chaired by Monte Romohr, the Governance Committee will be chaired by Gerald Kuster and the Corporate Responsibility Committee will be chaired by Jody Bezner. For the Transition Period, the Chairman and Vice Chairman of the Board, together with the Chairs of the Standing Committees, shall make up the Executive Committee. (d) OFFICE OF LEADERSHIP. The "Office of Leadership" will consist of the Chief Executive Officer and the President of the Surviving Entity. Robert Honse ("Honse") will serve as Chief Executive Officer of the Surviving Entity, reporting to the board of directors of the Surviving Entity. It is anticipated that Honse shall serve in that capacity through no later than December 31, 2003; and John D. Johnson ("Johnson") will serve as the President of the Surviving Entity, reporting to the Chief Executive Officer of the Surviving Entity. Upon expiration of Honse's service as Chief Executive Officer, it is anticipated that Johnson shall assume the role of President and Chief Executive Officer of the Surviving Entity. Both the Chief Executive Officer and the President will serve at the pleasure of the Board of Directors of the Surviving Entity at all times, subject, however, to the monetary provisions of any applicable employment contract. Such employment contracts will provide that Honse, as Chief Executive Officer, may not demote, discharge, change the senior management reporting relationships (described in paragraph (e) below) of, or otherwise materially adversely change the status of, Johnson, as President, without the agreement of the Executive Committee of the Board of Directors. (e) SENIOR MANAGEMENT. Senior management will be as designated by the Office of Leadership from time to time in accordance with the Surviving Entity Bylaws. The reporting relationships between senior management and the Office of Leadership are identified in Exhibit C attached hereto and will be incorporated into employment contracts with the Chief Executive Officer and the President. (f) EXCHANGE AND CONVERSION OF STOCK, NON-STOCK EQUITY AND PATRONAGE EQUITIES. At and as of the Effective Time, without any further action by the parties or any of their respective members, and as further described in the Plan of Merger, (i) each member of CHSC and each member of Farmland shall become a member of the Surviving Entity, to the extent they are eligible for membership under the Surviving Entity Articles and the Surviving Entity Bylaws, and (ii) except for any stock and equity interests of Farmland in CHSC or any stock interest of CHSC in Farmland (which shall, in each case, be extinguished), the stock, non-stock equity and patronage equity interests of each member, patron and former patron of Farmland shall be exchanged for non-stock equity and patronage equity interests in the Surviving Entity at their stated value amount on a dollar-for-dollar basis, as further described in the Plan of Merger. (g) CAPITAL PLAN. From and after the Effective Time, the Surviving Entity will operate pursuant to a capital plan that adheres to the principles set forth on Exhibit D attached hereto and the Surviving Entity shall use its best efforts to adopt and implement a -4- capital plan that incorporates such principles (the "Capital Plan"). The Capital Plan may be adopted and amended from time to time, by the board of directors of the Surviving Entity, provided that amendment of any provisions of the Capital Plan relating to disposition of the Terra tax case shall require a vote of three-fourths (3/4) of the full board of directors of the Surviving Entity, and provided further that any such amendment shall, as far as feasible, adhere to the "Key Terra Principles" described on Exhibit D attached hereto. ARTICLE II REPRESENTATIONS AND WARRANTIES OF CHSC CHSC represents and warrants to Farmland and the Surviving Entity that the statements contained in this Article II are correct and complete in all material respects as of the date of this Agreement, except as set forth in the CHSC Disclosure Schedule delivered by CHSC to Farmland attached hereto (the "CHSC Disclosure Schedule"). Nothing in the CHSC Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the CHSC Disclosure Schedule identifies the exception with particularity and describes the relevant facts in detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself). For purposes of this Agreement (a) the word "Subsidiary" when used with respect to any Person (as herein defined) means any other Person, whether incorporated or unincorporated (i) of which fifty percent or more of the securities or other ownership interests is directly owned or controlled by such Person or by any one or more of its Subsidiaries, or (ii) of which securities or other interests having by their terms ordinary voting power to elect fifty percent or more of the board of directors or others performing similar functions with respect to such corporation or other organization is directly owned or controlled by such Person or by any one or more of its Subsidiaries, or (iii) when such Person is CHSC, the entities listed on the CHSC Disclosure Schedule, or (iv) when such Person is Farmland, the entities listed on the Farmland Disclosure Schedule (as herein defined), (b) "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof, and (c) a "Material Adverse Effect" with respect to any Person means a material adverse effect on the financial condition, business, liabilities, properties, assets or results of operations, taken as a whole, of such Person and its Subsidiaries, taken as a whole, except to the extent resulting from (w) any changes in general United States or global economic conditions, (x) any changes affecting the agricultural industry in general, (y) matters whose significance or impact would reasonably be expected to be primarily short term (i.e., under one year) or (z) matters disclosed on the Person's Disclosure Schedule. -5- SECTION 2.01 ORGANIZATION AND GOOD STANDING. CHSC is a cooperative association duly organized and existing under Chapter 308A of the Minnesota Statutes, is in good standing under the laws of the State of Minnesota, and has all requisite corporate power and authority to own its properties and conduct its business as it is presently being conducted. CHSC is duly qualified to do business and is in good standing in each jurisdiction in which it conducts business or owns or leases properties of a nature which would require such qualification, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on CHSC. CHSC has heretofore delivered to Farmland true and complete copies of the CHSC articles of incorporation and bylaws as currently in effect. SECTION 2.02 FINANCIAL STATEMENTS. CHSC has delivered to Farmland (a) its audited financial statements as of August 31, 1998, accompanied by the opinion of PricewaterhouseCoopers, (b) the audited financial statements of CENEX, Inc. for the year ended September 30, 1997 and the eight months ended May 31, 1998, (c) the audited financial statements of Harvest States Cooperatives for the year ended May 31, 1998, and (d) the unaudited financial statements of CHSC for the nine months ended May 31, 1999. Such financial statements fairly present the financial position of CHSC at the dates indicated therein and the results of its operation for the periods indicated therein, in conformity with generally accepted accounting principles consistently applied ("GAAP"). There has been no material adverse change in the financial condition or results of operations of CHSC since May 31, 1999. SECTION 2.03 ABSENCE OF LIABILITIES. Neither CHSC nor any Subsidiary of CHSC has any liabilities or obligations, absolute or contingent, except for liabilities and obligations which are (i) reflected in the financial statements referred to in Section 2.02, (ii) fully covered by insurance, except for reasonable deductibles or self-insured retention levels, (iii) incurred in the ordinary course of business since May 31, 1999 and not materially different in type or amount from those reflected in the financial statements referred to in Section 2.02, or (iv) would not in the aggregate reasonably be expected to have a Material Adverse Effect on CHSC. SECTION 2.04 TITLE TO PROPERTY. Except as reflected in the notes accompanying the audited financial statements of CHSC, CHSC has good and marketable title to all real and personal property reflected as owned on the books and records of CHSC as of the date of this Agreement and owns outright all other assets, properties or property interests acquired since that date, in each case free of all mortgages, liens, charges and encumbrances, other than (i) easements, rights-of-way and other encumbrances which do not materially impair the use of such real or personal property for the same or similar purposes as such real or personal property has been used by CHSC prior to the Effective Time, (ii) liens for -6- current taxes that are not yet due and payable, (iii) liens related to the acquisition of inventory or otherwise arising in the normal course of business, and (iv) other liens, encumbrances and title defects which would not reasonably be expected to have a Material Adverse Effect on CHSC. SECTION 2.05 INTELLECTUAL PROPERTY. CHSC owns or possesses, is licensed under or otherwise has lawful access to, all patents, trade secrets, know-how, other confidential information, trademarks, service marks, copyrights, trade names, logos and other intellectual property, whether registered or unregistered, necessary for the lawful conduct of its business as currently conducted, without any infringement of or conflict with the industrial or intellectual property rights of any third party, except as would not reasonably be expected to have a Material Adverse Effect on CHSC. CHSC does not know or have reason to know of any unauthorized use or disclosure or misappropriation of any of its intellectual property, which disclosure, use, or misappropriation would reasonably be expected to have a Material Adverse Effect on CHSC. SECTION 2.06 COMPLIANCE WITH LAWS, ETC. CHSC is in compliance with all applicable laws and regulations the violation of which would reasonably be expected to have a Material Adverse Effect on CHSC. CHSC has all governmental authorizations, consents, licenses and permits required by law or otherwise necessary for the proper operation of its business as currently conducted, all of such licenses and permits are in full force and effect and no action to terminate, withdraw, not renew or materially limit or otherwise change any such license or permit is pending or has been threatened by any governmental agency or other party, except as would not reasonably be expected to have a Material Adverse Effect on CHSC. SECTION 2.07 PENDING LITIGATION, CLAIMS, ACTIONS, PROCEEDINGS OR INVESTIGATIONS. There is no action, proceeding or investigation pending against, or to the best of the knowledge of CHSC after reasonable inquiry, is threatened against CHSC or any Subsidiary of CHSC or any of the assets which are owned by CHSC or any Subsidiary of CHSC which would reasonably be expected to have a Material Adverse Effect on CHSC. SECTION 2.08 ABSENCE OF DEFAULTS. CHSC is not in default under any provision of its Articles of Incorporation or Bylaws or any indenture, mortgage, loan agreement or other material agreement to which it is a party or by which it is bound, and CHSC is not in violation of any statute, order, rule or regulation of any court or governmental agency having jurisdiction over it or its properties, which, in each case, could have a Material Adverse Effect on CHSC, and, except for any consent or approval identified on the CHSC Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the Transaction in accordance with this Agreement will in any respect conflict with or result in a breach of any of the foregoing, which could have a Material Adverse Effect on CHSC. -7- SECTION 2.09 AUTHORIZATION. CHSC has the corporate power and authority to enter into and to perform its obligations under this Agreement (subject to the approval of its members as required by Section 5.01(a)). This Agreement and the Transaction have been duly and validly authorized by the Board of Directors of CHSC, and (except for the approvals of its members, as required by Section 5.01(a)) no other corporate action is required by CHSC in connection with this Agreement or the Transaction. This Agreement constitutes the valid and binding agreement of CHSC, enforceable against CHSC in accordance with its terms, except to the extent such enforcement may be limited by the application of equitable principles where equitable relief is sought or bankruptcy and other laws relating to the enforcement of creditors' rights generally. SECTION 2.10 INSURANCE. CHSC has secured appropriate insurance policies which (i) are issued by sound and reputable insurance companies duly authorized to write said insurance, (ii) are in full force and effect, (iii) are sufficient for compliance with all requirements of law and all agreements to which CHSC is a party, and (iv) provide reasonable insurance coverage for the assets and operations of CHSC and all liabilities related thereto. SECTION 2.11 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by CHSC of this Agreement and the consummation of the Transaction by CHSC require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than (a) the filing of appropriate documents to effect the Plan of Merger under applicable law, (b) compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (c) compliance with applicable requirements of U.S. state and federal securities laws and (d) other actions or filings which if not taken or made would not, individually or in the aggregate, have a Material Adverse Effect on CHSC or the Surviving Entity following the Effective Time. SECTION 2.12 SUBSIDIARIES. Each Subsidiary of CHSC is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, has all powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except for those the absence of which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on CHSC. Each Subsidiary of CHSC is duly qualified to do business and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on CHSC. -8- SECTION 2.13 SEC FILINGS. (a) CHSC has delivered to Farmland (i) its annual report on Form 10-K for its fiscal year ended August 31, 1998, (ii) its quarterly reports on Form 10-Q for its fiscal quarters ended after August 31, 1998, (iii) all of its other reports, statements, schedules and registration statements filed with the SEC since August 31, 1998 (the documents referred to in this Section 2.13(a) being referred to collectively as the "CHSC SEC Documents"). (b) As of its filing date, each CHSC SEC Document complied as to form in all material respects with the applicable requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). (c) As of its filing date, each CHSC SEC Document filed pursuant to the Exchange Act did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. SECTION 2.14 ABSENCE OF CERTAIN CHANGES. Except as set forth in the CHSC Disclosure Schedule, since May 31, 1999, CHSC and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or development of a state of circumstances or facts which has had or reasonably would be expected to have, individually or in the aggregate, a Material Adverse Effect on CHSC; (b) any transaction or commitment made, or any contract, agreement or settlement entered into, by (or judgment, order or decree affecting) CHSC or any of its Subsidiaries relating to its assets or business (including the acquisition or disposition of any assets) or any relinquishment by CHSC or any of its Subsidiaries of any contract or other right, in either case, material to CHSC and its Subsidiaries taken as a whole, other than transactions, commitments, contracts, agreements or settlements (including without limitation settlements of litigation and tax proceedings) in the ordinary course of business consistent with past practice, those contemplated by this Agreement, or as agreed to in writing by Farmland; (c) any change in any method of accounting or accounting practice (other than any change for tax purposes) by CHSC or any of its Subsidiaries, except for any such change which is not significant or which is required by reason of a concurrent change in GAAP; or (d) any increase in (or amendments to the terms of) compensation, bonus or other benefits payable to directors, officers or employees of CHSC or any of its Subsidiaries, other than in the ordinary course of business consistent with past practice, as permitted by this Agreement, or as agreed to in writing by Farmland. SECTION 2.15 TAXES. Except as set forth in the CHSC Balance Sheet dated May 31, 1999 (including the notes thereto) and except as would not, individually or in the aggregate, have a Material Adverse Effect on CHSC, (i) all CHSC Tax Returns required to be filed with any taxing authority by, or with respect -9- to, CHSC and its Subsidiaries have been filed in accordance with all applicable laws; (ii) CHSC and its Subsidiaries have timely paid all Taxes shown as due and payable on the CHSC Tax Returns that have been so filed, and, as of the time of filing, the CHSC Tax Returns correctly reflected the facts regarding the income, business, assets, operations, activities and the status of CHSC and its Subsidiaries (other than Taxes which are being contested in good faith and for which adequate reserves are reflected on the CHSC Balance Sheet); (iii) CHSC and its Subsidiaries have made provision for all Taxes payable by CHSC and its Subsidiaries for which no CHSC Tax Return has yet been filed; (iv) the charges, accruals and reserves for Taxes with respect to CHSC and its Subsidiaries reflected on the CHSC Balance Sheet are adequate under GAAP to cover the Tax liabilities accruing through the date thereof; (v) there is no action, suit, proceeding, audit or claim now proposed or pending against or with respect to CHSC or any of its Subsidiaries in respect of any Tax where there is a reasonable possibility of an adverse determination; and (vi) to the best of CHSC's knowledge and belief, neither CHSC nor any of its Subsidiaries is liable for any Tax imposed on any entity other than such Person, except as the result of the application of Treas. Reg. Section 1.1502-6 (and any comparable provision of the tax laws of any state, local or foreign jurisdiction) to the affiliated group of which CHSC is the common parent. For purposes of this Agreement, "Taxes" shall mean any and all taxes, charges, fees, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, excise, stamp, real or personal property, ad valorem, withholding, social security (or similar), unemployment, occupation, use, service, service use, license, net worth, payroll, franchise, severance, transfer, recording, employment, premium, windfall profits, environmental (including taxes under Section 59A of the Internal Revenue Code of 1986, as amended (the "Code")), customs duties, capital stock, profits, disability, sales, registration, value added, alternative or add-on minimum, estimated or other taxes, assessments or charges imposed by any federal, state, local or foreign governmental entity and any interest, penalties, or additions to tax attributable thereto. For purposes of this Agreement, "Tax Returns" shall mean any return, report, form or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax. SECTION 2.16 EMPLOYEE BENEFIT PLANS. (a) Prior to the date hereof, CHSC has provided Farmland with a list identifying each material "employee benefit plan," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), each material employment, severance or similar contract, plan, arrangement or policy applicable to any director, former director, employee or former employee of CHSC and each material plan or arrangement (written or oral), providing for compensation, bonuses, profit-sharing, stock option or other stock related rights or other forms of incentive or deferred compensation, vacation benefits, insurance coverage (including any self-insured arrangements), health or medical benefits, disability benefits, workers' compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, health, medical or life insurance benefits) which is maintained, administered or contributed to by CHSC and covers any employee or director or former employee or director of CHSC, or under which CHSC has any liability. Such material plans (excluding any such plan that is a "multiemployer -10- plan", as defined in Section 3(37) of ERISA) are referred to collectively herein as the "CHSC Employee Plans". (b) Each CHSC Employee Plan has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations (including but not limited to ERISA and the Code) which are applicable to such Plan, except where failure to so comply would not, individually or in the aggregate, have a Material Adverse Effect on CHSC. (c) Neither CHSC nor any affiliate of CHSC has incurred a liability under Title IV of ERISA that has not been satisfied in full, and no condition exists that presents a material risk to CHSC or any affiliate of CHSC of incurring any such liability other than liability for premiums due the Pension Benefit Guaranty Corporation (which premiums have been paid when due). (d) Each CHSC Employee Plan which is intended to be qualified under Section 401(a) of the Code is so qualified and has been so qualified during the period from its adoption to date, and each trust forming a part thereof is exempt from federal income tax pursuant to Section 501(a) of the Code. (e) No director or officer or other employee of CHSC or any of its Subsidiaries will become entitled to any retirement, severance or similar benefit or enhanced or accelerated benefit solely as a result of the transactions contemplated hereby. (f) Each CHSC Employee Plan that provides for post-retirement health and medical, life or other insurance benefits for retired employees of CHSC or any of its Subsidiaries has been adequately reserved for in CHSC's financial statements. (g) There has been no amendment to, written interpretation or announcement (whether or not written) by CHSC or any of its affiliates relating to, or change in employee participation or coverage under, any CHSC Employee Plan which would increase materially the expense of maintaining such CHSC Employee Plan above the level of the expense incurred in respect thereof for the 12 months ended May 31, 1999. SECTION 2.17 ENVIRONMENTAL MATTERS. (a) Except as set forth in the CHSC SEC Documents filed prior to the date hereof and with such exceptions as, individually or in the aggregate, have not had, and would not reasonably be expected to have, a Material Adverse Effect on CHSC (i) no notice, notification, demand, request for information, citation, summons, complaint or order has been received by, and no investigation, action, claim, suit, proceeding or review is pending or, to the knowledge of CHSC or any of its Subsidiaries, threatened by any Person against, CHSC or any of its Subsidiaries, and no penalty has been assessed against CHSC or any of its Subsidiaries, in each case, with respect to any matters relating to or arising out of any Environmental Law; (ii) CHSC and its Subsidiaries are and have been in compliance with all Environmental Laws; (iii) there are no liabilities of CHSC or any of its -11- Subsidiaries relating to or arising out of any Environmental Law of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability; and (iv) there has been no environmental investigation, study, audit, test, review or other analysis conducted of which CHSC has knowledge in relation to the current or prior business of CHSC or any of its Subsidiaries or any property or facility now or previously owned, leased or operated by CHSC or any of its Subsidiaries which has not been delivered to Farmland at least five days prior to the date hereof. All liabilities of CHSC or any of its Subsidiaries relating to or arising out of any Environmental Law of any kind whatsoever have been adequately reserved for on the financial statements of CHSC, or for unconsolidated Subsidiaries, on the financial statements of such Subsidiaries. (b) For purposes of this Agreement, the term "Environmental Laws" means any federal, state, local and foreign statutes, laws (including, without limitation, common law), judicial decisions, regulations, ordinances, rules, judgments, orders, codes, injunctions, permits, governmental agreements or governmental restrictions relating to human health and safety, the environment or to pollutants, contaminants, wastes, or chemicals. SECTION 2.18 POOLING; TAX TREATMENT. The parties intend that the Transaction be accounted for under the "pooling of interests" method under the requirements of Opinion No. 16 (Business Combinations) of the Accounting Principles Board of the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, and the rules and regulations of the Securities and Exchange Commission. Neither CHSC nor any of its affiliates has taken or agreed to take any action or is aware of any fact or circumstance that would prevent the Transaction from qualifying (i) for "pooling of interests" accounting treatment as described above or (ii) as a reorganization within the meaning of Section 368 of the Code (a "368 Reorganization"). SECTION 2.19 NO DISSENTERS' RIGHTS. No member of CHSC or any other holder of equity of CHSC, other than the holders of Equity Participation Units as defined in CHSC's Bylaws and as further defined in resolutions of the CHSC board of directors establishing the defined business units to which such Equity Participation Units relate, have the right to dissent from the Transaction and receive payment for their interest in cash or otherwise receive any property or other interest in the Transaction, other than as provided in the Plan of Merger. SECTION 2.20 ACQUISITION CO. Acquisition Co. has been formed by CHSC solely for the purpose of carrying out the Transaction if Structure B is selected. Acquisition Co. is a "Subsidiary" of CHSC for purposes hereof. Acquisition Co. has no assets or liabilities, other than nominal assets to comply with any organizational requirements of Ohio law. -12- SECTION 2.21 FULL DISCLOSURE. CHSC has disclosed to Farmland all facts material to the transactions contemplated in this Agreement, including disclosure of all material contracts (as such term is described in Item 601 of Regulation S-K under the Securities Act of 1933, as amended ("Regulation S-K")). No representation, warranty, or covenant by CHSC contained in this Agreement or the Plan of Merger, and no statement contained in any certificate, schedule, or other documents or instrument furnished to Farmland pursuant hereto or in connection with the transactions contemplated hereby, including responses to Farmland inquiries put to CHSC in the course of its investigation to confirm the warranties and representations of CHSC in this Agreement, when taken as a whole, contains or will contain any untrue statement of a material fact or omits or will omit a material fact which would make it misleading as to CHSC. ARTICLE III REPRESENTATIONS AND WARRANTIES OF FARMLAND Farmland represents and warrants to CHSC and the Surviving Entity that the statements contained in this Article III are correct and complete in all material respects as of the date of this Agreement, except as set forth in the Farmland Disclosure Schedule attached hereto (the "Farmland Disclosure Schedule"). Nothing in the Farmland Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Farmland Disclosure Schedule identifies the exception with particularity and describes the relevant facts in detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself). SECTION 3.01 ORGANIZATION AND GOOD STANDING. Farmland is a cooperative corporation duly organized and existing under Chapter 17, Article 16 of the Kansas Statutes, is in good standing under the laws of the State of Kansas, and has all requisite corporate power and authority to own its properties and conduct its business as it is presently being conducted. Farmland is duly qualified to do business and is in good standing in each jurisdiction in which it conducts business or owns or leases properties of a nature which would require such qualification, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on Farmland. Farmland has heretofore delivered to Farmland true and complete copies of the Farmland articles of incorporation and bylaws as currently in effect. -13- SECTION 3.02 FINANCIAL STATEMENTS. Farmland has delivered to CHSC (a) its audited financial statements as of August 31, 1998, accompanied by the opinion of KPMG-Peat Marwick, and (b) its unaudited financial statements for the nine months ended May 31, 1999. Such financial statements fairly present the financial position of Farmland at the dates indicated therein and the results of its operation for the periods indicated therein, in conformity with GAAP. There has been no material adverse change in the financial condition or results of operations of Farmland since May 31, 1999. SECTION 3.03 ABSENCE OF LIABILITIES. Neither Farmland nor any Subsidiary of Farmland has any liabilities or obligations, absolute or contingent, except for liabilities and obligations which are (i) reflected in the financial statements referred to in Section 3.02, (ii) fully covered by insurance, except for reasonable deductibles or self-insured retention levels, (iii) incurred in the ordinary course of business since May 31, 1999 and not materially different in type or amount from those reflected in the financial statements referred to in Section 3.02, or (iv) would not in the aggregate reasonably be expected to have a Material Adverse Effect on Farmland. SECTION 3.04 TITLE TO PROPERTY. Except as reflected in the notes accompanying the audited financial statements of Farmland, Farmland has good and marketable title to all real and personal property reflected as owned on the books and records of Farmland as of the date of this Agreement and owns outright all other assets, properties or property interests acquired since that date, in each case free of all mortgages, liens, charges and encumbrances, other than (i) easements, rights-of-way and similar encumbrances which do not materially impair the use of such real or personal property for the same or similar purposes as such real or personal property has been used by Farmland prior to the Effective Time, (ii) liens for current taxes that are not yet due and payable, (iii) liens related to the acquisition of inventory or otherwise arising in the normal course of business, and (iv) other liens, encumbrances and title defects which would not reasonably be expected to have a Material Adverse Effect on Farmland. SECTION 3.05 INTELLECTUAL PROPERTY. Farmland owns or possesses, is licensed under or otherwise has lawful access to, all patents, trade secrets, know-how, other confidential information, trademarks, service marks, copyrights, trade names, logos and other intellectual property, whether registered or unregistered, necessary for the lawful conduct of its business as currently conducted, without any infringement of or conflict with the industrial or intellectual property rights of any third party, except as would not reasonably be expected to have a Material Adverse Effect on Farmland. Farmland does not know or have reason to know of any unauthorized use or disclosure or misappropriation of any of its intellectual property. which disclosure, use, or misappropriation would reasonably be expected to have a Material Adverse Effect on Farmland. -14- SECTION 3.06 COMPLIANCE WITH LAWS, ETC. Farmland is in compliance with all applicable laws and regulations the violation of which would reasonably be expected to have a Material Adverse Effect on Farmland. Farmland has all governmental authorizations, consents, licenses and permits required by law or otherwise necessary for the proper operation of its business as currently conducted, all of such licenses and permits are in full force and effect, and no action to terminate, withdraw, not renew or materially limit or otherwise change any such license or permit is pending or has been threatened by any governmental agency or other party, except as would not reasonably be expected to have a Material Adverse Effect on Farmland. SECTION 3.07 PENDING LITIGATION, CLAIMS, ACTIONS, PROCEEDINGS OR INVESTIGATIONS. There is no action, proceeding or investigation pending against, or to the best of the knowledge of Farmland after reasonable inquiry, is threatened against Farmland or any Subsidiary of Farmland or any of the assets which are owned by Farmland or any Subsidiary of Farmland which would reasonably be expected to have a Material Adverse Effect on Farmland. SECTION 3.08 ABSENCE OF DEFAULTS. Farmland is not in default under any provision of its Articles of Incorporation or Bylaws or any indenture, mortgage, loan agreement or other material agreement to which it is a party or by which it is bound, and Farmland is not in violation of any statute, order, rule or regulation of any court or governmental agency having jurisdiction over it or its properties, which, in each case, could have a Material Adverse Effect on Farmland, and, except for any consent or approval identified on the Farmland Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the Transaction in accordance with this Agreement will in any respect conflict with or result in a breach of any of the foregoing, which could have a Material Adverse Effect on Farmland. SECTION 3.09 AUTHORIZATION. Farmland has the corporate power and authority to enter into and to perform its obligations under this Agreement (subject to the approvals of its members as required by Section 5.01(b)). This Agreement and the Transaction have been duly and validly authorized by the Board of Directors of Farmland, and (except for the approvals of its members as required by Section 5.01(b)) no other corporate action is required by Farmland in connection with this Agreement or the Transaction. This Agreement constitutes the valid and binding agreement of Farmland, enforceable against Farmland in accordance with its terms, except to the extent such enforcement may be limited by the application of equitable principles where equitable relief is sought or bankruptcy and other laws relating to the enforcement of creditors' rights generally. -15- SECTION 3.10 INSURANCE. Farmland has secured appropriate insurance policies which (i) are issued by sound and reputable insurance companies duly authorized to write said insurance, (ii) are in full force and effect, (iii) are sufficient for compliance with all requirements of law and all agreements to which Farmland is a party, and (iv) provide reasonable insurance coverage for the assets and operations of Farmland and all liabilities related thereto. SECTION 3.11 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by Farmland of this Agreement and the consummation of the Transaction by Farmland require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than (a) the filing of appropriate documents to effect the Plan of Merger under applicable law, (b) compliance with any applicable requirements of the HSR Act, and (c) other actions or filings which if not taken or made would not, individually or in the aggregate, have a Material Adverse Effect on Farmland or the Surviving Entity following the Effective Time. SECTION 3.12 SUBSIDIARIES. Each Subsidiary of Farmland is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, has all powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except for those the absence of which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Farmland. Each Subsidiary of Farmland is duly qualified to do business and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on Farmland. SECTION 3.13 SEC FILINGS. (a) Farmland has delivered to CHSC (i) its annual report on Form 10-K for its fiscal year ended August 31, 1998, (ii) its quarterly reports on Form 10-Q for its fiscal quarters ended after August 31, 1998, (iii) all of its other reports, statements, schedules and registration statements filed with the SEC since August 31, 1998 (the documents referred to in this Section 3.13(a) being referred to collectively as the "Farmland SEC Documents"). (b) As of its filing date, each Farmland SEC Document complied as to form in all material respects with the applicable requirements of the Exchange Act. (c) As of its filing date, each Farmland SEC Document filed pursuant to the Exchange Act did not contain any untrue statement of a material fact or omit to state any material fact -16- necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. SECTION 3.14 ABSENCE OF CERTAIN CHANGES. Except as set forth in the Farmland Disclosure Schedule, since May 31, 1999, Farmland and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or development of a state of circumstances or facts which has had or reasonably would be expected to have, individually or in the aggregate, a Material Adverse Effect on Farmland; (b) any transaction or commitment made, or any contract, agreement or settlement entered into, by (or judgment, order or decree affecting) Farmland or any of its Subsidiaries relating to its assets or business (including the acquisition or disposition of any assets) or any relinquishment by Farmland or any of its Subsidiaries of any contract or other right, in either case, material to Farmland and its Subsidiaries taken as a whole, other than transactions, commitments, contracts, agreements or settlements (including without limitation settlements of litigation and tax proceedings) in the ordinary course of business consistent with past practice, those contemplated by this Agreement, or as agreed to in writing by CHSC; (c) any change in any method of accounting or accounting practice (other than any change for tax purposes) by Farmland or any of its Subsidiaries, except for any such change which is not significant or which is required by reason of a concurrent change in GAAP; or (d) any increase in (or amendments to the terms of) compensation, bonus or other benefits payable to directors, officers or employees of Farmland or any of its Subsidiaries, other than in the ordinary course of business consistent with past practice, as permitted by this Agreement, or as agreed to in writing by CHSC. SECTION 3.15 TAXES. Except as set forth in the Farmland Balance Sheet dated May 31, 1999 (including the notes thereto) and except as would not, individually or in the aggregate, have a Material Adverse Effect on Farmland, (i) all Farmland Tax Returns required to be filed with any taxing authority by, or with respect to, Farmland and its Subsidiaries have been filed in accordance with all applicable laws; (ii) Farmland and its Subsidiaries have timely paid all Taxes shown as due and payable on the Farmland Tax Returns that have been so filed, and, as of the time of filing, the Farmland Tax Returns correctly reflected the facts regarding the income, business, assets, operations, activities and the status of Farmland and its Subsidiaries (other than Taxes which are being contested in good faith and for which adequate reserves are reflected on the Farmland Balance Sheet); (iii) Farmland and its Subsidiaries have made provision for all Taxes payable by Farmland and its Subsidiaries for which no Farmland Tax Return has yet been filed; (iv) the charges, accruals and reserves for Taxes with respect to Farmland and its Subsidiaries reflected on the Farmland Balance Sheet are adequate under GAAP to cover the Tax liabilities accruing through the date thereof; (v) there is no action, suit, proceeding, audit or claim now proposed or pending against or with respect to Farmland or any of its Subsidiaries in respect of any Tax where there is a reasonable possibility of an adverse determination; and (vi) to the best of Farmland's knowledge and belief, neither Farmland nor any of its Subsidiaries is liable for any Tax imposed on any entity other than such Person, except as the -17- result of the application of Treas. Reg. Section 1.1502-6 (and any comparable provision of the tax laws of any state, local or foreign jurisdiction) to the affiliated group of which Farmland is the common parent. SECTION 3.16 EMPLOYEE BENEFIT PLANS. (a) Prior to the date hereof, Farmland has provided CHSC with a list identifying each material "employee benefit plan," as defined in Section 3(3) of ERISA, each material employment, severance or similar contract, plan, arrangement or policy applicable to any director, former director, employee or former employee of Farmland and each material plan or arrangement (written or oral), providing for compensation, bonuses, profit-sharing, stock option or other stock related rights or other forms of incentive or deferred compensation, vacation benefits, insurance coverage (including any self-insured arrangements), health or medical benefits, disability benefits, workers' compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, health, medical or life insurance benefits) which is maintained, administered or contributed to by Farmland and covers any employee or director or former employee or director of Farmland, or under which Farmland has any liability. Such material plans (excluding any such plan that is a "multiemployer plan", as defined in Section 3(37) of ERISA) are referred to collectively herein as the "Farmland Employee Plans". (b) Each Farmland Employee Plan has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations (including but not limited to ERISA and the Code) which are applicable to such Plan, except where failure to so comply would not, individually or in the aggregate, have a Material Adverse Effect on Farmland. (c) Neither Farmland nor any affiliate of Farmland has incurred a liability under Title IV of ERISA that has not been satisfied in full, and no condition exists that presents a material risk to Farmland or any affiliate of Farmland of incurring any such liability other than liability for premiums due the Pension Benefit Guaranty Corporation (which premiums have been paid when due). (d) Each Farmland Employee Plan which is intended to be qualified under Section 401(a) of the Code is so qualified and has been so qualified during the period from its adoption to date, and each trust forming a part thereof is exempt from federal income tax pursuant to Section 501(a) of the Code. (e) No director or officer or other employee of Farmland or any of its Subsidiaries will become entitled to any retirement, severance or similar benefit or enhanced or accelerated benefit solely as a result of the transactions contemplated hereby. (f) Each Farmland Employee Plan that provides for post-retirement health and medical, life or other insurance benefits for retired employees of Farmland or any of its Subsidiaries has been adequately reserved for in Farmland's financial statements. -18- (g) There has been no amendment to, written interpretation or announcement (whether or not written) by Farmland or any of its affiliates relating to, or change in employee participation or coverage under, any Farmland Employee Plan which would increase materially the expense of maintaining such Farmland Employee Plan above the level of the expense incurred in respect thereof for the 12 months ended May 31, 1999. SECTION 3.17 ENVIRONMENTAL MATTERS. Except as set forth in the Farmland SEC Documents filed prior to the date hereof and with such exceptions as, individually or in the aggregate, have not had, and would not reasonably be expected to have, a Material Adverse Effect on Farmland (i) no notice, notification, demand, request for information, citation, summons, complaint or order has been received by, and no investigation, action, claim, suit, proceeding or review is pending or, to the knowledge of Farmland or any of its Subsidiaries, threatened by any Person against, Farmland or any of its Subsidiaries, and no penalty has been assessed against Farmland or any of its Subsidiaries, in each case, with respect to any matters relating to or arising out of any Environmental Law; (ii) Farmland and its Subsidiaries are and have been in compliance with all Environmental Laws; (iii) there are no liabilities of Farmland or any of its Subsidiaries relating to or arising out of any Environmental Law of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability; and (iv) there has been no environmental investigation, study, audit, test, review or other analysis conducted of which Farmland has knowledge in relation to the current or prior business of Farmland or any of its Subsidiaries or any property or facility now or previously owned, leased or operated by Farmland or any of its Subsidiaries which has not been delivered to CHSC at least five days prior to the date hereof. All liabilities of Farmland or any of its Subsidiaries relating to or arising out of any Environmental Law of any kind whatsoever have been adequately reserved for on the financial statements of Farmland, or for unconsolidated Subsidiaries, on the financial statements of such Subsidiaries. SECTION 3.18 POOLING; TAX TREATMENT. The parties intend that the Transaction be accounted for under the "pooling of interests" method under the requirements of Opinion No. 16 (Business Combinations) of the Accounting Principles Board of the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, and the rules and regulations of the Securities and Exchange Commission. Neither Farmland nor any of its affiliates has taken or agreed to take any action or is aware of any fact or circumstance that would prevent the Transaction from qualifying (i) for "pooling of interests" accounting treatment as described above or (ii) as a 368 Reorganization. SECTION 3.19 NO DISSENTERS' RIGHTS. No member of Farmland or any other holder of equity of Farmland have the right to dissent from the Transaction and receive payment for their interest in cash or otherwise receive any property or other interest in the Transaction, other than as provided in the Plan of Merger. -19- SECTION 3.20 FULL DISCLOSURE. Farmland has disclosed to CHSC all facts material to the transactions contemplated in this Agreement, including disclosure of all material contracts (as such term is described in Item 601 of Regulation S-K). No representation, warranty, or covenant by Farmland contained in this Agreement or the Plan of Merger, and no statement contained in any certificate, schedule, or other documents or instrument furnished to CHSC pursuant hereto or in connection with the transactions contemplated hereby, including responses to CHSC inquiries put to Farmland in the course of its investigation to confirm the warranties and representations of Farmland in this Agreement, when taken as a whole, contains or will contain any untrue statement of a material fact or omits or will omit a material fact which would make it misleading as to Farmland. ARTICLE IV PRE-CLOSING COVENANTS The parties agree as follows with respect to the period between the execution of this Agreement and the Closing Date: SECTION 4.01 SELECTION OF STRUCTURE. The board of directors of each of CHSC and Farmland shall work together to determine whether Structure A or Structure B shall be selected as the most appropriate structure for the Transaction. If Structure B is selected, CHSC agrees to take such action as the sole member of Acquisition Co., or otherwise, to permit Acquisition Co. to take such actions as may be necessary to effect the CHSC/Acquisition Co. Merger pursuant to applicable law, it being understood that following such Merger the Surviving Entity shall be reincorporated as a cooperative association under Chapter 308A of the Minnesota Statutes as soon as practicable after the issue or issues that precluded use of Structure A have been resolved, unless the board of directors of the Surviving Entity, by a three-fourths (3/4) vote, determines otherwise. SECTION 4.02 GOOD FAITH EFFORTS. Each party will use its good faith efforts (i) to take all action necessary to render accurate, as of the Closing Date, its representations and warranties contained herein, and to refrain from taking any action which would render any such representation or warranty inaccurate as of the Closing Date, (ii) to perform or cause to be satisfied each covenant or condition to be performed or satisfied by it pursuant to this Agreement or the Plan of Merger, and to cause the Transaction to be consummated, and (iii) to obtain all licenses or other approvals required to be obtained by it from any appropriate governmental or regulatory body or other person in connection with the carrying out of the Transaction and the continued operation of business by the Surviving Entity after the Closing Date, including without limitation the consents and approvals identified in each party's Disclosure Schedule. -20- SECTION 4.03 PRESERVATION OF BUSINESS. Each party shall, and shall cause each of its Subsidiaries to, conduct its business in the ordinary course and in a manner consistent with its past practices (except as expressly contemplated hereby), and shall use good faith efforts to preserve intact its business organization, properties (except as they may be sold, used or otherwise disposed of in the ordinary course) and the good will of its members, suppliers, customers and others having business relationships with it. SECTION 4.04 CONDUCT OF BUSINESS. Each Party agrees to not engage in, and agrees to cause each of its Subsidiaries not to engage in, any practice, take any action, or enter into any transaction outside of the ordinary course of business without the prior consent of the other party to this Agreement. Without limiting the generality of the foregoing, each party shall not and each party agrees to cause each of its Subsidiaries to not: (a) grant to any person any option to purchase, or other right to acquire, capital stock or other equity interests, except for allocation of patronage equities in a manner consistent with past practice; (b) issue any capital stock or other equity interests, except in the ordinary course of business; (c) make any material amendment to enter into or terminate any material contract, lease or understanding; (d) amend its Articles of Incorporation, Bylaws, or any board policies; (e) incur any indebtedness for borrowed money or make any commitment to borrow money, except indebtedness incurred in the ordinary course of business pursuant to credit arrangements existing as of the date of this Agreement (including any renewals thereof); (f) make any material capital expenditures other than in the ordinary course of business; (g) mortgage any of its assets, or except in the ordinary course of business, sell any of its assets having an aggregate value which would be material to its business; (h) pay any dividends or make any distributions with respect to its capital stock or equity interests, except in the ordinary course of business; -21- (i) reclassify, combine, subdivide, split-up, or amend its capital stock or equity interests; (j) purchase, acquire or redeem any shares of capital stock or other equity interests (other than in satisfaction of allocated losses), except pursuant to the existing equity redemption/base capital plans of the party; or (k) agree or commit to do any of the foregoing. SECTION 4.05 MEETINGS OF MEMBERS. The parties will take all steps necessary to call special meetings of, and/or mail votes by, the members of Farmland and CHSC, to be held on or around November 23, 1999 for purposes of considering and voting on the Transaction and other matters covered by this Agreement in accordance with their respective Articles of Incorporation, Bylaws and applicable law. The parties will cooperate with each other in connection with the special member meetings and/or mail votes and will develop a mutually agreed upon plan for disseminating information concerning the Transaction to their members (including holding member information meetings and preparation of a joint statement of terms and conditions to be mailed to members). SECTION 4.06 FULL ACCESS. Each party will permit the authorized representatives of the other party to have full access at all reasonable times, and in a manner so as not to interfere with the normal business operations of such party, to all premises, properties, personnel, books, records (including tax records), contracts, and documents of or pertaining to such party. The obligations of each party with respect to any "Confidential Information" (as such term is defined in that certain Confidentiality Agreement between the parties dated April 8, 1999 (the "Confidentiality Agreement")) furnished by the other party shall be governed in all respects by the Confidentiality Agreement, the terms of which are incorporated herein by this reference. If for any reason the Transaction is not consummated, each party will promptly return all documents, papers, books, records and other materials (and all copies thereof) embodying any Confidential Information obtained in the course of its investigation and evaluation. SECTION 4.07 NOTICE OF DEVELOPMENTS. Each party will give prompt written notice to the other of any development which could reasonably be expected to result in a Material Adverse Effect on such party or which would cause a breach of any of its representations and warranties contained herein. Except as specified in such written notice, no disclosure by a party pursuant to this Section 4.07 shall be deemed to amend or supplement such party's Disclosure Schedule or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant. -22- SECTION 4.08 EXCLUSIVE. Neither party will (i) solicit, initiate, or encourage the submission of any proposal or offer from any person relating to the acquisition of any capital stock or other voting securities, or any substantial portion of the assets of, such party (including any acquisition structured as a merger, consolidation, or share exchange) or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any person to do or seek any of the foregoing. Each party will notify the other party immediately if any person makes any proposal, offer, inquiry, or contact with respect to any of the foregoing. SECTION 4.09 HART-SCOTT-RODINO FILINGS. CHSC and Farmland shall prepare and file with the Antitrust Division of the U.S. Justice Department (the "Antitrust Division") and the Federal Trade Commission (the "FTC"), all reports required to be filed in connection with the Transaction pursuant to the HSR Act. Each of CHSC and Farmland shall cooperate fully with each other in preparation of such reports. If either the Antitrust Division or the FTC requests that additional information be filed pursuant to the HSR Act, CHSC and HSR shall prepare and file such additional information as soon as practicable after the request, and shall cooperate fully with each other in preparation of such additional information. With respect to preparation or filing of any of the reports or additional information described in this Section 4.09, each party shall bear its own costs. SECTION 4.10 TAX AND ACCOUNTING TREATMENT. Each of the parties shall not take any action and shall not fail to take any action, which action or failure to act would prevent, or would be reasonably likely to prevent, the Transaction from qualifying (a) for "pooling of interests" accounting treatment as described in Sections 2.19 and 3.19, or (b) as a 368 Reorganization. ARTICLE V CLOSING CONDITIONS SECTION 5.01 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective obligations of CHSC and Farmland to consummate the Transaction and other matters described in this Agreement are, at their respective options, subject to the satisfaction or waiver of each of the following conditions on or before the Closing Date: -23- (a) The members of CHSC shall have approved this Agreement, the Plan of Merger, and the Transaction, all in accordance with the requirements of applicable law and the Articles of Incorporation and Bylaws of CHSC; (b) The members of Farmland shall have approved this Agreement, the Plan of Merger, and the Transaction, all in accordance with the requirements of applicable law and the Articles of Incorporation and Bylaws of Farmland; (c) If Structure B is to be used to effect the combination, all steps then legally feasible to reincorporate the Surviving Entity as a Minnesota cooperative association (as described in Section 4.01 hereof) shall have been taken; (d) The parties shall have made the filings required by Section 4.09 above under the HSR Act, and all applicable time periods under the HSR Act shall have expired; (e) No injunction, restraining order or order of any nature issued by any court of competent jurisdiction, government or governmental agency enjoining the Transaction shall have been issued and remain in effect; (f) All consents, approvals and waivers which are necessary in connection with the Transaction, or any part thereof, shall have been obtained, including the consents and approvals referred to in Section 4.02 above, other than any such consents, approvals or waiver as do not, individually or in the aggregate, have a Material Adverse Effect on the Surviving Entity; and (g) No action shall have been threatened or instituted by any governmental agency or any other person challenging the legality of the Transaction, seeking to prevent or delay consummation of the Transaction or seeking to obtain divestiture or other relief in the event of consummation of the Transaction. It is understood in the event that such an action is threatened or instituted, the parties will first attempt for a period of 90 days to obtain dismissal or other favorable resolution of such threatened or actual action prior to exercise of their right to terminate hereunder. SECTION 5.02 ADDITIONAL CONDITIONS TO OBLIGATION OF CHSC. The obligation of CHSC to consummate the Transaction is, at its option, subject to the satisfaction or waiver of each of the following additional conditions at the Closing Date. (a) All the representations and warranties of Farmland contained in this Agreement shall be true and correct in all material respects on the Closing Date as though such representations and warranties were made on and as of the Closing Date, and Farmland shall have performed all of its obligations and complied with all of its covenants contained -24- in this Agreement and in the Plan of Merger to be performed or complied with prior to the Closing Date; (b) There shall have occurred no change since the date hereof in the assets, liabilities, financial condition or operations of Farmland which, in the reasonable judgment of CHSC, has or is likely to have a Material Adverse Effect on the Surviving Entity; provided, however, that an adverse ruling in the Terra tax case referred to on Exhibit D hereto shall not be considered as such a change; (c) CHSC shall have received a certificate, dated as of the Closing Date, and executed by the President of Farmland, certifying in such detail as CHSC may reasonably request as to the accuracy of such representations and warranties, the fulfillment of such obligations, compliance with such covenants and satisfaction of the conditions to CHSC's obligation as of the Closing Date; and (d) All actions, proceedings and documents necessary to carry out the Transaction shall be reasonably satisfactory to CHSC SECTION 5.03 ADDITIONAL CONDITIONS TO OBLIGATION OF FARMLAND. The obligation of Farmland to consummate the Transaction is, at its option, subject to the satisfaction or waiver of each of the following additional conditions on or before the Closing Date: (a) All the representations and warranties of CHSC contained in this Agreement shall be true and correct in all material respects on the Closing Date as though such representations and warranties were made on and as of the Closing Date, and CHSC shall have performed all of its obligations and complied with all of its covenants contained in this Agreement and in the Plan of Merger to be performed or complied with prior to the Closing Date; (b) There shall have occurred no change since the date hereof in the assets, liabilities, financial condition or operations of CHSC which, in the reasonable judgment of Farmland, has or is likely to have a Material Adverse Effect on the Surviving Entity; (c) Farmland shall have received a certificate, dated as of the Closing Date, executed by the President of CHSC, certifying in such detail as Farmland may reasonably request as to the accuracy of such representations and warranties, the fulfillment of such obligations, compliance with such covenants and satisfaction of the conditions to Farmland's obligations as of the Closing Date; and (d) All actions, proceedings and documents necessary to carry out the Transaction shall be reasonably satisfactory to Farmland, including the effectiveness of the CHSC/Acquisition Co. Merger, if Structure B is selected. -25- ARTICLE VI POST-CLOSING AGREEMENTS With respect to issues relating to the Surviving Entity subsequent to the Effective Time, CHSC and Farmland agree as follows: SECTION 6.01 CONSOLIDATION OF BENEFIT PLANS. Within a reasonable period of time after the Effective Time, the Surviving Entity shall take steps to consolidate the various benefit plans provided to the employees of the respective parties in accordance with the applicable provisions of the Code and ERISA. This consolidation of plans shall be accomplished in a manner to be determined by the Surviving Entity. SECTION 6.02 PATRONAGE DISTRIBUTIONS. Following the Effective Time and within the time period required by Subchapter T of the Code, the Surviving Entity will make patronage allocations to the former members of each party (a) based on patronage transactions with the respective parties during each party's respective fiscal year or portion thereof immediately preceding the Effective Time and (b) in accordance with the terms of the bylaws of the party that are in effect during the period such patronage transaction occurred. The distributions of such allocation shall be in the form of cash and equity credits in a manner consistent with the previous patronage distributions of each party. SECTION 6.03 INDEMNIFICATION OF FORMER OFFICERS; INSURANCE. The surviving Entity shall indemnify each director, officer, manager, employee or agent of CHSC or Farmland, and each person serving at the request of CHSC or Farmland as a director, officer, manager, employee or agent of any other entity, partnership, joint venture, trust or enterprise, against any losses, claims or expenses incurred by such person prior to the Effective Time that would be indemnifiable under Bylaws of the Surviving Entity as in force on the Effective Time and otherwise to the fullest extent provided or permitted by any statute which applies to any type of corporation of the state of incorporation of the Surviving Entity as in effect at such time. The Surviving Entity shall maintain insurance coverage against any such loss, claim or expense in an amount of at least $20,000,000, subject to standard exclusions and exceptions to coverage, for a period of not less than six (6) years after the Effective Time, subject to the right of the Board of Directors to discontinue such coverage on grounds of unreasonable cost. -26- ARTICLE VII TERMINATION SECTION 7.01 TERMINATION OF AGREEMENT. This Agreement shall be terminated and the Transaction abandoned if at any time prior to the Closing: (a) The members of CHSC at the CHSC member meeting called for the purpose of voting on the Transaction, fail to approve the Transaction as required by Section 5.01(a), or the members of Farmland at the Farmland member meeting called for the purpose of voting on the Transaction, fail to approve the Transaction as required by Section 5.01(b); or (b) The parties mutually agree in writing to terminate this Agreement; or (c) Either party delivers a written notice to the other to the effect that (i) one or more of the conditions to its obligations as set forth herein cannot be met, (ii) the other party has defaulted in a material respect under one or more of its covenants or agreements contained herein, or (iii) any of the representations or warranties of the other party are or have become materially untrue or incorrect as of the date of such notice, and in any case such condition or conditions have not been satisfied, such default or defaults have not been remedied or such representation or warranty has not been rendered true and correct within thirty (30) days after such notice is mailed; or (d) The Closing has not occurred on or before December 31, 2000, or such later date as the parties may mutually agree upon. SECTION 7.02 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to Section 7.01 above, all rights and obligations of the parties hereunder shall terminate without any liability of either party to the other (except for any liability of a party for breach of this Agreement); provided, however, that the confidentiality and return of documents provisions contained in or referred to Section 4.06 above shall survive any such termination. -27- ARTICLE VIII MISCELLANEOUS SECTION 8.01 WAIVER OF CONDITIONS. Any party may, at its option, waive in writing any and all of the conditions herein contained to which its obligations hereunder are subject. A party, by consummating the transactions contemplated herein, shall be deemed to have waived any breach of a warranty, representation, covenant or condition of which such party received written notice prior to the Closing Date if the notice specifically referred to this Section 8.01 and described the breach in reasonable detail. SECTION 8.02 AMENDMENT. The parties by mutual consent may, before or after approval of this Agreement by the members, amend, modify or supplement this Agreement in such manner as may be agreed upon in writing. SECTION 8.03 BINDING NATURE. This Agreement shall be binding upon and inure only to the benefit of the parties hereto and their respective successors and assigns, provided that neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or delegated by any of the parties hereto without the prior written consent of the other parties hereto. SECTION 8.04 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 8.05 ENTIRE AGREEMENT. Except for the Confidentiality Agreement (the terms of which are incorporated herein by reference pursuant to Section 4.06 hereof), this Agreement, the Plan of Merger and the other documents referred to herein and therein set forth the entire understanding of the parties hereto with respect to the matters provided for herein and therein and supersede all prior agreements, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of either party. SECTION 8.06 NOTICES. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given if delivered or mailed, certified or registered mail, with postage prepaid: -28- If to CHSC: Cenex Harvest States Cooperatives 5500 CENEX Drive Inver Grove Heights, MN 55077-1733 Attn: Vice President and General Counsel If to Farmland: Farmland Industries, Inc. Department 62 3315 North Oak Trafficway Kansas City, Missouri 64116 Attn: General Counsel SECTION 8.07 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the parties contained in Articles II and III of this Agreement shall form the basis for closing conditions only, shall not survive the Closing Date and, except to the extent of the principles for the Capital Plan in Exhibit D hereto, shall not form the basis for any action by or on behalf of either party or any third party for breach, misrepresentation or indemnity at any time after the Closing Date. SECTION 8.08 CAPTIONS. The article and section headings of this Agreement are for convenience only and shall not affect the meaning or construction of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. CENEX HARVEST STATES FARMLAND INDUSTRIES, INC. COOPERATIVES By /s/ Noel K. Estenson By /s/ Harry D. Cleberg --------------------------------- -------------------------------------- Its Chief Executive Officer Its President and Chief Executive Officer -------------------------------- ------------------------------------- Attest: /s/ Bernard L. Sanders --------------------------------- Corporate Secretary The undersigned, UCB Acquisition Co., an Ohio cooperative corporation, the only member of which is Cenex Harvest States Cooperatives, hereby joins in the foregoing Transaction Agreement and agrees to take all actions required to effect Structure B, as therein defined, if said structure is selected pursuant to Section 1.01 of said Transaction Agreement. UCB ACQUISITION CO. By /s/ Noel K. Estenson Date: September 23, 1999 --------------------------------- -------------------------------------- President -29- EXHIBIT A-1 STRUCTURE A AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Plan") is dated as of _______ __, 2000, and is by and between CENEX HARVEST STATES COOPERATIVES ("CHSC") and FARMLAND INDUSTRIES, INC. ("Farmland"), each of which may be referred to herein as a "Constituent Cooperative"' and both of which may be collectively referred to herein as the "Constituent Cooperatives". RECITALS WHEREAS, CHSC is a cooperative association organized under Chapter 308A of the Minnesota Statutes (as amended, the "Minnesota Act"), and Farmland is a cooperative corporation organized under Article 16 of Chapter 17 of the Kansas Statutes (as amended, the "Kansas Act"); and WHEREAS, the respective Boards of Directors of CHSC and Farmland and the respective members of CHSC and Farmland have approved and adopted this Plan and the transactions contemplated hereby in the manner required by Section 308A.801 of the Minnesota Act and Sections 17-1637 and 17-1638 of the Kansas Act, and in the manner required by their respective Articles of Incorporation and Bylaws; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements of the parties contained herein, the parties hereto agree as follows: AGREEMENT SECTION 1. THE MERGER. As of the Effective Time (as defined in Section 8), CHSC and Farmland shall combine through merger (the "Merger"), in accordance with the applicable provisions of the Minnesota Act and the Kansas Act; and CHSC, whose name shall change to "United Country Brands, Inc." and whose Articles of Incorporation and Bylaws each shall be amended and restated in their entirety as further provided herein, shall be the surviving cooperative and shall continue to exist by virtue of, and shall be governed by, the Minnesota Act. SECTION 2. ARTICLES OF MERGER. On or before the Effective Time, CHSC and Farmland each shall execute articles of merger (the "Articles of Merger") and/or a certificate of merger (the "Certificate of Merger") setting forth the information required by and otherwise in compliance with Section 308A.801 of the Minnesota Act and Sections 17-1637 and 17-1638 of the Kansas Act. The Articles of Merger and/or the Certificate of Merger shall be filed with the Secretary of State of the State of Minnesota or as otherwise required by the Minnesota Act, and with the Secretary of State -1- of the State of Kansas or as otherwise required by the Kansas Act, and shall provide that the Merger shall become effective on the Effective Time. SECTION 3. EFFECT OF THE MERGER. From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members: (a) United Country Brands, Inc., as the surviving cooperative in the Merger, shall have all of the rights, privileges, immunities and powers, and shall be subject to all the duties and liabilities, of a cooperative organized under the Minnesota Act; (b) United Country Brands, Inc., as the surviving cooperative in the Merger, shall possess all of the rights, privileges, immunities and franchises, of a public as well as a private nature, of each Constituent Cooperative, and all property, real, personal and mixed, and all debts due on whatever account, including all choses in action, and each and every other interest of or belonging to or due to each Constituent Cooperative, shall be deemed to be and hereby is vested in United Country Brands, Inc., without further act or deed, and the title to any property, or any interest therein, vested in either Constituent Cooperative, shall not revert or be in any way impaired by reason of the Merger; (c) United Country Brands, Inc. shall be responsible and liable for all of the liabilities and obligations of each Constituent Cooperative, and any claim existing or action or proceeding pending by or against one of the Constituent Cooperatives may be prosecuted as if the Merger had not taken place and United Country Brands, Inc. may be substituted in its place; (d) neither the rights of creditors nor any liens upon the property of either of the Constituent Cooperatives shall be impaired by the Merger; and (e) the Merger shall have any other effect set forth in the Minnesota Act and the Transaction Agreement dated September __, 1999, by and between CHSC and Farmland (the "Transaction Agreement"), all with the effect and to the extent provided in the applicable provisions of the Minnesota Act and the Kansas Act. SECTION 4. ARTICLES OF INCORPORATION; BYLAWS. From and after the Effective Time, pursuant to the Articles of Merger and without any further action by the Constituent Cooperatives or any of their respective members: (a) the name of CHSC, as the surviving cooperative in the Merger, shall be changed to "United Country Brands, Inc."; and -2- (b) the Articles of Incorporation of United Country Brands, Inc., as the surviving cooperative in the Merger, shall be amended and restated in their entirety to read as set forth in SCHEDULE I attached hereto and made a part hereof (the "Surviving Entity Articles"). From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members, the Bylaws of United Country Brands, Inc., as the surviving cooperative in the Merger, shall be amended and restated in their entirety to read as set forth in EXHIBIT A-2 attached to the Transaction Agreement and made a part hereof (the "Surviving Entity Bylaws"). SECTION 5. BOARD OF DIRECTORS. From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members, each person serving as a director of one of the Constituent Cooperatives immediately prior to the Effective Time shall become a director of United Country Brands, Inc., as the surviving cooperative in the Merger, to serve in accordance with the Surviving Entity Bylaws. SECTION 6. EXCHANGE, REDESIGNATION AND CONVERSION AND CONTINUATION OF CAPITAL STOCK, NON-STOCK EQUITY INTERESTS, PATRONS' EQUITIES AND MEMBERSHIPS. As of the Effective Time, the manner and basis of exchanging and continuing the shares of capital stock, non-stock equity interests, patronage equity interests (including all entitlements to patronage refunds), any other allocated equity interests, and unallocated and capital reserves of CHSC and Farmland (all such interests referred to herein as "CHSC Equity Interests" or "Farmland Equity Interests", respectively), and membership interests in CHSC and Farmland, for equal Equity Interests and membership interests in United Country Brands, Inc., shall be as set forth in this Section 6: (a) CONTINUATION OF CHSC MEMBERSHIPS. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members, each member of CHSC shall be and continue as a member of United Country Brands, Inc., to the extent such member is eligible for membership under the Surviving Entity Articles and the Surviving Entity Bylaws, in such class and with such incidents of membership as are set forth in the Surviving Entity Articles and the Surviving Entity Bylaws. (b) CONTINUATION OF FARMLAND MEMBERSHIPS. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members, each member of Farmland shall become and be a member of United Country Brands, Inc., to the extent such member is eligible for membership under the Surviving Entity Articles and the Surviving Entity Bylaws, in such class and with such incidents of membership as are set forth in the Surviving Entity Articles and the Surviving Entity Bylaws. (c) CONTINUATION OF CHSC EQUITY INTERESTS. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective -3- members, all CHSC Equity Interests standing on the books of CHSC immediately prior to the Effective Time shall be determined and continued as like and equal Equity Interests in United Country Brands, Inc. at their stated dollar amount on a dollar-for-dollar basis, year of issue (as determined necessary), and with the other rights and preferences of such CHSC Equity Interests; provided, however, that as of the Effective Time, an amount equal to the unallocated capital reserves of CHSC, minus an amount equal to the deferred patronage equity of CHSC (as computed from the books and records of CHSC as of the Effective Time, in accordance with generally accepted accounting principles, consistently applied), and minus $100 million, shall be allocated and distributed to the CHSC members (in such manner and to such members as the CHSC board of directors shall specify prior to the Effective Time) in the form of allocated nonpatronage equity of United Country Brands, Inc. (d) CONVERSION OF FARMLAND EQUITY INTERESTS. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, all Farmland Equity Interests standing on the books of Farmland immediately prior to the Effective Time shall be converted into equal Equity Interests in United Country Brands, Inc. at their stated dollar amount on a dollar-for-dollar basis, as follows: (i) Common Stock and Associate Member Common Stock. Each share of common stock and associate member common stock of Farmland issued and outstanding or otherwise standing on the books of Farmland immediately prior to the Effective Time shall be exchanged for allocated patronage equity or allocated nonpatronage equity of United Country Brands, Inc. in a face amount of $25.00, and in such designations or series so as to preserve the year of issue (as United Country Brands, Inc. deems necessary) and other terms and conditions of the original issuance. (ii) Patronage Equity Interests. All capital credits, patronage refunds and any other allocated or to be allocated equity interests (including all entitlements to patronage refunds) as of the Effective Time which are not included in clause (i) above shall be exchanged for allocated patronage equity or allocated nonpatronage equity of United Country Brands, Inc. in a face amount equal to such capital credits, patronage refunds, allocated or to be allocated equity interests, entitlements to patronage refunds, or other equity interests in such denominations or other designations or series so as to preserve the year of issue (as United Country Brands, Inc. deems necessary) and other terms and conditions of the original issuance. -4- (iii) SF Services Warrants. The outstanding Warrants for Equity Interests of Farmland issued in the acquisition of SF Services, Inc. shall, from and after the Effective Time, represent warrants to convert into United Country Brands, Inc. allocated patronage equity or allocated nonpatronage equity in the same face amount as the Warrants could have been converted into face amount Farmland Equity Interests. (iv) Unallocated Surplus. There shall be allocated to the Farmland members (in such manner and to such members as the Farmland board of directors shall specify prior to the Effective Time) an amount equal to the amount by which Farmland's earned surplus account (as computed from the books and records of Farmland as of the Effective Time, in accordance with generally accepted accounting principles, consistently applied) exceeds $100 million, and United Country Brands, Inc. allocated nonpatronage equity shall be so issued to such Farmland members as of the Effective Time; provided, however, that the United Country Brands, Inc. allocated nonpatronage equity issued hereunder shall be registered in the name of United Country Brands, Inc. to be held by it in escrow and disposed of as provided in the Capital Plan of United Country Brands, Inc. (v) Preferred Stock. Each share of 8% Series A Cumulative Redeemable Preferred Stock of Farmland issued and outstanding or otherwise standing on the books of Farmland immediately prior to the Effective Time shall be converted into one share of 8% Series A Cumulative Redeemable Preferred Stock of United Country Brands, Inc. (vi) Net Effect. The net effect of the conversion of Farmland Equity Interests for equal Equity Interests in United Country Brands, Inc. shall be that the holders of Farmland Equity Interests standing on the books of Farmland immediately prior to the Effective Time shall hold and will have equal Equity Interests in United Country Brands, Inc. immediately following the Effective Time, in terms of stated dollar amount on a dollar-for-dollar basis, year of issue (as determined necessary) and any other rights and preferences. (e) Notwithstanding the foregoing provisions, the following shall be canceled and extinguished as of the Effective Time: (i) any membership interest which Farmland has in CHSC; (ii) any CHSC Equity Interest held by Farmland; (iii) any membership interest which CHSC has in Farmland; and -5- (iv) any Farmland Equity Interest held by CHSC. (f) SURVIVING ENTITY ARTICLES AND BYLAWS TO GOVERN. Membership in United Country Brands, Inc. and all Equity Interests in United Country Brands, Inc. issued or credited in exchange for Farmland Equity Interests and continued and credited with respect to CHSC Equity Interests as described above, shall in all instances be governed by the provisions of the Surviving Entity Articles and the Surviving Entity Bylaws. (g) FURTHER ASSURANCES OF HOLDERS OF EQUITY. Each holder of CHSC Equity Interests and each holder of Farmland Equity Interests shall take such action or cause to be taken such action as United Country Brands, Inc. may reasonably deem necessary or appropriate to effect the exchange and continuation of the equity interests hereunder, including without limitation the indorsement and delivery of any stock certificates or other evidences of equity being exchanged or continued hereunder. SECTION 7. FURTHER ASSURANCES. From time to time and after the Effective Time, as and when requested by United Country Brands, Inc., or its successors or assigns, CHSC and Farmland shall execute and deliver or cause to be executed and delivered all such deeds and other instruments, and shall take or cause to be taken all such further action or actions, as United Country Brands, Inc., or its successors or assigns, may deem necessary or desirable in order to vest in and confirm to United Country Brands, Inc., or its successors or assigns, title to and possession of all of the properties, rights, privileges, powers and franchises referred to in Section 3 of this Plan, and otherwise to carry out the intent and purposes of this Plan. If United Country Brands, Inc. shall at any time deem that any further assignments or assurances or any other acts are necessary or desirable to vest, perfect or confirm of record or otherwise the title to any property or to enforce any claims of CHSC or Farmland vested in United Country Brands, Inc. pursuant to this Plan, the officers of United Country Brands, Inc., or its successors or assigns, are hereby specifically authorized as attorneys-in-fact of each of CHSC and Farmland (which appointment is irrevocable and coupled with an interest), to execute and deliver any and all such deeds, assignments and assurances and to do all such other acts in the name and on behalf of each of CHSC and Farmland, or otherwise, as such officer shall deem necessary or appropriate to accomplish such purpose. SECTION 8. EFFECTIVE TIME. The Merger shall become effective at 12:02 a.m. Central Time on March 1, 2000 (the "Effective Time"). SECTION 9. TERMINATION AND AMENDMENT. (a) TERMINATION. At any time prior to the filing of this Plan, or a certificate or articles of merger in lieu thereof, with the Secretaries of State of the State of Minnesota and the State of Kansas, this Plan may be terminated by the mutual consent of the boards of directors of CHSC and Farmland notwithstanding approval of this Plan by the members or stockholders of such entities. -6- (b) AMENDMENT. In addition, the boards of directors of CHSC and Farmland may amend this Plan at any time prior to the filing of this Plan, or a certificate or articles of merger in lieu thereof, with the Secretaries of State of the State of Minnesota and the State of Kansas, provided that an amendment made subsequent to the adoption of this Plan by the members or stockholders of CHSC and Farmland shall not: (i) alter or change the amount or kind of shares, securities, cash, property or rights, or any of the proceedings, in exchange for or on conversion of all or any of the shares of any class or series thereof of such entities; (ii) alter or change any term of the articles of incorporation of United Country Brands, Inc.; or (iii) alter or change any of the terms and conditions of this Plan if such alteration or change would adversely affect the members or holders of any class or series thereof of such entities. SECTION 10. GOVERNING LAW. This Plan shall be governed by and construed in accordance with the laws of the States of Minnesota and Kansas. IN WITNESS WHEREOF, this Plan has been agreed to and executed by the duly authorized representatives of CHSC and Farmland, as of the date first set forth above. CENEX HARVEST STATES FARMLAND INDUSTRIES, INC. COOPERATIVES By By --------------------------------- -------------------------------------- Its Its -------------------------------- ------------------------------------- -7- SCHEDULE I AMENDED AND RESTATED ARTICLES OF INCORPORATION OF UNITED COUNTRY BRANDS, INC. ARTICLE I NAME, REGISTERED AGENT, REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS SECTION 1.1 NAME. The name of this cooperative association shall be United Country Brands, Inc. (this "Cooperative"). SECTION 1.2 REGISTERED AGENT AND REGISTERED OFFICE. The registered agent of this Cooperative shall be CT Corporation System. The registered office for this Cooperative shall be located at [to be inserted]. SECTION 1.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business for this Cooperative shall be in the city of Kansas City, Missouri, and in the county of Clay County, Missouri. ARTICLE II PURPOSES AND POWERS SECTION 2.1 PURPOSES. This Cooperative is organized for the following purposes: (a) to receive, handle, store, warehouse, manufacture, process, market, purchase, sell and otherwise deal in the agricultural products and services of its members, nonmember patrons and others; (b) to manufacture, buy, sell, market, store, warehouse, acquire, transport, distribute, process, produce, drill, mine, refine, and otherwise deal in and procure for its members, nonmember patrons and others, fertilizer, petroleum products, feed, grain, livestock, machinery, equipment, supplies, and other goods, products, merchandise and services used or useful in farming and the agricultural industry; (c) to engage in activities involving agricultural education, research and development, legislation and economic or social conditions pertaining to the agricultural industry; (d) to engage in the financing of the activities described above; and (e) to engage in any activity connected with or related to any such purposes, and to engage in any other lawful purpose. To this end, the business and activities of this Cooperative shall be conducted on a cooperative basis, as provided in the Bylaws of this Cooperative ("Bylaws"). SECTION 2.2 AUTHORIZATION; POWERS. In addition to other powers, this Cooperative may perform every act and thing necessary, proper, incidental or convenient to the conduct of its business or the accomplishment of its purposes. This Cooperative shall have all powers, privileges and rights conferred by applicable law. Without limiting the foregoing, this Cooperative shall have the power to: (a) borrow money from and to loan money to its members, nonmember patrons and others; (b) guarantee or stand as surety on loans made to its members, nonmember patrons and others by lenders; (c) issue bonds, deeds of trust, debentures, notes, and other obligations and to secure the same by pledge, mortgage, or trust deed on any property; and draw, make, accept, endorse, guarantee, execute, and issue promissory notes, bills of exchange, drafts, warrants, warehouse receipts, certificates and other obligations, and negotiable or transferable instruments for any purpose deemed necessary to further the objectives for which this Cooperative is formed; (d) acquire, purchase, hold, lease, encumber, sell, exchange, and convey such real estate, buildings, and personal property as this Cooperative may require; (e) purchase, acquire, own, mortgage, pledge, sell, assign, transfer or otherwise dispose of, equity or debt securities created by any other corporation or other legal entity wherever organized, with all the rights, powers and privileges of ownership thereof; (f) borrow money, to incur obligations and to assume obligations of any other person, individual, corporation or other legal entity, in any amount; and make contracts for hire; (g) issue equity and debt securities, whether certificated or uncertificated, as further provided in these Articles of Incorporation ("Articles") and in the Bylaws; 2 (h) join with other cooperatives, limited liability companies, corporations, partnerships, associations or other entities to form district, state, or national marketing, manufacturing, purchasing and service organizations and other organizations engaged in the general purposes for which this Cooperative is formed, and to purchase, acquire, and hold the capital stock or other equity interest and the notes, bonds, and other obligations of such organizations; (i) have one or more offices, and to conduct any or all of its operations and business, and promote its purposes without restriction as to places or amounts; and (j) carry on any other business in connection with the foregoing and to engage in any of such activities on its own account or as agent for others, or alone or in association with others, and to employ agents, consultants and nominees to perform any or all of the powers described herein. The powers, privileges and rights specified herein shall, except where otherwise expressed, be in no way limited or restricted by reference to or inference from the terms of any other provision of these Articles. The enumeration of powers, privileges and rights herein shall not be held to limit or restrict in any manner the general powers, privileges and rights conferred upon this Cooperative under applicable law. ARTICLE III DURATION This Cooperative shall have perpetual existence. ARTICLE IV MEMBERSHIP AND AUTHORIZED CAPITAL INSTRUMENTS SECTION 4.1 MEMBERSHIP BASIS. This Cooperative is organized on a membership basis with capital stock. SECTION 4.2 QUALIFICATION OF MEMBERS. Membership in this Cooperative shall be restricted to producers of agricultural products and associations of such producers who patronize this Cooperative in accordance with terms and conditions prescribed by the Board of Directors (the "Board") and only such producers and associations of such producers shall be eligible voting members of this Cooperative. For purposes of this Article, "producers of agricultural products" shall mean persons (including individuals and joint ventures, corporations, partnerships, limited liability companies, unincorporated associations or other legal entities owned or controlled by individual farmers, ranchers or their family groups) that are engaged in the production of one or 3 more agricultural products, including tenants of land used for the production of such products and lessors of land that receive as rent therefor any part of the product of such land. The Board may establish minimum levels of business that cooperative associations and producers must transact with or through this Cooperative to be eligible for membership in this Cooperative, and also may adopt such additional conditions, qualifications, methods of acceptance, duties, rights and privileges of membership in this Cooperative as it may from time to time deem advisable. The Board may refuse membership or provide conditional membership to an applicant in its sole and absolute discretion. A membership in this Cooperative is transferable only with the consent and approval of the Board . SECTION 4.3 MEMBER, CLASSES. This Cooperative shall have three (3) classes of members, which are hereby designated as the "Cooperative Association Member" class, the "Defined Member" class, and the "Individual Member" class, as more particularly described in the Bylaws. This Cooperative may have such additional classes of members, with such designations, and such relative rights, preferences, privileges and limitations, as may be provided in the Bylaws of this Cooperative. SECTION 4.4 VOTING RIGHTS. Voting rights in this Cooperative arise solely by virtue of membership and only members shall have voting power. Each member shall have a minimum of one (1) vote in the affairs of this Cooperative, and may otherwise be entitled to additional votes as further authorized in the Bylaws. This Cooperative has affiliated cooperative members and additional votes are provided based on the amount of business transacted, the amount of equity held and the number of members in the affiliated cooperative member. SECTION 4.5 NON-MEMBER PATRONAGE. Associations of producers of agricultural products and producers of agricultural products described in the first paragraph of Section 4.2 and other individuals and entities who patronize this Cooperative under conditions established by the Board or as provided in the Bylaws, but who are otherwise not eligible to be members of this Cooperative may nevertheless conduct business with this Cooperative on a patronage basis as a nonmember patron, as more particularly provided in the Bylaws or by Board policy. Such nonmember patrons are not members and are not entitled to voting rights or other privileges incident to membership. SECTION 4.6 BOARD OF DIRECTORS. In addition to and not by way of limitation of the powers granted to the Board by applicable law or elsewhere in these Articles or the Bylaws, the Board shall have the following authority and powers, which may be exercised from time to time at its sole and absolute discretion: (a) DEFINED BUSINESS UNITS. The Board by resolution may establish and organize separate defined business units of this Cooperative ("Defined Business Unit") with respect to the operations of this Cooperative, on such terms and conditions and having such rights, preferences, privileges and limitations as the Board deems appropriate, as may be further provided in the 4 Bylaws. The Board may sell, liquidate, dissolve or wind up any Defined Business Unit, in which event, subject to the rights of holders of preferred stock of this Cooperative, the excess of assets over liabilities of such Defined Business Unit shall be used first to redeem the Equity Participation Units (as defined below) of the Defined Business Unit on a pro rata basis. (b) EQUITY PARTICIPATION UNITS. The Board by resolution may establish and issue one or more than one class or series of equity participation units ("Equity Participation Units") in connection with each Defined Business Unit, may set forth the designation of classes or series of Equity Participation Units, and may fix the relative rights, preferences, privileges and limitations of each class or series of Equity Participation Units, as may be further provided in the Bylaws. Equity Participation Units shall not entitle the holder to voting rights and may be issued to and held only by Defined Members. Equity Participation Units may only be sold or transferred with the approval of the Board. (c) ISSUANCE OF DEBT AND/OR EQUITY. The Board by resolution may establish and issue to any person (whether member, nonmember patron, or other person) one or more than one class or series of debt or equity, may set forth the designation of classes or series of such debt or equity, and may fix the relative rights, preferences, privileges and limitations of each class or series of debt or equity, including, without limitation, one or more than one class or series of preferred stock, including specifically, the 8% Series A Cumulative Redeemable Preferred Shares, par value $25.00 per share, described in the Appendix to these Articles. Dividends may be paid on the equity capital of this Cooperative established pursuant to this Section 4.6(c); provided, however, that dividends on such equity capital may not exceed eight percent (8%) per annum. Debt or equity established pursuant to this Section 4.6(c) shall not entitle the holder to voting rights. Unless otherwise expressly authorized by the Board, equity established and issued pursuant to this Section 4.6(c) may only be sold or transferred with the approval of the Board of Directors. ARTICLE V NET INCOME AND LOSS The net income of this Cooperative in excess of dividends on equity capital and additions to reserves shall be distributed to members and nonmember patrons annually or more often on the basis of patronage. The records of this Cooperative may show the interest of members and equity holders in the reserves. Net income may be accounted for and distributed on the basis of allocation units that may be functional, divisional, departmental, geographic, or otherwise. Net income may be distributed in cash, allocated patronage equities (including without limitation patrons equities), revolving fund certificates, securities of this Cooperative, other securities, or any combination thereof. Any such allocated equity shall be redeemable only at the option of the Board. The net loss of an allocation unit or allocation units may be offset against the net income of other allocation units to the extent permitted by applicable law. The foregoing provisions of this Article V shall be implemented as more particularly provided in the Bylaws. 5 ARTICLE VI FIRST LIEN This Cooperative shall have a first lien on all equity interests standing on its books for all indebtedness of the respective holders or owners thereof to this Cooperative. This Cooperative shall also have the right, exercisable at the option of the Board, to set off such indebtedness against the face amount of such equity interests; provided, however, that nothing contained herein shall give the holder of such equity interests any right to have such set off made. ARTICLE VII CERTAIN CORPORATE ACTIONS; DISSOLUTION SECTION 7.1 SUPERMAJORITY VOTE. A merger, consolidation, liquidation or dissolution involving this Cooperative, or the sale of all or substantially all of the assets and property of this Cooperative, may be authorized by the members in accordance with applicable law; provided, however, in the event the Board declares, by resolution adopted by a majority of the Board present and voting, that the action involves or is related to a hostile takeover, then, to the extent permitted by applicable law, the action may be adopted only upon the approval of eighty percent (80%) of the total voting power of the members of this Cooperative, whether or not present and voting on the action. Notwithstanding Article X of these Articles of Incorporation, this Article may be amended only upon the approval of eighty percent (80%) of the total voting power of the members of this Cooperative, whether or not present and voting on the amendment. SECTION 7.2 DISSOLUTION, LIQUIDATION, AND WINDING UP. In the event of any dissolution, liquidation or winding up of this Cooperative, whether voluntary or involuntary, all debts and liabilities of this Cooperative shall be paid first according to their respective priorities. As more particularly provided in the Bylaws, the remaining assets shall then be paid to the holders of equity capital to the extent of their interests therein and any excess shall be paid to the patrons of this Cooperative on the basis of their past patronage. The Bylaws may provide more particularly for the allocation among the members and nonmember patrons of this Cooperative of the consideration received in any merger or consolidation to which this Cooperative is a party. ARTICLE VIII BOARD OF DIRECTORS The business and affairs of this Cooperative shall be managed by a Board of Directors of not less than twenty-five (25) directors, with the exact number of directors as shall be specified in the Bylaws. 6 ARTICLE IX LIMITATION OF DIRECTOR LIABILITY No director of this Cooperative shall be personally liable to this Cooperative or its members for monetary damages for breach of fiduciary duty as a director, except for liability: (a) for a breach of the director's duty of loyalty to this Cooperative or its members; (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (c) for a transaction from which the director derived an improper personal benefit; or (d) for an act or omission occurring prior to the date when the provisions of this Article (or predecessor thereto) became effective. It is the intention of the members of this Cooperative to limit or eliminate the personal liability of the directors of this Cooperative to the greatest extent permitted under applicable law. If amendments to applicable law are passed after the effective date of this Article which authorize cooperatives to act to further limit or eliminate the personal liability of directors, then the liability of the directors of this Cooperative shall be limited or eliminated to the greatest extent permitted by applicable law, as so amended. Any repeal or modification of this Article by the members of this Cooperative shall not adversely affect any right of or any protection available to a director of this Cooperative serving prior to or at the time of such repeal or modification. ARTICLE X AMENDMENT These Articles of Incorporation may be amended in accordance with applicable law; provided, however, in the event the Board declares, by resolution adopted by a majority of the Board present and voting, that the amendment involves or is related to a hostile takeover, then, to the extent permitted by applicable law, the amendment may be adopted only upon the approval of eighty percent (80%) of the total voting power of the members, whether or not present and voting on the amendment. # # # 7 APPENDIX RIGHTS, PREFERENCES, LIMITATIONS, RESTRICTIONS AND DESIGNATIONS OF THE 8% SERIES A CUMULATIVE REDEEMABLE PREFERRED SHARES OF UNITED COUNTRY BRANDS, INC. (i) DESIGNATION. The Series of Preferred Stock is hereby designated as "8% Series A Cumulative Redeemable Preferred Shares" (hereinafter referred to as the "Series A Preferred Shares"). (ii) NUMBER. The maximum number of authorized shares of the Series A Preferred Shares shall be 2,000,000. (iii) RELATIVE SENIORITY. (A) In respect of rights to receive dividends and to participate in distribution of payments in the event of any liquidation, dissolution or winding up of United Country Brands, Inc. (the "Corporation"), the Series A Preferred Shares shall rank (x) senior to the common shares, associate member common shares and all other capital credits, equity interests and shares of capital stock of the Corporation which, by their terms, rank junior to the Series A Preferred Shares and (y) on a parity with all other preferred shares of the Corporation which are not, by their terms, junior to the Series A Preferred Shares. (B) So long as the Series A Preferred Shares remain outstanding, the Corporation will not authorize or issue any preferred shares which rank senior to the Series A Preferred Shares. (iv) DIVIDENDS. (A) The holders of the then outstanding Series A Preferred Shares shall be entitled to receive, when and as declared by the Board of Directors of the Corporation, out of funds legally available for the payment of dividends, cumulative cash dividends at the rate of 8.0% of the liquidation preference of $50 per share per annum (equivalent to $4.00 per share per annum). Such dividends shall accumulate from December 19, 1997 (which is the date of the original issue of the Series A Preferred Shares by a predecessor entity of the Corporation), and shall be payable quarterly in arrears on the 1st day of each February, May, August and November or, if not a Business Day (as defined below), the succeeding business day (each, a "Dividend Payment Date"). Any dividends payable on the Series A Preferred Shares will be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends will be payable to holders of record as they appear in the share records of the Corporation at the close of business on the applicable record date, which shall be the 15th day of the calendar month immediately prior to the month in which the applicable Dividend Payment Date falls or such other date designated by the Board of Directors of the Corporation that is not more than 30 nor less than 10 days prior to such Dividend Payment Date (each, a "Dividend Record Date"). "Business Day" means any day other than a Saturday, a Sunday, or a day on which banking institutions in The City of New York are authorized or required by law or executive order to remain closed. (B) The amount of any dividends accumulated on any Series A Preferred Shares at any Dividend Payment Date shall be the amount of any unpaid dividends accumulated thereon to but excluding such Dividend Payment Date and the amount of dividends accumulated on any shares of Series A Preferred Shares at any date other than a Dividend Payment Date shall be equal to the sum of the amount of any unpaid dividends accumulated thereon to but excluding the last preceding Dividend Payment Date, plus an amount calculated on the basis of the annual dividend rate of $4.00 per share for the period after such last preceding Dividend Payment Date to and including the date as of which the calculation is made based on a 360-day year of twelve 30-day months. Dividends on the Series A Preferred Shares will accumulate whether or not the Corporation has earnings, whether or not there are funds legally available for the payment of such dividends and whether or not such dividends are authorized or declared. (C) Except as otherwise expressly provided herein, the Series A Preferred Shares will not be entitled to any dividends in excess of full cumulative dividends as described above and shall not be entitled to participate in the earnings or assets of the Corporation, and no interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series A Preferred Shares which may be in arrears. (D) No dividends on the Series A Preferred Shares shall be authorized by the Board of Directors of the Corporation or be paid or set apart for payment by the Corporation at such time as the terms and provisions of any agreement of the Corporation, including any agreement relating to its indebtedness, prohibits such authorization, payment or setting apart for payment or provides that such authorization, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such authorization or payment shall be restricted or prohibited by law. (E) Except as provided in the immediately following paragraph, unless full cumulative dividends on the Series A Preferred Shares have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment therefor set apart for such payment on the Series A Preferred Shares for all past dividend periods and the then current dividend period, no dividends (other than in common shares, associate member common shares or other capital stock, capital credits or equity interests ranking junior to the Series A Preferred Shares as to dividends and upon liquidation) shall be declared or paid or set aside for payment upon any preferred shares, common shares, associate member common shares or any other 2 capital stock, capital credits or equity interests of the Corporation ranking junior to or on a parity with the Series A Preferred Shares as to dividends or upon liquidation, nor shall any preferred shares, common shares, associate member common shares or any other capital stock, capital credits or equity interests of the Corporation ranking junior to or on a parity with the Series A Preferred Shares as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid or made available for a sinking fund for the redemption of such shares) by the Corporation (except by conversion into or exchange for other capital stock, capital credits or equity interests of the Corporation ranking junior to the Series A Preferred Shares as to dividends and upon liquidation). (F) Notwithstanding the foregoing paragraph, the Corporation shall be permitted to declare and pay or set apart for payment patronage dividends or refunds, subject to the limitation that, whenever the terms described in the foregoing paragraph would operate to restrict dividends, not more than 20% of such aggregate patronage dividends or refunds for any fiscal year shall be in cash, with the remainder to be paid in the form of common stock, associate member common stock, capital credits or equity interests. In addition, when dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series A Preferred Shares and other preferred shares of the Corporation ranking on a parity as to dividends with the Series A Preferred Shares, dividends may be declared on the Series A Preferred Shares and such other preferred shares provided that such dividends shall be declared pro rata so that the amount of dividends declared per Series A Preferred Share and per each other preferred share shall in all cases bear to each other the same ratio that the accumulated dividends per Series A Preferred Share and per such other preferred share bear to each other. (G) Any dividend payment made on the Series A Preferred Shares shall first be credited against the earliest accumulated but unpaid dividend due with respect to such shares which remains payable. (v) LIQUIDATION RIGHTS. (A) Upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation (collectively, a "liquidation"), the holders of the Series A Preferred Shares then outstanding shall be entitled to be paid out of the assets of the Corporation legally available for distribution to its shareholders or members liquidating distributions in cash or property at its fair market value as determined by the Corporation's Board of Directors in the amount of a liquidation preference equal to $50 per share plus accumulated and unpaid dividends, if any, thereon to the date of such liquidation, before any distribution of assets is made to holders of common shares, associate member common shares or any other capital stock, capital credits or equity interests of the Corporation ranking junior to the Series A Preferred Shares as to liquidation rights. (B) After payment to the holders of the Series A Preferred Shares of the full amount of the liquidating distributions to which they are entitled as provided in paragraph 3 (v) (A), the holders of Series A Preferred Shares, as such, shall have no right or claim to any of the remaining assets of the Corporation. (C) If upon any voluntary or involuntary liquidation, the legally available assets of the Corporation are insufficient to pay the amount of the liquidating distributions on the Series A Preferred Shares and the corresponding amounts payable on all other preferred shares of the Corporation ranking on a parity with the Series A Preferred Shares in the distribution of assets upon liquidation, then the holders of the Series A Preferred Shares and such other preferred shares shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. (D) Neither the sale, lease, transfer or conveyance of all or substantially all of the property or business of the Corporation, nor the merger or consolidation of the Corporation into or with any other entity or the merger or consolidation of any other entity into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph (v). (vi) REDEMPTION. (A) Optional Redemption. The Series A Preferred Shares are not redeemable prior to December 15, 2022. On and after December 15, 2022, the Corporation may, at its option (subject to the provisions of this paragraph(vi)), redeem at any time all or, from time to time, part of the Series A Preferred Shares, payable in cash at a per share redemption price (the "Redemption Price") set forth in the table below plus, in each case, accumulated and unpaid dividends, if any, thereon to and including the date fixed for redemption (the "Redemption Date"), without interest, to the extent the Corporation will have funds legally available therefor. If redeemed during the twelve month period, Beginning December 15, Redemption Price ---------------------- ---------------- 2022 ......................................... $52.00 2023 ......................................... 51.60 2024 ......................................... 51.20 2025 ......................................... 50.80 2026 ......................................... 50.40 2027 and thereafter........................... 50.00 (B) Procedures for Redemption. (1) Notice of redemption will be given by publication in a newspaper of general circulation in The City of New York, such publication to be made once a week for two successive weeks commencing not less than 30 nor more than 60 days prior to the 4 Redemption Date. A similar notice furnished by the Corporation will be mailed by the registrar, postage prepaid, not less than 30 nor more than 60 days prior to the Redemption Date, addressed to each holder of record of the Series A Preferred Shares to be redeemed at the address set forth in the share transfer records of the registrar. No failure to give such notice or any defect thereto or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series A Preferred Shares except as to the holder to whom notice was defective or not given. In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Shares may be listed or admitted to trading, such notice shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the number of Series A Preferred Shares to be redeemed; (iv) the place or places where the Series A Preferred Shares are to be surrendered for payment of the Redemption Price; and (v) that dividends on the Series A Preferred Shares to be redeemed will cease to accumulate on such redemption date. If fewer than all the Series A Preferred Shares held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of Series A Preferred Shares to be redeemed from such holder. (2) If notice of redemption of any Series A Preferred Shares has been given in accordance with paragraph (vi)(B)(1) above and provided that on or before the Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Corporation in trust for the benefit of the holders of any Series A Preferred Shares so called for redemption, then from and after the Redemption Date dividends will cease to accumulate on such Series A Preferred Shares, and such shares shall no longer be deemed outstanding and all rights of the holders of such Series A Preferred Shares will terminate, except the right to receive the Redemption Price. Upon surrender, in accordance with such notice, of certificates for any Series A Preferred Shares so redeemed (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice shall so state), such Series A Preferred Shares shall be redeemed by the Corporation at the Redemption Price. In case fewer than all the Series A Preferred Shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed Series A Preferred Shares without cost to the holder thereof. (3) Any funds deposited with a bank or trust company for the purpose of redeeming Series A Preferred Shares shall be irrevocable except that: (a) the Corporation shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any Series A Preferred Shares redeemed shall have no claim to such interest or other earnings; and (b) any balance of monies so deposited by the Corporation and unclaimed by the holders of the Series A Preferred Shares entitled thereto at the expiration of two years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Corporation, and after any such repayment, the 5 holders of the Series A Preferred Shares entitled to the funds so repaid to the Corporation shall look only to the Corporation for payment without interest or other earnings. (4) Unless full cumulative dividends on the Series A Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment therefor set apart for such payment on the Series A Preferred Shares for all past dividend periods and the then current dividend period, no Series A Preferred Shares shall be redeemed unless all outstanding Series A Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase or acquisition of Series A Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series A Preferred Shares. In addition, unless full cumulative dividends on the Series A Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment therefor set apart for such payment on the Series A Preferred Shares for all past dividend periods and the then current dividend period, the Corporation shall not purchase or otherwise acquire, directly or indirectly, any Series A Preferred Shares; provided, however, that the foregoing shall not prevent the purchase or acquisition of Series A Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series A Preferred Shares. (5) If the Redemption Date is after a Dividend Record Date and before the related Dividend Payment Date, the dividend payable on such Dividend Payment Date shall be paid to the holder in whose name the Series A Preferred Shares to be redeemed are registered at the close of business on such Dividend Record Date notwithstanding the redemption thereof between such Dividend Record Date and the related Dividend Payment Date or the Corporation's default in the payment of the dividend due. Except as provided in this paragraph (vi), the Corporation will make no payment or allowance for unpaid dividend, whether or not in arrears, on Series A Preferred Shares to be redeemed. (6) In case of redemption of less than all Series A Preferred Shares at the time outstanding, the Series A Preferred Shares to be redeemed shall be selected pro rata from the holders of record of such Series A Preferred Shares in proportion to the number of Series A Preferred Shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Corporation. (vii) VOTING RIGHTS. Except as required by law, and as set forth below, the holders of the Series A Preferred Shares shall not be entitled to vote at any meeting of the shareholders or members or otherwise or to participate in any action taken by the Corporation or the shareholders or members thereof. (A) So long as any Series A Preferred Shares remain outstanding, the Corporation will not, without the affirmative vote or consent of the holders of at least a majority of the Series A Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting, alter or change the powers, preferences or special rights of the Series A 6 Preferred Shares so as to affect them adversely; provided, however, that (1) any increase in the amount of the authorized preferred shares of the Corporation or the creation or the issuance of any other preferred shares of the Corporation, or (ii) any increase in the amount of authorized Series A Preferred Shares, in each case ranking on a parity with or junior to the Series A Preferred Shares with respect to the payment of dividends and the distribution of assets upon liquidation, shall not be deemed to adversely affect such powers, preferences or special rights. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to such vote or consent would otherwise be required shall be effected, all outstanding Series A Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been irrevocably deposited in trust to effect such redemption. (B) On each matter submitted to a vote of the holders of Series A Preferred Shares in accordance with this paragraph (vii), or as otherwise required by law, each Series A Preferred Share shall be entitled to one vote. With respect to each Series A Preferred Share, the holder may designate a proxy, with each such proxy having the right to vote on behalf of the holder. (viii) CONVERSION. The Series A Preferred Shares are not convertible into or exchangeable for any other property or securities of the Corporation. (ix) RESTRICTIONS ON TRANSFER. (A) The Series A Preferred Shares have not been registered under the Securities Act of 1933, as amended (the "Securities Act") and, until so registered, may not be offered or sold except to (i) "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) in reliance upon the exemption from the registration requirements of the Securities Act provided by Rule 144A, and (ii) institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) in transactions exempt from the registration requirements of the Securities Act. (B) Until registered under the Securities Act, the Series A Preferred Shares may not be sold or otherwise transferred in an amount that is less than $100,000 in aggregate liquidation preference. Any such transfer of Series A Preferred Shares in an amount less than $100,000 in aggregate liquidation preference shall be deemed to be void and of no legal effect whatsoever. Any such transferee shall be deemed not to be the holder of such Series A Preferred Shares for any purpose, including, but not limited to, the receipt of dividends on such Series A Preferred Shares, and such transferee shall be deemed to have no interest whatsoever in such Series A Preferred Shares. 7 (C) Until the Series A Preferred Shares are registered under the Securities Act, all certificates representing such Series A Preferred Shares will bear a legend referring to the restrictions described above. # # # 8 EXHIBIT A-2 AMENDED AND RESTATED BYLAWS OF UNITED COUNTRY BRANDS, INC. ARTICLE I OFFICES AND RECORDS SECTION 1.1 CORPORATE OFFICES. This Cooperative (this "Cooperative") may have such corporate offices and places of business anywhere as the Board of Directors (the "Board") may from time to time designate or the business of this Cooperative may require. SECTION 1.2 REGISTERED OFFICE AND REGISTERED AGENT. The location of the registered office and the name of the registered agent of this Cooperative shall be as stated in the Articles of Incorporation of this Cooperative (the "Articles") or as shall be determined from time to time by resolution of the Board and on file in the appropriate public offices. SECTION 1.3 BOOKS, ACCOUNTS AND RECORDS, AND INSPECTION RIGHTS. The books, accounts and records of this Cooperative, except as may be otherwise required by applicable law, may be kept at such place or places as the Board may from time to time determine. The Board shall determine whether, to what extent and the conditions upon which the books, accounts and records of this Cooperative, or any of them, shall be open to the inspection of the members, and no member shall have any right to inspect any book, account or record of this Cooperative, except as conferred by law or by resolution of the members or Board. ARTICLE II MEMBERSHIP SECTION 2.1 QUALIFICATIONS. Producers of agricultural products and associations of producers of agricultural products who are eligible and who patronize this Cooperative under conditions established by the Board or as elsewhere provided in these Bylaws (these "Bylaws") may, upon approval or pursuant to the authorization of the Board, become members of this Cooperative. Each transaction between this Cooperative and each member shall be subject to and shall include as a part of its terms each provision of the Articles and these Bylaws, whether or not the same be expressly referred to in said transaction. SECTION 2.2 CLASSES OF MEMBERS. In accordance with the Articles, there shall be three classes of members of this Cooperative, which are hereby designated as the "Cooperative Association" class, "Individual Member" class and the "Defined Member" class. Membership in a particular class of members shall be determined as follows: (a) COOPERATIVE ASSOCIATION MEMBERS. All members which are cooperative associations shall belong to and be part of the Cooperative Association class of members and shall become known and be designated as "Cooperative Association Members;" (b) INDIVIDUAL MEMBERS. All members who are directly engaged in production agriculture, including individuals operating as sole proprietors, farm corporations, farm partnerships or other legal entities, shall belong to and be part of the Individual Member class of members, and shall become known and be designated as "Individual Members;" and (c) DEFINED MEMBERS. All members who are holders of Equity Participation Units (as described in the Articles) shall belong to and be part of the Defined Member class of members, and shall become known and be designated as "Defined Members." SECTION 2.3 DEFINED MEMBERS AND DEFINED BUSINESS UNITS. (a) DEFINED BUSINESS UNITS. Each Defined Member holding Equity Participation Units in a Defined Business Unit (as defined in the Articles) shall be eligible to receive patronage distributions from the Defined Business Unit as a separate allocation unit. (b) DELIVERY RIGHTS AND OBLIGATIONS. The delivery rights and obligations of each Defined Member shall be as specified in a written agreement ("DBU Agreement") by and between the Defined Member and this Cooperative. A modification to a DBU Agreement must receive prior written approval from the Defined Members who (i) hold a majority of the voting power of the Defined Business Unit that is a party to the subject DBU Agreement, and (ii) who are present and voting at a meeting of Defined Members holding Equity Participation Units in such Defined Business Unit. The notice of such meeting must contain the proposed modification to the DBU Agreement. (c) DEFINED MEMBER BOARDS. Each Defined Business Unit shall be represented by a Defined Member Board. The initial members of each Defined Member Board shall be selected by the Board. Subsequently, the members of the Defined Business Unit in question shall be entitled to elect, on a one Defined Member/one vote basis, the members of the Defined Member Board. Each Defined Member Board shall be made up of at least five (5) but not more than ten (10) individuals. Each member of a Defined Member Board must be either a Defined Member in good standing, or a representative of a Defined Member in good standing and in full compliance with its delivery obligations; provided, however, that no employee of this Cooperative may serve as a member of any Defined Member Board. Each Defined Member Board shall be headed by a Chairperson selected by and from the Board of this Cooperative. Each Defined Member Board 2 shall meet at least quarterly (one of which meetings may be its annual meeting), and shall be charged with reflecting Defined Member concerns and providing direct communication to the Board. Individuals serving on a Defined Member Board shall serve for staggered terms of three (3) years and until their successors are elected and have qualified. The policies and procedures governing all other aspects of such Defined Member meetings and Defined Member Boards shall be established and amended from time to time at the discretion of the Board. SECTION 2.4 TERMINATION OF MEMBERSHIP. If the Board determines that a member has become ineligible for membership in this Cooperative, such member shall have no rights or privileges on account of such membership in the management of the affairs of this Cooperative, and the membership of such member may be terminated by the Board. Membership may, at the discretion of the Board, be terminated whenever the Board by resolution finds that a member has: (a) intentionally or repeatedly violated any provision of the Articles, Bylaws or Board policies of this Cooperative; (b) failed to patronize this Cooperative during the last two completed fiscal years; (c) breached any contract with or duty to this Cooperative; (d) willfully obstructed any lawful purpose or activity of this Cooperative; (e) remained indebted to this Cooperative for ninety (90) days after such indebtedness becomes payable; (f) died or legally dissolved; or (g) failed in the judgment of the Board to comply with the qualifications and standards adopted by the Board from time to time; provided, however, that termination of any member's membership as a result of any of the circumstances listed in paragraphs (a) through (g) above shall not be deemed to revoke such member's consent contained in Article IX hereof but rather such member may only revoke such consent in writing. Upon termination of membership such member shall thereafter have no voting rights in this Cooperative. No action taken hereunder shall impair the obligations or liabilities of a member under any contract with this Cooperative. Redemption of the equities held by terminated members shall remain at the sole discretion of the Board. ARTICLE III MEETINGS OF MEMBERS 3 SECTION 3.1 ANNUAL AND SPECIAL MEETINGS. The annual meeting of the members of this Cooperative shall be held at a time and place fixed by the Board. The Chairman of the Board shall call a special meeting of the members upon the written petition of at least twenty percent (20%) of the members or upon a majority vote of the directors present and voting at a Board meeting. The special members' meeting shall be held at the time and place specified in the notice of the meeting, and the notice shall also state the purpose of the special members' meeting. No business shall be considered at the special members' meeting except as specified in the notice of the meeting. Members' meetings shall be directed and governed pursuant to rules, procedures and guidelines set forth from time to time by the Board. SECTION 3.2 NOTICE OF MEETINGS. Notice of the annual meeting or of a special meeting of the members shall be published or mailed as prescribed by law. The notice of a meeting must be published at least two weeks before the date of the meeting or mailed at least 15 days before the date of the meeting. The notice shall state the date, time, and place of the meeting, and in the case of a special meeting, the purposes for which the meeting is called. The Secretary shall execute a certificate which contains a copy of the notice, shows the date of mailing or publication (as the case may be), and states the notice was mailed or published (as the case may be) as prescribed by these Bylaws. The certificate shall be made a part of the meeting. The failure of any member to receive notice shall not invalidate any action which may be taken by the members at a meeting. SECTION 3.3 VOTING POWER. The voting power of the members of this Cooperative shall be exercised as follows: (a) for transactions involving dissolution of this Cooperative, sale of eighty percent (80%) or more of this Cooperative's assets or mergers or consolidations where this Cooperative's members would receive less than 50% of the membership equity of the surviving entity, the following shall apply: (i) each Cooperative Association Member shall have one (1) vote for each producer of agricultural products registered and accepted as a member of such Cooperative Association Member who patronized such Member within the preceding fiscal year by purchasing or marketing goods or services supplied by or marketed by this Cooperative, including, as applicable, Individual Members and Defined Members; and (ii) each Individual Member and Defined Member shall have one (1) vote; provided, however, that Individual Members and Defined Members may be grouped with other such members in local units ("Patrons Associations") as may be established from time to time pursuant to Section 3.3(b)(ii) below. (b) for all other matters to be voted on by the membership of this Cooperative: (i) each Cooperative Association Member shall have: 4 (A) one (1) vote for each $10,000, or major fraction thereof, of the average annual business transacted on a patronage basis with this Cooperative or with any predecessor cooperative associations during the three years ending on the last day of this Cooperative's fiscal year last ended prior to the meeting; and (B) one (1) vote for each $1,000, or major fraction thereof, of equity issued by this Cooperative or by any predecessor cooperative associations as the initial purchased equity by a member or patron or as a patronage refund and standing on the books of this Cooperative in the name of such member; and (ii) each Individual Member and Defined Member shall have one (1) vote; provided, however, that Individual Members and Defined Members may be grouped with other such members in Patrons Associations as may be established from time to time, and each such Patrons Association shall have: (A) one (1) vote for each Individual Member and Defined Member grouped in such Patrons Association (minus one vote for any Individual Member or Defined Member in such Patrons Association who elects to cast a vote personally under procedures approved by the Board); plus (B) one (1) vote for each $10,000, or major fraction thereof, of the average annual business transacted with this Cooperative or with any predecessor cooperative associations (combined sales to and purchases from) by the Individual Members and Defined Members grouped in such Patrons Associations, during the three years ending on the last day of this Cooperative's fiscal year last ended prior to the meeting; plus (C) one (1) vote for each $1,000, or major fraction thereof, of equity issued by this Cooperative as the initial purchased equity by a member or patron or as a patronage refund and standing on the books of this Cooperative in the name of the Individual Members and Defined Members grouped in such Patrons Associations, calculated on an aggregate basis. Provided, however, that no member shall be entitled to vote more than 5% of the total votes of this Cooperative eligible to be cast. The most recently completed fiscal year shall be used for determining each member's number of votes unless otherwise specified by the Board. 5 For purposes of Section 3.3(b)(i), the dollar value of commodities delivered by a Defined Member to a Cooperative Association Member for handling by and on behalf of this Cooperative shall be included in the calculation for determining the number of permitted votes of the Cooperative Association Member. For purposes of Section 3.3(b)(ii), the face amount of any Equity Participation Units issued to and held by a member shall be included in the determination of the amount of equity in this Cooperative held by such member. In determining the number of permitted votes of a member, the Board shall give due consideration to the membership eligibility criteria set forth in these Bylaws and the Articles. The Board shall have the authority to suspend or adjust voting power to reflect such criteria, including without limitation the authority to establish reasonable procedures to address special circumstances. (Such procedures might include, for example, the following: (a) procedures to equitably adjust the calculation of the average annual business of members having less than three full years of business included in the averaging period, and (b) procedures to equitably measure the business transacted by Cooperative Association Members that have acquired or merged with other entities that did business with this Cooperative or with any predecessor cooperative association within the averaging period.) (c) Individual Members and Defined Members who are grouped in Patrons Associations who intend to vote individually hereunder shall be entitled to do so after complying with procedures established by the Board. (d) Each Cooperative Association Member or Patrons Association shall be represented at the members' meetings of this Cooperative by an elected or appointed delegate or an alternate, which delegate or alternate shall exercise the voting rights of such Cooperative Association Member or Patrons Association at such meetings as hereinafter provided. Each delegate or alternate representing a Cooperative Association Member shall be selected at the discretion of the Cooperative Association Member. Each delegate or alternate representing Individual Members and Defined Members in a Patrons Association shall be elected on a one member/one vote basis by the Individual Members and the Defined Members grouped in the Patrons Association, at an annual meeting of such Patrons Association held following reasonable notice, and pursuant to such other procedures as the Board may establish from time to time. In no instance shall managers or other employees of this Cooperative appoint such delegates or alternates. Such delegates shall exercise the same powers at such members' meetings as the delegates of Cooperative Association Members may exercise. SECTION 3.4 MANNER OF VOTING. At annual and special meetings of members of this Cooperative, the designated number of permitted votes of members as provided above shall be cast in the following manner: 6 (a) Each Individual Member and each Defined Member who has provided notice to vote individually under procedures established by the Board shall be entitled to cast such member's own vote. (b) Each Cooperative Association Member and each Patrons Association representing groups of Individual Members and Defined Members shall cast its votes through its duly selected delegate or alternate. (c) Mail voting is permitted where, in the notice of the meeting, the Board shall have designated that mail voting is permitted for a specific issue or issues. Any such mail voting shall be conducted pursuant to procedures adopted by the Board and consistent with applicable law. Nothing in this section shall, however, prevent the members at an annual or special meeting of this Cooperative from considering and acting upon issues in addition to those submitted for mail voting, provided that applicable notice requirements are met. (d) There shall be no voting by proxy or under power of attorney at any annual or special meeting of this Cooperative other than through Patrons Associations as described herein, or in the case of a spouse voting on behalf of a member. SECTION 3.5 QUORUM. (a) A quorum necessary to the transaction of business at any annual or special meeting of this Cooperative shall be at least 50 members as long as there are more than 500 members of this Cooperative, or at least ten percent (10%) of the total number of members if there are 500 or less members of this Cooperative. A majority of the votes cast in person, by mail vote or by other approved means, at any meeting of the members, shall decide all questions except where a greater vote is required by the Articles, by these Bylaws or by law. (b) Each Cooperative Association Member and Patrons Association shall certify its delegates and alternates to this Cooperative, in the manner prescribed by the Board. No individual shall serve as a delegate for more than one Cooperative Association Member or Patrons Association. A delegate representing a Patrons Association must be an Individual Member or Defined Member of the Patrons Association. The Board may establish such additional eligibility criteria, procedures, standards and structure with respect to the delegate system of this Cooperative as it from time to time deems advisable. No employee of this Cooperative shall serve as a delegate or alternate at any meeting of this Cooperative. SECTION 3.6 PRESIDING OFFICER. The Chairman of the Board shall preside at all meetings of the members. 7 ARTICLE IV BOARD OF DIRECTORS SECTION 4.1 BOARD OF DIRECTORS. The business and affairs of this Cooperative shall be governed by the Board. Until the annual meeting of the members of this Cooperative to be held following the close of the fiscal year ending in calendar year 2001 (the "2001 annual meeting"), the Board shall consist of 34 directors, 17 of which shall be individuals serving on the Board of Directors of Cenex Harvest States Cooperatives and 17 of which shall be individuals serving on the Board of Directors of Farmland Industries, Inc. at the effective time of the combination of these two cooperatives. Such Board shall be designated in the Articles and these Bylaws as the "Transition Board." Commencing upon the election and qualification of directors at the 2001 annual meeting of members of this Cooperative, the Board shall consist of twenty-five (25) directors, eighteen (18) of whom shall be producers as defined herein and seven (7) of whom shall be local executives as defined herein. SECTION 4.2 DIRECTOR QUALIFICATIONS. The qualifications for the office of director shall be as follows: (a) For producer directors: (1) At the time of the election, the individual must be less than the age of 65. (2) The individual must be a voting member of this Cooperative or a voting member of a Cooperative Association Member of this Cooperative. (3) The individual must reside in the district from which he or she is to be elected. (4) At the time of the election, the individual's primary occupation must be farming or ranching. (5) The individual may not be a full time employee of this Cooperative or of a Cooperative Association Member of this Cooperative. (6) The qualifications set forth in this Section 4.2(a) shall not apply to any individual serving on the Transition Board. (b) For local executive directors: (1) At the time of the election, the individual must be less than the age of 65. (2) The individual must be a full-time executive employee of a Cooperative Association Member of this Cooperative. (3) The Cooperative Association Member employing the individual must have its primary headquarters located in the district from which he or she is to be elected. 8 SECTION 4.3 TRANSITION BOARD, 2001 ELECTIONS. (a) The terms of each director serving on the Transition Board shall expire at the 2001 annual meeting. Elections will be held for each of the twenty-five (25) positions of the new Board at such annual meeting. In advance of such meeting, the Transition Board shall designate nine (9) of the Board positions as having three-year terms (to expire at the 2004 annual meeting), eight of the Board positions as having two-year terms (to expire at the 2003 annual meeting) and eight of the Board positions as having one-year terms (to expire at the 2002 annual meeting). The determination of the staggered terms shall be made in an impartial manner using any fair and equitable method as the Transition Board may determine. (b) The procedure for electing directors at the 2001 annual meeting shall be in accordance with Section 4.4 herein. (c) If a director's position on the Transition Board becomes vacant, the remaining directors may fill the director's position until the next annual meeting, at which point a director will be elected by the members pursuant to a procedure established by the Transition Board. SECTION 4.4 ELECTION OF DIRECTORS. (a) At the 2001 annual meeting and at each annual meeting of the members thereafter, directors shall be elected to fill vacancies created by expired terms. Beginning at the 2002 annual meeting, the term of office of such directors shall be three (3) years and until their respective successors are elected and qualified. (b) The nomination and election of directors of this Cooperative shall be by district. The territory served by this Cooperative shall be divided into districts and each such district shall be represented by at least one (1) producer director and one (1) local executive director. Each district shall be represented by one or more producer directors apportioned to the districts on the basis of eligible votes. In districts with three (3) or more producer directors, not all of the producer directors may be residents of the same state. The districts shall be as follows: DISTRICT 1 includes the States of Washington, Oregon, California, Nevada, Utah, Idaho, Arizona, New Mexico, Alaska and Hawaii, the Canadian province of British Columbia and Mexico; DISTRICT 2 includes the States of Nebraska, Wyoming and Colorado. DISTRICT 3 includes the States of North Dakota, South Dakota and Montana and the Canadian provinces of Alberta, Saskatchewan and Manitoba. 9 DISTRICT 4 includes the States of Minnesota, Wisconsin and Michigan and the Canadian provinces of Ontario, Quebec, Newfoundland, New Brunswick, Nova Scotia and Prince Edward Island. DISTRICT 5 includes the States of Iowa, Illinois, Indiana, Ohio, Pennsylvania, Maryland, Delaware, New York, New Jersey, Connecticut, Massachusetts, Rhode Island, New Hampshire, Vermont and Maine. DISTRICT 6 includes the States of Missouri, Arkansas, Louisiana, Mississippi, Tennessee, Kentucky, Alabama, Georgia, Florida, South Carolina, North Carolina, Virginia and West Virginia. DISTRICT 7 includes the States of Kansas, Oklahoma and Texas. (c) From time to time, the Board shall review member representation on the Board. The Board shall have the responsibility and authority to maintain equitable representation of the members as determined by relative voting power by reapportioning the number of producer director positions per district (with each district to have at least one producer director). The Board shall have the power to finally approve all such reapportionment plans by a majority vote of those directors present and voting. The membership shall be promptly informed of any such approved reapportionment plan. Any such reapportionment plan shall be implemented for each district in which a director position is lost at the first subsequent annual meeting of this Cooperative which corresponds to the expiration of the term of office of one or more of such district's producer directors. (d) The various districts shall, by caucus, elect directors as provided herein. The Chairman of the Board may appoint a nominating committee to facilitate elections in district caucuses for any district where a caucus is to be held. Candidate nominations for directors may be made from the floor by any official delegate or eligible voting Individual Member or Defined Member at the district caucus. (e) When multiple director positions are to be filled within a district, each director position will be subject to a separate election. Such district shall elect each director by a majority of votes cast by members eligible to vote and voting. If, on the first ballot for a director position, no candidate receives a majority, there shall be a runoff election between the two candidates who received the most votes on the first ballot. In the district caucus, each member entitled to vote shall have the number of votes as determined under these Bylaws for each election held. The Board may establish at its discretion quorum requirements and further procedures not inconsistent with these Bylaws for the nomination and election of directors and the conduct and timing of district caucuses. SECTION 4.5 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Any director of this Cooperative may resign at any time by submitting a written resignation to the Chairman of the 10 Board or this Cooperative's Secretary. Vacancies and newly created directorships may be filled by a majority of the directors then in office, even if less than a quorum, until the next annual or special meeting of the members, when the members shall elect a director to serve the unexpired term. SECTION 4.6 MEETINGS. The Board shall meet regularly at such times and places as the Board may determine. Special meetings may be called by the Chairman or by any three directors. All meetings shall be held on such notice as the Board may prescribe; provided, however, that any business may be transacted at any meeting without specification of such business in the notice of such meeting. Directors may participate in any such meeting by means of a conference telephone conversation or other comparable method of communication by which all persons participating in the meeting can hear and communicate with each other. For purposes of taking any action at the meeting, any such directors shall be deemed present in person at the meeting. SECTION 4.7 QUORUM AND VOTING. For both the Board and the Executive Committee of the Board, a quorum shall consist of a majority of the directors serving on the Board or the Executive Committee as the case may be. A majority vote of the directors present shall decide all questions except where a greater vote is required by the Articles, by these Bylaws or by law. SECTION 4.8 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of the Board may be taken without a meeting if all directors consent thereto in writing and the writing or writings are held with the minutes or proceedings of the Board. ARTICLE V DUTIES OF DIRECTORS SECTION 5.1 GENERAL POWERS. The business and affairs of this Cooperative shall be governed by the Board. The Board shall exercise all of the powers of this Cooperative except as such are by law, the Articles, or these Bylaws conferred upon or reserved to the members. The Board shall adopt such policies, rules, regulations, and actions not inconsistent with law, the Articles or these Bylaws, as it may deem advisable. The day-to-day business affairs of this Cooperative shall be in the management and control of the Chief Executive Officer, selected by the Board. SECTION 5.2 EXECUTIVE COMMITTEE; OTHER COMMITTEES. An executive committee of six, which shall include the Chairman, Vice Chairman, and four other members to be elected by the Board from among its own members at its first meeting after each annual meeting, shall have all the powers and exercise all the functions of the Board when the Board is not in session, subject to the Board's general control and direction. The Board may in its discretion also establish other committees (including, but not limited to, a Capital Committee, a Finance/Audit Committee, a Governance Committee, and a Corporate Responsibility Committee). The rules pertaining to such committees shall be determined by the Board in its sole and absolute discretion. 11 SECTION 5.3 BONDS. The Board may require the officers, agents, or employees charged by this Cooperative with responsibility for the custody of any of its funds or property to give adequate bonds. Such bonds, unless cash security is given, shall be furnished by a responsible bonding company and approved by the Board and the cost thereof shall be paid by this Cooperative. SECTION 5.4 AUDITS. As often as the Board may consider necessary, but at least once a year, the Board shall obtain the services of a competent and independent auditor, who shall make a careful audit of the books and accounts of this Cooperative and render a report in writing thereon. The annual auditors' report shall be available at the next annual meeting of the members. SECTION 5.5 COMPENSATION. The Board may fix the compensation of directors for serving as directors of this Cooperative. SECTION 5.6 RESIGNATIONS AND REMOVALS. To the extent permitted by applicable law, any director of this Cooperative may be removed for cause by vote of not less than two-thirds (2/3) of the votes cast at any annual meeting or at any special meeting of the members called for that purpose. In addition, to the extent permitted by applicable law, any director of this Cooperative may be removed for cause by vote of not less than three-fourths (3/4) of the full Board at any regular Board meeting or special Board meeting called for that purpose. Any director subject to removal shall be informed in writing of the charges proffered against him or her at least fifteen (15) days before the membership meeting or Board meeting, as the case may be, and at such meeting shall have an opportunity to be heard in person or by counsel. Any such meeting shall be conducted under procedures established at the sole discretion of the Chairman of the Board. If any director is removed, and there are more than 180 days until the next annual meeting of members, the Board shall arrange for, and prescribe the procedures of a special election through which the members in the affected district will fill the vacancy. Officers or agents of the Board may be removed from office or employment at any time by action of the Board. ARTICLE VI OFFICERS SECTION 6.1 ELECTION OF OFFICERS. Promptly following each annual meeting of the members, the Board shall elect from its membership a Chairman and a Vice Chairman. The Board shall also elect a Chief Executive Officer, a President (who may also be the Chief Executive Officer), one or more Vice-Presidents (with such designations as recommended by the Chief Executive Officer), a Secretary and a Treasurer, none of whom need be a director or member of this Cooperative. The Board may also elect, from time to time, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as it shall deem necessary, none of whom need be a director or member. Other than the office of Chairman and Vice 12 Chairman, one person may hold one or more of the offices provided for above, if eligible to hold each such office. If any vacancy shall occur among the offices set forth above, it shall be filled by the Board at its next regular meeting following the vacancy. Officers shall be elected annually unless otherwise provided by the Board. In addition to the authority granted to the officers in these Bylaws, the officers shall have such powers and authority, including the power to delegate any responsibility, as the Board may grant such officers from time to time. SECTION 6.2 CHAIRMAN. The Chairman shall preside at all meetings of the members and the Board. Except where the signature of the Chief Executive Officer is required, the Chairman shall possess the same power as the Chief Executive Officer to sign all certificates, contracts and other instruments of this Cooperative which may be authorized by the Board. SECTION 6.3 VICE CHAIRMAN. In the absence or disability of the Chairman, the Vice Chairman shall perform the duties and exercise the powers of the Chairman. The Vice Chairman shall have such other duties as may be assigned from time to time by the Board. SECTION 6.4 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall have general supervision of the day-to-day business affairs of this Cooperative, shall sign or countersign all certificates, contracts or other instruments of this Cooperative as authorized by the Board, shall make reports to the Board and members, shall recommend the officers of this Cooperative to the Board for election (except the offices of Chairman and Vice Chairman), and shall perform such other duties as are incident to the Chief Executive Officer's office or are properly required by the Board. In the event the office of President is not separately filled, the Chief Executive Officer shall also serve as the President and may exercise the authority of the office of Chief Executive Officer in either or both capacities. SECTION 6.5 PRESIDENT. In the event the office of President is separately filled, the President shall report to the Chief Executive Officer, and shall perform such duties as the Board may prescribe upon the recommendation of the Chief Executive Officer. In the absence or disability of the Chief Executive Officer, the President shall perform the duties and exercise the powers of the Chief Executive Officer. SECTION 6.6 VICE PRESIDENTS. In the absence or disability of the Chief Executive Officer and the President, the Vice Presidents, in the order designated by the Board, shall perform the duties and exercise the powers of the President. Each Vice President shall have such other duties as are assigned to such Vice President from time to time by the Chief Executive Officer or the President. SECTION 6.7 SECRETARY. The Secretary shall keep complete minutes of each meeting of the members and of the Board, and shall, to the extent required by law, sign with the Chairman or the Chief Executive Officer all notes, conveyances and encumbrances of real estate, capital securities and instruments requiring the corporate seal; provided, however, that the Secretary, in writing, may authorize any other officer or employee to execute or sign the Secretary's name to any or all such instruments. The Secretary shall keep a record of all business of this Cooperative, prepare 13 and submit to the annual meeting of the members a report of the previous fiscal year's business, and give all notice as required by law. The Secretary shall perform such other duties as may be required by the Board. The Board may delegate, or authorize the Secretary to delegate, to any other officer or employee, under the supervision of the Secretary, all or any of the duties enumerated in this section. SECTION 6.8 TREASURER. The Treasurer shall supervise the safekeeping of all funds and property of this Cooperative, supervise the books and records of all financial transactions of this Cooperative, and perform such other duties as may be required by the Board. The Board may delegate, or authorize the Treasurer to delegate, to any other officer or employee, under the supervision of the Treasurer, all or any of the duties enumerated in this section. ARTICLE VII INDEMNIFICATION AND INSURANCE Section 7.1 INDEMNIFICATION. This Cooperative shall indemnify each person who is or was a director, officer, manager, employee, or agent of this Cooperative, and any person serving at the request of this Cooperative as a director, officer, manager, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred to the fullest extent provided or permitted by any statute of the state of incorporation of this Cooperative which applies to any type of corporation. Section 7.2 INSURANCE. This Cooperative shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, manager, employee, or agent of this Cooperative, or is or was serving at the request of this Cooperative as a director, officer, manager, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against that person and incurred by that person in any such capacity. ARTICLE VIII METHOD OF OPERATION - PATRONAGE REFUNDS SECTION 8.1 COOPERATIVE OPERATION. This Cooperative shall be operated on a cooperative basis in carrying out its business within the scope of the powers and purposes defined in the Articles. The net earnings of this Cooperative shall be computed under generally accepted accounting principles, unless otherwise determined by the Board, provided, however, that any change shall be on a prospective basis only. The net earnings of this Cooperative in excess of amounts credited by the Board to Capital Reserves and amounts of dividends, if any, paid with respect to equity capital shall be accounted for and distributed annually on the basis of allocation units as provided in this Article VIII. 14 Each transaction between this Cooperative and each member shall be subject to and shall include as a part of its terms each provision of the Articles and Bylaws, whether or not the Articles or Bylaws are expressly referred to in such transaction. Each member for whom this Cooperative markets or procures goods or services shall be entitled to the net income arising out of such transaction as provided in this Article VIII, unless such member and this Cooperative have expressly agreed to conduct such business on a nonpatronage basis. No nonmember for whom this Cooperative markets or procures goods or services shall be entitled to the net income arising out of said transactions as provided in this Article VIII unless this Cooperative agrees to conduct said business on a patronage basis. SECTION 8.2 PATRONS; PATRONAGE BUSINESS; NONPATRONAGE BUSINESS. As used in this Article VIII, the following definitions shall apply: (a) The term "patron" shall refer to any member or nonmember with respect to business conducted with this Cooperative on a patronage basis in accordance with Section 8.1. (b) The term "patronage business" shall refer to business done by this Cooperative with or for patrons. (c) The term "nonpatronage business" shall refer to business done by this Cooperative that does not constitute "patronage business." SECTION 8.3 ESTABLISHMENT OF ALLOCATION UNITS. Allocation units shall be established by the Board on a reasonable and equitable basis and they may be functional, divisional, departmental, geographic, or otherwise; provided, that each Defined Business Unit shall be accounted for as a separate allocation unit. SECTION 8.4 CURRENT YEAR'S NET EARNINGS (LOSSES) AND DETERMINATION OF THE PATRONAGE INCOME OR LOSS OF AN ALLOCATION UNIT. This Cooperative's overall net earnings or loss shall be determined using generally accepted accounting principles, unless otherwise determined by the Board; provided, however, that any change shall be on a prospective basis only, and shall be divided into (i) a patronage sourced portion, determined on the basis of the quantity or value of business done by this Cooperative with or for its patrons who are eligible to receive patronage refunds and (ii) a non-patronage sourced portion which shall include amounts determined on the basis of the quantity or value of business done with or for persons who are not eligible to receive patronage refunds from this Cooperative, plus such net amounts of income, expenses, or loss which are unrelated to the operations carried on by this Cooperative for its patrons on a cooperative basis. The net income or net loss of an allocation unit from patronage business for each fiscal year shall be the sum of (1) the gross revenues directly attributable to goods or services marketed or procured for patrons of such allocation unit, plus (2) an equitably apportioned share of other items of income or gain attributable to this Cooperative's patronage business, less (3) all expenses and costs of goods or services directly attributable to goods or 15 services marketed or procured for patrons of such allocation unit, less (4) an equitably apportioned share of all other expenses or losses attributable to this Cooperative's patronage business, dividends on equity capital and distributable net income from patronage business that is credited to the Capital Reserve pursuant to Section 8.8(c). Expenses and cost of goods or services shall include without limitation any unit retentions provided in Section 8.9. Such net income or net loss shall be subject to adjustment as provided in Section 8.6 relating to losses. SECTION 8.5 ALLOCATION OF PATRONAGE INCOME WITHIN ALLOCATION UNITS. The net income of an allocation unit from patronage business for each fiscal year, less any amounts thereof that are otherwise allocated in dissolution pursuant to Article X, shall be allocated among the patrons of such allocation unit in the ratio that the quantity or value of the business done with or for each such patron bears to the quantity or value of the business done with or for all patrons of such allocation unit. The Board shall reasonably and equitably determine whether allocations within any allocation unit shall be made on the basis of quantity or value. SECTION 8.6 TREATMENT OF PATRONAGE LOSSES OF AN ALLOCATION UNIT. (a) METHODS FOR HANDLING PATRONAGE LOSSES. The Board shall have complete discretion to determine the handling and ultimate disposition of this Cooperative's patronage-sourced net losses (including allocation unit losses) and the form, priority and manner in which such losses or portions thereof shall be taken into account, retained, and ultimately disposed of or recovered. The Board may retain such losses and subsequently (i) offset all or part of such net loss against the net income of one or more other allocation units for such fiscal year to the extent allowed by law; (ii) dispose of them by offset against the net earnings of this Cooperative (or of one or more of the allocation units) in subsequent years, (iii) apply such losses to prior years' patronage allocations at any time in order to dispose of them by means of offset and cancellation against patron's equity accounts, or (iv) select and use any other method of disposition of such losses as the Board, in its sole discretion, shall from time to time determine, provided however, that the net income or net loss of a Defined Business Unit shall not be netted against the net income or net loss of any other allocation unit, that patron equities distributed based on the earnings of a Defined Business Unit shall not be canceled based on the net loss of other allocation units and that the net loss of a Defined Business Unit shall not be applied in cancellation of patron equities distributed based on earnings of other allocation units. (b) NETTING. If one or more of this Cooperative's allocation units experience losses during any fiscal year, the losses of such allocation unit(s) may be allocated to and netted with earnings of one or more of the other allocation units of this Cooperative or be otherwise handled and disposed of in accordance with Section 8.6. This Cooperative's patrons shall be notified in any fiscal year for which such netting occurred. SECTION 8.7 DISTRIBUTION OF NET INCOME. (a) PATRONAGE REFUNDS. The net income allocated to a patron pursuant to Section 8.5 shall be distributed annually or more often to such patron as a patronage refund; provided, 16 however, that no distribution need be made where the amount otherwise to be distributed to a patron is less than a DE MINIMUS amount that may be established from time to time by the Board. (b) PATRONAGE EQUITIES. Patronage refunds may be distributed in cash, qualified and non-qualified allocated patronage equities, securities of this Cooperative, other securities, or any combination thereof designated by the Board and other equity may be distributed to members or patrons in the form of allocated non-patronage equity. All such equity is referred to collectively herein as "Patronage Equities", including, without limitation, the following: (i) ALLOCATED PATRONAGE EQUITY, which may be in one or more than one class or series, in such designations or denominations, and with such relative rights, preferences, privileges and limitations as may be fixed by the Board, with no maturity date, and bearing no interest, dividend or other annual payment. (ii) ALLOCATED NONPATRONAGE EQUITY, which may be in one or more than one class or series, in such designations or denominations, and with such relative rights, preferences, privileges and limitations as may be fixed by the Board, with no maturity date, and bearing no interest, dividend or other annual payment. Allocated Nonpatronage Equity may be distributed to patrons as part of the allocation and distribution of nonpatronage income. Such certificates shall be callable for payment in cash or other assets at such times as may be determined by the Board. (c) WRITTEN NOTICES OF ALLOCATION. The non-cash portion of a patronage refund distribution that is attributable to patronage business shall constitute a written notice of allocation as defined in 26 U.S.C. Section 1388 which shall be designated by the Board as a qualified written notice of allocation, as a non-qualified written notice of allocation, or any combination thereof, as provided in such section. (d) NO VOTING RIGHTS. Patronage Equities shall not entitle the holders thereof to any voting or other rights to participate in the affairs of this Cooperative (which rights are reserved solely for the members of this Cooperative), provided that certain Patronage Equities held by members of this Cooperative may be a factor in determining the voting power of such members as more particularly provided in these Bylaws and by the Board. (e) TRANSFER RESTRICTION. Patronage Equities may only be transferred with the consent and approval of the Board, and by such instrument of transfer as may be required or approved by this Cooperative. (f) BOARD AUTHORITY TO ALLOW CONVERSION. The Board also shall have the authority to allow conversion of Patronage Equities into Equity Participation Units, or such other equity interests and/or debt instruments of this Cooperative on such terms as shall be established by the Board. 17 (g) REDEMPTION DISCRETIONARY. No person shall have any right whatsoever to require the retirement or redemption of any Patronage Equities, or of any allocated or unallocated Capital Reserve. Such redemption or retirement is solely within the discretion and on such terms as determined from time to time by the Board. SECTION 8.8 CAPITAL RESERVE. The Board shall cause to be created a Capital Reserve and shall annually add to the Capital Reserve the sum of the following amounts: (a) The annual net income of this Cooperative attributable to nonpatronage business; (b) Annual net income from patrons who are unidentified or to whom the amount otherwise to be distributed is less than the DE MINIMUS amount provided in Section 8.7(a); and (c) As determined by the Board on a prospective basis only, an amount not to exceed 10% of the distributable net income from patronage business. The discretion to credit patronage income to a Capital Reserve shall be reduced or eliminated with respect to the net income of any period following the adoption of a Board resolution that irrevocably provides for such reduction or elimination with respect to such period. SECTION 8.9 PER UNIT RETENTIONS. The Board may require from time to time, capital contributions in addition to the capital contributed from retained patronage and Equity Participation Units. These capital contributions shall be made directly through a retain on a per unit basis for the products received by this Cooperative from its members, and the same may be determined on either a qualified or a nonqualified basis as defined in Subchapter T of the United States Internal Revenue Code. SECTION 8.10 BASE CAPITAL PLAN. For the purposes of acquiring and maintaining adequate capital to finance the business of this Cooperative, the Board may establish a Base Capital Plan. The Plan may provide a mechanism for determining this Cooperative's total capital requirements and each member's or patron's share thereof (the base capital requirement). As part of the Plan, the Board may, in its discretion, provide for redemption of capital held by members or patrons in excess of their base capital requirements and may provide a mechanism under which the cash portion of the patronage refund payable to members or patrons will depend upon the degree to which such members or patrons meet their base capital requirements. Such Plan may be amended or modified from time to time or suspended by the Board as it deems fit. ARTICLE IX CONSENT SECTION 9.1 CONSENT. Each individual or entity that hereafter applies for and is accepted to membership in this Cooperative and each member as of the effective date of this Bylaw who continues as a member after such date shall, by such act alone, consent that the amount of any 18 distributions with respect to its patronage which are made in qualified written notices of allocation (as defined in 26 U.S.C. ss. 1388), and which are received by the member from this Cooperative, will be taken into account by the member at their stated dollar amounts in the manner provided in 26 U.S.C. ss.1385(a) in the taxable year in which such qualified written notices of allocation are received by the member. SECTION 9.2 CONSENT NOTIFICATION TO MEMBERS AND PROSPECTIVE MEMBERS. Written notification of the adoption of this Bylaw, a statement of its significance and a copy of the provision shall be given separately to each member and prospective member before becoming a member of this Cooperative. SECTION 9.3 CONSENT OF NONMEMBER PATRONS. If this Cooperative obligates itself to do business with a nonmember on a patronage basis, such nonmember must either: (a) agree in writing, prior to any transaction to be conducted on a patronage basis, that the amount of any distributions with respect to patronage which are made in written notices of allocation (as defined in 26 U.S.C. ss. 1388), and which are received by the nonmember patron from this Cooperative, will be taken into account by the nonmember patron at their stated dollar amounts in the manner provided in 26 U.S.C. ss.1385(a) in the taxable year in which such written notices of allocation are received by the nonmember patron and further, that any revocation of such agreement will terminate this Cooperative's obligation to distribute patronage with respect to transactions with such nonmember that occur after the close of this Cooperative's fiscal year in which the revocation is received; or (b) consent to take the stated dollar amount of any written notice of allocation into account in the manner provided in 26 U.S.C. ss. 1385 by endorsing and cashing a qualified check as defined in and within the time provided in 26 U.S.C. ss.1388(c)(2)(C); provided that failure to so consent shall cause the written notice of allocation that accompanies said check to be canceled with no further action on the part of this Cooperative. ARTICLE X MERGER OR CONSOLIDATION, AND DISSOLUTION SECTION 10.1 MERGER OR CONSOLIDATION. If the terms of a merger or consolidation of which this Cooperative is a party do not provide the members and nonmember patrons of this Cooperative with an economic interest in the surviving entity that is substantially similar to the economic interest possessed by such members and nonmember patrons in this Cooperative immediately before such merger or consolidation, the value of the consideration received shall be divided among them in the same manner as a comparable amount of net liquidation proceeds would be distributed pursuant to Section 10.2. This shall not be construed to prevent issuance of differing forms of consideration to different groups of members and nonmember patrons to the extent allowed by law. SECTION 10.2 LIQUIDATION, DISSOLUTION AND WINDING-UP. Subject to the Articles, in the event of any liquidation, dissolution or winding up of the affairs of this Cooperative, whether 19 voluntary or involuntary, equity capital shall be distributed to the holders thereof as follows: first to payment of the liquidation preference on any preferred stock of this Cooperative, second to payment of the face amount (par value) of all Equity Participation Units; third to payment of the face amount (par value) of all Allocated Patronage Equity and other outstanding equities (other than Allocated Nonpatronage Equity); and fourth to payment of the face amount (par value) of Allocated Nonpatronage Equity; provided, however, that, following payment in full of the liquidation preference on any preferred stock of this Cooperative, assets held at such time by any Defined Business Unit shall first be used to redeem the Equity Participation Units of the Defined Business Unit on a pro rata basis. Any assets remaining after the foregoing payments have been made shall be allocated among the allocation units in such manner as the Board, having taken into consideration the origin of such amounts, shall determine to be reasonable and equitable. Amounts so allocated shall be paid to current and former patrons of each such allocation unit in proportion to their patronage of such unit over such period as may be determined to be equitable and practicable by the Board. Such obligation to distribute shall be construed as a preexisting duty to distribute any patronage sourced net gain realized in the winding up process to the maximum extent allowable by law. ARTICLE XI GENERAL PROVISION SECTION 11.1 SEAL. The Board may, by resolution, adopt, alter or abandon the use of a corporate seal. SECTION 11.2 AMENDMENTS. Except as otherwise provided herein, these Bylaws may be amended or altered, in whole or in part, as provided by law, at any regular or special meeting of the members, when such action has been duly announced in the notice of such meeting, provided that a majority of the votes cast by the members entitled to vote and voting, including mail ballots, if applicable, shall approve such amendment or alteration. # # # 20 EXHIBIT B-1 STRUCTURE B/STEP ONE AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Plan") is dated as of ________ __, 2000, and is by and between CENEX HARVEST STATES COOPERATIVES ("CHSC") and UCB ACQUISITION CO. ("UCB Acquisition"), each of which may be referred to herein as a "Constituent Cooperative," and both of which may be collectively referred to herein as the "Constituent Cooperatives". RECITALS WHEREAS, CHSC is a cooperative association organized under Chapter 308A of the Minnesota Statutes (as amended, the "Minnesota Act"), and UCB Acquisition is a cooperative association organized under Chapter 29 of Title 17 of the Ohio Revised Code (as amended, the "Ohio Act"); and WHEREAS, CHSC is the sole member of UCB Acquisition; and WHEREAS, the respective Boards of Directors of CHSC and UCB Acquisition and the respective members of CHSC and UCB Acquisition have approved and adopted this Plan and the transactions contemplated hereby in the manner required by Section 308A.801 of the Minnesota Act and Sections 1729.35 and 1729.36 of the Ohio Act, and in the manner required by their respective Articles of Incorporation and Bylaws; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements of the parties contained herein, the parties hereto agree as follows: AGREEMENT SECTION 1. THE MERGER. As of the Effective Time (as defined in Section 8), CHSC and UCB Acquisition shall combine through merger (the "Merger"), in accordance with the applicable provisions of the Minnesota Act and the Ohio Act. UCB Acquisition, whose Articles of Incorporation and Bylaws each shall be amended and restated in their entirety as further provided herein, and whose name shall change to United Country Brands, Inc. ("UCB"), shall be the surviving cooperative association. UCB shall continue to exist by virtue of, and shall continue to be governed by, the Ohio Act. The separate existence of CHSC shall cease as of the Effective Time. SECTION 2. ARTICLES OF MERGER AND CERTIFICATE OF MERGER. (a) THE ARTICLES OF MERGER. On or before the Effective Time, CHSC and UCB Acquisition each shall execute articles of merger (the "Articles of Merger") setting forth the information required by and otherwise in compliance with Section 308A.801 of the Minnesota Act. The Articles of Merger shall be filed with the Secretary of State of the State of Minnesota or as otherwise required by the Minnesota Act, and shall provide that the Merger shall become effective at the Effective Time. (b) THE CERTIFICATE OF MERGER. On or before the Effective Time, CHSC and UCB Acquisition each shall execute a certificate of merger (the "Certificate of Merger") setting forth the information required by and otherwise in compliance with Section 1729.38 of the Ohio Act. The Certificate of Merger shall be filed with the Secretary of State of the State of Ohio or as otherwise required by the Ohio Act, and shall provide that the Merger shall become effective at the Effective Time. SECTION 3. EFFECT OF THE MERGER. From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders: (a) UCB, as the surviving cooperative association in the Merger, shall have all of the rights, privileges, immunities, and powers, and shall be subject to all the duties and liabilities, of a cooperative association organized under the Ohio Act; (b) UCB, as the surviving cooperative association in the Merger, shall possess all of the rights, privileges, immunities, and franchises, of a public as well as a private nature, of each Constituent Cooperative; (c) all property, including real, personal, and mixed, and all debts due on whatever account, including all choses in action, and each and every other interest of or belonging to or due to each Constituent Cooperative, shall be deemed to be and hereby is vested in UCB, without further act or deed; (d) the title to any property, or any interest therein, vested in either Constituent Cooperative, shall not revert or be in any way impaired by reason of the Merger; (e) UCB shall be responsible and liable for all of the liabilities and obligations of each Constituent Cooperative, and any claim existing or action or proceeding pending by or against one of the Constituent Cooperatives may be prosecuted as if the Merger had not taken place, and UCB may be substituted in its place; -2- (f) without the creditor's consent, neither the rights of any creditor nor any liens upon the property of either of the Constituent Cooperatives shall be impaired by the Merger; (g) the Merger shall not be considered an assignment; and (h) the Merger shall have any other effect set forth in the Ohio Act, and in the Transaction Agreement dated September, 1999, by and between CHSC, Farmland Industries, Inc. ("Farmland"), and UCB Acquisition (the "Transaction Agreement"), all with the effect and to the extent provided in the applicable provisions of the Minnesota Act and the Ohio Act. SECTION 4. ARTICLES OF INCORPORATION AND BYLAWS. (a) THE SURVIVING ENTITY ARTICLES. From and after the Effective Time, pursuant to the Certificate of Merger and the Articles of Merger, and without any further action by the Constituent Cooperatives or any of their respective members or equity holders, the Articles of Incorporation of UCB Acquisition, as the surviving cooperative association in the Merger, shall be amended and restated in their entirety to read as set forth in SCHEDULE I attached to this Plan and made a part of it (the "Surviving Entity Articles"). A copy of the Surviving Entity Articles was provided to the respective members of each Constituent Cooperative in connection with their consideration of the Merger. (b) THE SURVIVING ENTITY BYLAWS. From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, the Bylaws of UCB Acquisition, as the surviving cooperative association in the Merger, shall be amended and restated in their entirety to read as set forth in EXHIBIT B-2, which is attached to the Transaction Agreement and made a part of both the Transaction Agreement and this Plan (the "Surviving Entity Bylaws"). A copy of the Surviving Entity Bylaws was provided to the respective members of each Constituent Cooperative in connection with their consideration of the Merger. SECTION 5. BOARD OF DIRECTORS. From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders: (a) each person serving as a director of CHSC immediately prior to the Effective Time shall become a director of UCB, as the surviving cooperative association in the Merger, to serve in accordance with the Surviving Entity Bylaws; and -3- (b) each person serving as a director of UCB Acquisition immediately prior to the Effective Time shall be removed, and shall no longer serve as a director of UCB after the Effective Time. SECTION 6. EXCHANGE, REDESIGNATION, CONVERSION, AND CONTINUATION OF CAPITAL STOCK, NON-STOCK EQUITY INTERESTS, PATRONS' EQUITIES, AND MEMBERSHIPS. As of the Effective Time, the manner and basis of exchanging and continuing the shares of capital stock, non-stock equity interests, patronage equity interests (including all entitlements to patronage refunds), any other allocated equity interests, and unallocated and capital reserves of CHSC and of UCB (all such interests referred to herein as "CHSC Equity Interests" or "UCB Equity Interests," respectively), and membership interests in CHSC and UCB, shall be as set forth in this Section 6: (a) CONTINUATION OF CHSC MEMBERSHIPS. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, each member of CHSC shall become and be a member of UCB, to the extent such member is eligible for membership under the Surviving Entity Articles and the Surviving Entity Bylaws, in such class and with such incidents of membership as are set forth in the Surviving Entity Articles and the Surviving Entity Bylaws. However, notwithstanding the foregoing provisions, any membership interest which Farmland has in CHSC shall be terminated as of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders. (b) TERMINATION OF THE CHSC MEMBERSHIP AND EQUITY INTERESTS IN UCB ACQUISITION. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, the membership of CHSC in UCB Acquisition shall be terminated, and all of CHSC's equity interests in UCB Acquisition shall be terminated, canceled, and extinguished. (c) EXCHANGE AND CONTINUATION OF CHSC EQUITY INTERESTS. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, all Equity Interests standing on the books of CHSC immediately prior to the Effective Time shall be converted into Equity Interests in UCB at their stated dollar amount on a dollar-for-dollar basis, or redeemed and canceled, as follows: (i) Equity Participation Units. Each Equity Participation Unit of CHSC issued and outstanding or otherwise standing on the books of CHSC immediately prior to the Effective Time, including without limitation all Wheat Milling EPUs and all Oilseed Processing & Refining EPUs, -4- shall be redeemed and canceled in a manner consistent with the terms and conditions of the original issuance. (ii) Patronage Equity Interests. All patronage certificates and any other allocated or to be allocated patronage equity interests (including all entitlements to patronage refunds) standing on the books of CHSC immediately prior to the Effective Time, including without limitation all Capital Equity Certificates, Certificates of Indebtedness, and Preferred Capital Certificates, shall be exchanged for like and equal patronage certificates, allocated or to be allocated patronage equity interests, entitlements to patronage refunds, allocated patronage equity, or other like and equal patronage equity interests on the books of UCB, at the same stated dollar amount and on a dollar-for-dollar basis, and in such denominations or other designations or series so as to preserve the year of issue (as UCB deems necessary), along with all of the other terms and conditions of the original issuance. (iii) Nonpatronage Equity Interests. All nonpatronage certificates and any other allocated or to be allocated nonpatronage equity interests (including all entitlements to nonpatronage refunds) standing on the books of CHSC immediately prior to the Effective Time shall be exchanged for like and equal nonpatronage certificates, allocated or to be allocated nonpatronage equity interests, entitlements to nonpatronage refunds, allocated nonpatronage equity, or other like and equal nonpatronage equity interests on the books of UCB, at the same stated dollar amount and on a dollar-for-dollar basis, and in such denominations or other designations or series so as to preserve the year of issue (as UCB deems necessary), along with all of the other terms and conditions of the original issuance. (iv) Patronage Payable and Capital Reserve. An amount equal to the unallocated capital reserves of CHSC, minus an amount equal to the deferred patronage equity of CHSC (as computed from the books and records of CHSC as of the Effective Time, in accordance with generally accepted accounting principles, consistently applied), and minus $100 million, shall be allocated and distributed to the CHSC members (in such manner and to such members as the CHSC Board of Directors shall specify prior to the Effective Time) in the form of allocated nonpatronage equity of UCB. (v) Net Effect. The net effect of the conversion of CHSC Equity Interests for like and equal Equity Interests in UCB shall be that the holders of CHSC Equity Interests standing on the books of CHSC immediately prior to the Effective Time shall receive from UCB and -5- will have like and equal Equity Interests in UCB immediately following the Effective Time in terms of stated dollar amount on a dollar-for-dollar basis, year of issue (as UCB deems necessary), and other rights and preferences, and that the patronage payable, capital reserve, and other allocated or unallocated Equity Interests of CHSC standing on its books immediately prior to the Effective Time shall be exchanged for the same identical and equal Equity Interest in UCB immediately following the Effective Time, in terms of the stated dollar amount on a dollar-for- dollar basis, year of issue (if applicable and as UCB deems necessary), and other rights and preferences. Notwithstanding the foregoing provisions, any CHSC Equity Interests that are held by Farmland shall be canceled and extinguished as of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders. (d) SURVIVING ENTITY ARTICLES AND SURVIVING ENTITY BYLAWS TO GOVERN. Membership in UCB and all Equity Interests in UCB issued or credited in exchange for CHSC Equity Interests, as described above, shall in all instances be governed by the provisions of the Surviving Entity Articles and the Surviving Entity Bylaws. (e) FURTHER ASSURANCES OF HOLDERS OF EQUITY INTERESTS. Each holder of CHSC Equity Interests shall take such action or cause to be taken such action as UCB may reasonably deem necessary or appropriate to effect the exchange and continuation of the CHSC Equity Interests described in this Plan, including without limitation the indorsement and delivery of any stock certificates or other evidences of equity being exchanged or continued under this Plan. (f) NO AFFECTED STOCKHOLDERS. CHSC and UCB Acquisition agree that the Merger does not involve any "Affected Stockholders," as defined in Section 1729.35 of the Ohio Act. SECTION 7. FURTHER ASSURANCES. From time to time and after the Effective Time, as and when requested by UCB, or its successors or assigns, CHSC shall execute and deliver or cause to be executed and delivered all such deeds and other instruments, and shall take or cause to be taken all such further action or actions, as UCB, or its successors or assigns, may deem necessary or desirable in order to vest in and confirm to UCB, or its successors or assigns, title to and possession of all of the properties, rights, privileges, powers, and franchises referred to in Section 3 of this Plan, and otherwise to carry out the intent and purposes of this Plan. If UCB shall at any time deem that any further assignments or assurances or any other acts are necessary or desirable to vest, perfect, or confirm of record or otherwise the title to any property or -6- to enforce any claims of CHSC vested in UCB pursuant to this Plan, the officers of UCB, or its successors or assigns, are hereby specifically authorized as attorneys-in-fact of CHSC (which appointment is irrevocable and coupled with an interest), to execute and deliver any and all such deeds, assignments, and assurances and to do all such other acts in the name of and on behalf of CHSC, or otherwise, as such officer shall deem necessary or appropriate to accomplish such purpose. SECTION 8. EFFECTIVE TIME. The Merger shall become effective at 12:01 a.m. Central Time on March 1, 2000 (the "Effective Time"). SECTION 9. GOVERNING LAW. This Plan shall be governed by and construed in accordance with the laws of the States of Minnesota and Ohio. SECTION 10. ABANDONMENT. In accordance with the Ohio Act and the Minnesota Act, the Merger may be abandoned at any time before the Effective Time, in the manner described in the Transaction Agreement. SECTION 11. AMENDMENT. Subject to any requirement or limitation imposed by law, this Plan may be amended in the manner described in the Transaction Agreement. IN WITNESS WHEREOF, this Plan has been agreed to and executed by the duly authorized representatives of CHSC and UCB Acquisition, as of the date first set forth above. CENEX HARVEST STATES UCB ACQUISITION CO. COOPERATIVES By By --------------------------------- -------------------------------------- Its Its -------------------------------- ------------------------------------- -7- SCHEDULE I TO EXHIBIT B-1 Please refer to Exhibit A-1, Schedule I STRUCTURE B/STEP TWO AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Plan") is dated as of ________ __, 2000, and is by and between FARMLAND INDUSTRIES, INC. ("Farmland") and UCB ACQUISITION CO. ("UCB Aquisition"), each of which may be referred to herein as a "Constituent Cooperative," and both of which may be collectively referred to herein as the "Constituent Cooperatives". RECITALS WHEREAS, Farmland is a cooperative corporation organized under Article 16 of Chapter 17 of the Kansas Statutes (as amended, the "Kansas Act"), and UCB Acquisition is a cooperative association organized under Chapter 29 of Title 17 of the Ohio Revised Code (as amended, the "Ohio Act"); and WHEREAS, Cenex Harvest States Cooperatives ("CHSC") is the sole member of UCB Acquisition; and WHEREAS, the respective Boards of Directors of Farmland and UCB Acquisition and the respective members of Farmland and UCB Acquisition have approved and adopted this Plan and the transactions contemplated hereby in the manner required by Sections 17-1637 and 17-1638 of the Kansas Act and Sections 1729.35 and 1729.36 of the Ohio Act, and in the manner required by their respective Articles of Incorporation and Bylaws; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements of the parties contained herein, the parties hereto agree as follows: AGREEMENT SECTION 1. THE MERGER. At the Effective Time (as defined in Section 8), Farmland and UCB Acquisition shall combine through merger (the "Merger"), in accordance with the applicable provisions of the Kansas Act and the Ohio Act. UCB Acquisition, whose Articles of Incorporation and Bylaws each shall be amended and restated in their entirety as further provided herein, and whose name shall change to United Country Brands, Inc. ("UCB"), shall be the surviving cooperative association. UCB shall continue to exist by virtue of, and shall continue to be governed by, the Ohio Act. The separate existence of Farmland shall cease as of the Effective Time. SECTION 2. ARTICLES OF MERGER AND CERTIFICATE OF MERGER. (a) THE ARTICLES OF MERGER. On or before the Effective Time, Farmland and UCB Acquisition each shall execute articles of merger (the "Articles of Merger") and/or a certificate of merger (the "Certificate of Merger") setting forth the information required by and otherwise in compliance with Sections 17-1637 and 17-1638 of the Kansas Act. The Articles of Merger and/or the Certificate of Merger shall be filed with the Secretary of State of the State of Kansas or as otherwise required by the Kansas Act, and shall provide that the Merger shall become effective at the Effective Time. (b) THE CERTIFICATE OF MERGER. On or before the Effective Time, Farmland and UCB Acquisition each shall execute a certificate of merger (the "Certificate of Merger") setting forth the information required by and otherwise in compliance with Section 1729.38 of the Ohio Act. The Certificate of Merger shall be filed with the Secretary of State of the State of Ohio or as otherwise required by the Ohio Act, and shall provide that the Merger shall become effective at the Effective Time. SECTION 3. EFFECT OF THE MERGER. From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders: (a) UCB, as the surviving cooperative association in the Merger, shall have all of the rights, privileges, immunities, and powers, and shall be subject to all the duties and liabilities, of a cooperative association organized under the Ohio Act; (b) UCB, as the surviving cooperative association in the Merger, shall possess all of the rights, privileges, immunities, and franchises, of a public as well as a private nature, of each Constituent Cooperative; (c) all property, including real, personal, and mixed, and all debts due on whatever account, including all choses in action, and each and every other interest of or belonging to or due to each Constituent Cooperative, shall be deemed to be and hereby is vested in UCB, without further act or deed; (d) the title to any property, or any interest therein, vested in either Constituent Cooperative, shall not revert or be in any way impaired by reason of the Merger; (e) UCB shall be responsible and liable for all of the liabilities and obligations of each Constituent Cooperative, and any claim existing or action or proceeding pending by or against one of the Constituent Cooperatives may be prosecuted as if the Merger had not taken place, and UCB may be substituted in its place; -2- (f) without the creditor's consent, neither the rights of any creditor nor any liens upon the property of either of the Constituent Cooperatives shall be impaired by the Merger; (g) the Merger shall not be considered an assignment; and (h) the Merger shall have any other effect set forth in the Ohio Act, and in the Transaction Agreement dated September, 1999, by and between CHSC, Farmland, and UCB Acquisition (the "Transaction Agreement"), all with the effect and to the extent provided in the applicable provisions of the Kansas Act and the Ohio Act. SECTION 4. ARTICLES OF INCORPORATION AND BYLAWS. (a) THE SURVIVING ENTITY ARTICLES. From and after the Effective Time, pursuant to the Certificate of Merger and the Articles of Merger, and without any further action by the Constituent Cooperatives or any of their respective members or equity holders, the Articles of Incorporation of UCB Acquisition, as the surviving cooperative association in the Merger, shall be amended and restated in their entirety to read as set forth in SCHEDULE I, which is attached to this Plan and made a part of it (the "Surviving Entity Articles"). A copy of the Surviving Entity Articles was provided to the respective members of each Constituent Cooperative in connection with their consideration of the Merger. (b) THE SURVIVING ENTITY BYLAWS. From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, the Bylaws of UCB Acquisition, as the surviving cooperative association in the Merger, shall be amended and restated in their entirety to read as set forth in EXHIBIT B-2, which is attached to the Transaction Agreement and made a part of both the Transaction Agreement and this Plan (the "Surviving Entity Bylaws"). A copy of the Surviving Entity Bylaws was provided to the respective members of each Constituent Cooperative in connection with their consideration of the Merger. SECTION 5. BOARD OF DIRECTORS. From and after the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders: (a) each person serving as a director of Farmland immediately prior to the Effective Time shall become a director of UCB, as the surviving cooperative association in the Merger, to serve in accordance with the Surviving Entity Bylaws; and -3- (b) each person serving as a director of UCB immediately prior to the Effective Time shall remain a director of UCB, as the surviving cooperative association in the Merger, to serve in accordance with the Surviving Entity Bylaws. SECTION 6. EXCHANGE, REDESIGNATION, CONVERSION, AND CONTINUATION OF CAPITAL STOCK, NON-STOCK EQUITY INTERESTS, PATRONS' EQUITIES, AND MEMBERSHIPS. On the Effective Time, the manner and basis of exchanging and continuing the shares of capital stock, non-stock equity interests, patronage equity interests (including all entitlements to patronage refunds), any other allocated equity interests, and unallocated and capital reserves of Farmland (all such interests referred to herein as "Farmland Equity Interests"), and membership interests in Farmland and UCB, for like and equal Equity Interests and membership interests in UCB, shall be as set forth in this Section 6: (a) CONTINUATION OF FARMLAND MEMBERSHIPS. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, each member of Farmland shall become and be a member of UCB, to the extent such member is eligible for membership under the Surviving Entity Articles and the Surviving Entity Bylaws, in such class and with such incidents of membership as are set forth in the Surviving Entity Articles and the Surviving Entity Bylaws. However, notwithstanding the foregoing provisions, any membership which UCB Acquisition has in Farmland shall be terminated as of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders. (b) TERMINATION OF THE FARMLAND MEMBERSHIP IN UCB. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, any membership interest which Farmland has in UCB shall be terminated. (c) EXCHANGE AND CONTINUATION OF FARMLAND EQUITY INTERESTS. As of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders, all Equity Interests standing on the books of Farmland immediately prior to the Effective Time shall be converted into Equity Interests in UCB at their stated dollar amount on a dollar-for-dollar basis, as follows: (i) Common Stock and Associate Member Common Stock. Each share of common stock and associate member common stock of Farmland issued and outstanding or otherwise standing on the books of Farmland immediately prior to the Effective Time shall be exchanged for allocated patronage equity or allocated nonpatronage equity of UCB in a face amount of $25.00, and in such designations or series -4- so as to preserve the year of issue (as UCB deems necessary) and other terms and conditions of the original issuance. (ii) Patronage Equity Interests. All capital credits, patronage refunds, and any other allocated or to be allocated equity interests (including all entitlements to patronage refunds) as of the Effective Time which are not included in clause (i) above shall be exchanged for allocated patronage equity or allocated nonpatronage equity of UCB in a face amount equal to such capital credits, patronage refunds, allocated or to be allocated equity interests, entitlements to patronage refunds, or other equity interests in such denominations or other designations or series so as to preserve the year of issue (as UCB deems necessary) and other terms and conditions of the original issuance. (iii) SF Services Warrants. The outstanding Warrants for Equity Interests of Farmland issued in the acquisition of SF Services, Inc. shall, from and after the Effective Time, represent warrants to convert into UCB allocated patronage equity or allocated nonpatronage equity in the same face amount as the Warrants could have been converted into face amount Farmland Equity Interests. (iv) Unallocated Surplus. There shall be allocated to the Farmland members (in such manner and to such members as the Farmland Board of Directors shall specify prior to the Effective Time) an amount equal to the amount by which Farmland's earned surplus account (as computed from the books and records of Farmland as of the Effective Time, in accordance with generally accepted accounting principles, consistently applied) exceeds $100 million, and UCB allocated nonpatronage equity shall be so issued to such Farmland members as of the Effective Time; provided, however, that the UCB allocated nonpatronage equity issued hereunder shall be registered in the name of UCB to be held by it in escrow and disposed of as provided in the Capital Plan of UCB. (v) Preferred Stock. Each share of 8% Series A Cumulative Redeemable Preferred Stock of Farmland issued and outstanding or otherwise standing on the books of Farmland immediately prior to the Effective Time shall be converted into one share of 8% Series A Cumulative Redeemable Preferred Stock of UCB. (vi) Net Effect. The net effect of the conversion of Farmland Equity Interests for like and equal Equity Interests in UCB shall be that the holders of Farmland Equity Interests standing on the books of Farmland immediately prior to the Effective Time shall hold and will -5- have equal Equity Interests in UCB immediately following the Effective Time, in terms of stated dollar amount on a dollar-for-dollar basis, year of issue (as determined necessary), and any other rights and preferences. Notwithstanding the foregoing provisions, any Farmland Equity Interests that are held by UCB Acquisition shall be canceled and extinguished as of the Effective Time, without any further action by the Constituent Cooperatives or any of their respective members or equity holders. (d) SURVIVING ENTITY ARTICLES AND SURVIVING ENTITY BYLAWS TO GOVERN. Membership in UCB and all Equity Interests in UCB issued or credited in exchange for Farmland Equity Interests, as described above, shall in all instances be governed by the provisions of the Surviving Entity Articles and the Surviving Entity Bylaws. (e) FURTHER ASSURANCES OF HOLDERS OF EQUITY INTERESTS. Each holder of Farmland Equity Interests shall take such action or cause to be taken such action as UCB may reasonably deem necessary or appropriate to effect the exchange and continuation of the Farmland Equity Interests described in this Plan, including without limitation the indorsement and delivery of any stock certificates or other evidences of equity being exchanged or continued under this Plan. (f) NO AFFECTED STOCKHOLDERS. Farmland and UCB Acquisition agree that the Merger does not involve any "Affected Stockholders," as defined in Section 1729.35 of the Ohio Act. SECTION 7. FURTHER ASSURANCES. From time to time and after the Effective Time, as and when requested by UCB, or its successors or assigns, Farmland shall execute and deliver or cause to be executed and delivered all such deeds and other instruments, and shall take or cause to be taken all such further action or actions, as UCB, or its successors or assigns, may deem necessary or desirable in order to vest in and confirm to UCB, or its successors or assigns, title to and possession of all of the properties, rights, privileges, powers, and franchises referred to in Section 3 of this Plan, and otherwise to carry out the intent and purposes of this Plan. If UCB shall at any time deem that any further assignments or assurances or any other acts are necessary or desirable to vest, perfect, or confirm of record or otherwise the title to any property or to enforce any claims of Farmland vested in UCB pursuant to this Plan, the officers of UCB, or its successors or assigns, are hereby specifically authorized as attorneys-in-fact of Farmland (which appointment is irrevocable and coupled with an interest), to execute and deliver any and all such deeds, assignments, and assurances and to do all such other acts in the name of and on behalf of -6- Farmland, or otherwise, as such officer shall deem necessary or appropriate to accomplish such purpose. SECTION 8. EFFECTIVE TIME. The Merger shall become effective at 12:02 a.m. Central Time on March 1, 2000 (the "Effective Time"). SECTION 9. GOVERNING LAW. This Plan shall be governed by and construed in accordance with the laws of the States of Kansas and Ohio. SECTION 10. ABANDONMENT. In accordance with the Kansas Act and the Ohio Act, the Merger may be abandoned at any time before the Effective Time, in the manner described in the Transaction Agreement. SECTION 11. AMENDMENT. Subject to any requirement or limitation imposed by law, this Plan may be amended in the manner described in the Transaction Agreement. IN WITNESS WHEREOF, this Plan has been agreed to and executed by the duly authorized representatives of Farmland and UCB Acquisition, as of the date first set forth above. FARMLAND INDUSTRIES, INC. UCB ACQUISITION CO. By By --------------------------------- -------------------------------------- Its Its -------------------------------- ------------------------------------- -7- SCHEDULE I TO EXHIBIT B-1 Please refer to Exhibit A-1, Schedule I EXHIBIT B-2 Please refer to Exhibit A-2 Surviving Entity Bylaws EXHIBIT C [FLOW CHART] BOARD OF DIRECTORS OFFICE LEADERSHIP CEO PRESIDENT ASSISTANTS ASSISTANT SENIOR MANAGEMENT B B B A A A A FINANCE COMMUNICATION ENERGY FARM MKTG GRAIN BASED MEMBER BUSINESS & SUPPLY FOODS SERVICES DEVELOPMENT B B B A A A LEGAL AGRONOMY STRATEGIC ALIGNED REF. FOODS SUPPORT PLANNING GRAIN LIVESTOCK SERVICES ALL SENIOR MANAGEMENT REPORTS TO OFFICE OF LEADERSHIP A AND B DENOTES PRIMARY CONTACT IN OFFICE OF LEADERSHIP A = PRESIDENT B = CHIEF EXECUTIVE OFFICER EXHIBIT D CAPITAL PLAN I. Key Principles Underlying the Capital Plan. 1) The total capital required by the Company will be dependent upon the assets required to be owned to accomplish its mission as well as the cost and availability of debt. 2) Each base capital pool will have a target level of base capital. 3) Members of the Company will be required to provide capital based upon relative use of the capitalization unit and the respective target levels of base capital. 4) Retention of earnings will be a source of capital. The percentage of earnings to be paid in cash patronage from a patronage pool will increase as a member's capital increases relative to the base capital requirement. 5) If a member has capital levels in excess of base capital requirements, the excess amount will be subject to retirement on a basis to be determined by the Board of Directors. 6) Patronage-sourced earnings will be allocated on a patronage basis provided that the Board will have the authority to designate a portion of patronage-sourced earnings as unallocated surplus to build a reserve to absorb losses. 7) Earnings from non-patronage sourced business will generally be used to build unallocated surplus. 8) The concept of Equity Participation Units developed by Harvest States will be retained. 9) Minimum capital requirements will be $1,000 for individual members and $10,000 for member cooperatives, with all existing members to be grandfathered under existing minimum capital requirements. New members meet minimum capital requirements through patronage earnings. II. Terra Tax Case. A. Key Terra Principles 1) No owner equities will be adversely impacted in a consolidated setting as compared to stand alone. In the event, however, that there is an adverse impact, it is understood that it should be borne by the former Farmland stockholders (equity holders). -1- 2) The Company must maintain a base of permanent equity to support its operations (i.e. equity which is not subject to retirement and is not credited to base capital plan requirements). 3) The outcome of the Terra case will not impact voting power. B. Key Terra Agreements 1) Each party will be responsible for $100,000,000 of permanent equity. a. As set forth in the Plan of Merger, at the Effective Time, the Surviving Entity will allocate and distribute to CHSC members non-patronage equity interests in the Surviving Entity in an amount equal to CHSC's surplus minus CHSC's deferred patronage as of the Effective Time and minus $100,000,000. Such non-patronage equity interests shall not be included for purposes of voting determinations but shall be "retirement/base capital eligible equity" (i.e., included in determining satisfaction of requirements for base capital and shall be eligible for redemption under the Capital Plan). b. At the Effective Time, the Surviving Entity will allocate to Farmland members non-patronage equity interests in the Surviving Entity in an amount equal to the excess of the Farmland surplus over $100,000,000 as of the Effective Time. The non-patronage equity interests allocated to Farmland's members shall be distributed to such members by transfer of such non-patronage equity interests to the Surviving Entity to be held in escrow on behalf of the Farmland members until the Terra tax case is resolved and is then to be distributed to Farmland members in accordance with the provisions set forth below or canceled. So long as such non-patronage equity is held in escrow, it shall not be included for purposes of voting determinations, shall not be included in determining satisfaction of requirements for base capital and shall not be eligible for redemption under the Capital Plan; however, once distributed from escrow to Farmland members, such non-patronage equity shall be included in determining satisfaction of requirements for base capital and shall be eligible for redemption under the Capital Plan. 2) If Terra is lost: a. The amount of the Terra loss (which amount shall be net of the deferred tax asset created) shall be determined. b. The amount in 2)a. shall be reduced by an amount equal to 64.5% of the net non-patronage income of the Surviving Entity from the Effective Time. -2- c. The net amount determined in 2)b. above shall first be allocated to Farmland members by cancellation of the non-patronage equity issued under 1)b. above up to such net amount and if, thereafter, there remains any non-patronage equity held in escrow under 1)b. above, it shall be distributed from escrow to the appropriate members and shall be converted to retirement/base capital eligible equity. d. If there is any net loss remaining after application of 2)c. above (the "Remaining Adjustment"), then equity in an amount equal to the Remaining Adjustment received by Farmland members in the Merger for their Farmland Equity Interests shall be converted to permanent equity so that such converted equity will not be included in determining satisfaction of requirements for base capital and will not be eligible for redemption under the Capital Plan. However, such equity will continue to be counted for voting purposes. e. Permanent equity in 2)d. will be converted to retirement/base capital eligible equity at a rate of 64.5% of the total non-patronage earnings (after application of all expenses other than interest on borrowings used to pay the Terra obligation), less an appropriate interest charge to reflect the borrowings used to pay the Terra obligation, less the reduction of the deferred tax asset associated with the Terra loss. f. Debt and other funding actions required to pay a Terra judgment will be serviced from non-patronage income deemed attributable to Farmland assets. g. Equity balances held by estates will be retired in full regardless of classification. h. An example of the foregoing is appended hereto as Appendix I. 3) If Terra is won, Farmland members' non-patronage equity allocated under 1)b. above will be converted into retirement/base capital eligible equity and distributed from the escrow. III. Other Contingent Liabilities. A. Key Principles. The parties recognize that there will be liabilities that arise in the future out of facts that existed at the Effective Time, which liabilities would be required to be paid by the Surviving Entity. Some of such liabilities and/or the facts related thereto may not be disclosed pursuant to the Transaction Agreement, or if disclosed, nevertheless may not be adequately reserved for in the party's financial statements. -3- B. Reclassification. Accordingly, in addition to the Terra Tax case matter, the Surviving Entity shall make reclassifications of equity as follows: (a) with respect to Farmland Contingent Losses, the Surviving Entity shall reclassify the equity that was received in the Transaction in exchange for Farmland common stock or other Farmland equity, and (b) with respect to CHSC Contingent Losses, the Surviving Entity shall reclassify the equity that was retained with respect to CHSC equity or was received in exchange for CHSC equity in the Transaction. C. Procedures and Definitions. 1) As used herein, "Farmland Contingent Loss" is a loss that exceeds $1,000,000.00 incurred by the Surviving Entity arising out of a matter or group of related matters relating to liabilities (fixed, contingent or otherwise, but not including losses relating to the Terra Tax case) of Farmland, the material facts of which existed at the Effective Time but were not included in Farmland's Disclosure Schedule and were not adequately reserved for in the financial statements of Farmland as of the Effective Time, or even if included in such disclosure schedule, were not adequately reserved for in the financial statements of Farmland as of the Effective Time, and a "CHSC Contingent Loss" is a loss that exceeds $1,000,000.00 incurred by the Surviving Entity arising out of a matter or group of related matters relating to liabilities (fixed, contingent or otherwise) of CHSC, the material facts of which existed at the Effective Time but were not included in CHSC's Disclosure Schedule and were not adequately reserved for in the financial statements of CHSC as of the Effective Time, or even if included in such disclosure schedule, were not adequately reserved for in the financial statements of CHSC as of the Effective Time; and which in either case come to light before October 1, 2000 or such earlier time as the parties agree. For purposes of these definitions: (i) a loss shall be deemed to have been incurred at the earlier of the time that (a) it was actually incurred, or (b) at the time that the party incurring the loss is required by GAAP to account for the loss on its books; (ii) whether a liability was "adequately" reserved for shall be assessed with reference to the finally-determined amount of the liability in question; and (iii) the amount of a Contingent Loss shall be determined net of any actual reserves. 2) In determining the amount of any loss, there shall be taken into account the reserves for such loss that were provided for in the financial statements of (i) Farmland or of any unconsolidated Subsidiary of Farmland, in the instance of determining the amount of any Farmland Contingent Loss, and (ii) CHSC or of any unconsolidated Subsidiary of CHSC, in the instance of determining the amount of any CHSC Contingent Loss. Determinations of the amount of any loss shall be made by the board of directors of the Surviving Entity. 3) Such reclassification of equity shall be done by the Surviving Entity as follows: -4- a. Each party's Contingent Losses shall be calculated. b. $20 million shall be deducted from each such Contingent Loss figure, to arrive at a "Net Contingent Loss" figure for each party. c. Reclassification of equity shall be made with respect to a party only if, and to the extent that, the aggregate of such party's Net Contingent Losses exceeds the aggregate of the other party's Net Contingent Losses. 4) Any such reclassification shall be made in a manner substantially similar to the procedures for the reclassification to be made if there is a loss relating to the Terra Tax case (as set forth in II above). 5) The provisions of this Part III may be modified upon the affirmative vote of three-fourths of the full board of directors of the Surviving Entity. APPENDIX I 1. Assume a Terra loss with a required payment of $400 million. The approximate after-tax charge to equity would be $280 million. A deferred tax asset of $120 million would be created. 2. If Farmland allocated equity is $550 million and unallocated surplus is $250 million, the $280 million charge would offset the entire unallocated account; $30 million would be carried in a deficit account. 3. Of the $550 million in allocated equities, $130 million would be converted to permanent equity. The remaining $420 million would remain as retirement/base capital eligible equity. 4. Assume, after the Effective Time, the Surviving Entity has total non-patronage income (after application of all expenses other than interest on borrowings used to pay the Terra obligation) of $93 million. 5. Of the $93 million in total non-patronage earnings, approximately $60 million would go into the Farmland pool. 6. Assume the interest expense on the Terra note is $25 million. The net non-patronage sourced income in the Farmland pool would be $35 million. 7. The $35 million net non-patronage sourced income in the pool will be sheltered with the NOL. As the NOL is used, the deferred tax asset will be reduced. 8. The net build-up in the unallocated surplus attributable to the Farmland pool will be $35 million less the reduction in the deferred tax asset. This net number will be the amount of permanent equity converted to retirement/base capital eligible equity. EX-10.36 5 EMPLOYMENT AGREEMENT EXHIBIT 10.36 EMPLOYMENT AGREEMENT THIS AGREEMENT is made effective as of May 1, 1999 by and between Michael Bergeland (hereinafter "Bergeland") and Cenex Harvest States Cooperatives, a Minnesota cooperative corporation (together with all affiliates, the "Company"). 1. The Employment Clause The Company hereby agrees to and does hereby employ Bergeland as Executive Vice President and Bergeland hereby agrees to continue in the employ of the Company as Executive Vice President 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 also agreed for the period of this agreement, Bergeland shall be afforded the same professional privileges generally afforded Executive Vice Presidents of the Company which include but are not limited to attendance at meetings, business trips, and continuation of membership on boards such as the Grain Exchange, United Harvest and the Company Retirement Plans. Bergeland shall also be afforded the same consideration for retention and/or success incentives as other Executive Vice President's of the Company should such incentives become operative through any merger, acquisition, or change in control. 2. Period of Employment; Termination of Agreement The period of employment shall commence on the date of this Agreement and, subject only to the provisions of Paragraphs 6(b) and 6(c) below, relating, respectively, to death and disability, shall continue through August 31, 2001, provided that Bergeland's employment may be terminated by either party on at least thirty (30) days written notice, subject to the rights and obligations of the parties set forth herein. 3. The Performance Clause Throughout the period of employment, Bergeland agrees to devote his full time and attention during normal business hours to the business of the Company, except for earned vacation and except for illness or incapacity. 4. The Compensation Clause a. For all services to be rendered by Bergeland in any capacity during the period of employment, Bergeland shall be paid as annual compensation a base or fixed salary of $300,000. The President & General Manager will annually review Bergeland's annual compensation and determine what is appropriate for a cost of living, merit increase, and/or increase in responsibilities or duties. b. Bergeland shall be entitled to receive incentive compensation based on the Executive Compensation Plan of the Company. It is agreed Bergeland shall receive the maximum payout as provided in the terms of the annual variable pay plan of the Company for the years 1999, 2000 and 2001. c. During the term of his employment hereunder, Bergeland shall be entitled to retain the automobile Bergeland presently uses and shall be covered by all provisions of the automobile policy in effect at the time of this Agreement. d. During the term of Bergeland's employment herunder, Bergeland shall be entitled to those employee benefits separately made available to him from time to time by the Company in its discretion, including financial planning, club memberships, executive physicals and executive disability programs. e. The Company shall bear such ordinary and necessary business expenses incurred by Bergeland in performing his duties herunder as the Company determines from time to time, provided that Bergeland 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) Terms of Severance Allowance and Amount. At the expiration of this Agreement, Bergeland shall be provided a severance allowance made up of the following components: i) Bergeland shall receive a lump sum payment for the Company's long-term variable pay plan equal to his target payout from that plan. ii) Bergeland and the Company are party to the "1997 Supplemental Executive Retirement Plan (SERP) Agreement" executed by Bergeland on May 30, 1997 and the Company on May 27, 1997. The schedule of SERP balance outlined in that agreement shall be accelerated by 5 years and 4 months so that Bergeland is eligible for the maximum amount provided for pursuant that schedule and shall be eligible to receive that amount effective September 1, 2001. iii) Medical, dental, vision and hearing insurance shall be provided to Bergeland on the same basis as other eligible retirees of the Company. iv) Ownership in the equity portion of Bergeland's membership at Midland Hills Golf Club shall be maintained by Bergeland. b) Terms and Conditions for Early Severance Allowance and Amount. In the event of termination of the employment of Bergeland by the Company during the period of employment for any reason other than for cause, as defined in (b) below, death or disability, the Company shall pay Bergeland a severance allowance by continuing Bergeland's base or fixed salary through August 31, 2001. In addition, Bergeland shall receive a pro rata benefit from variable pay plans of the employer in effect at the time this Agreement is effective. Bergeland shall also receive benefits described in 5(a)(ii-iv) above. Said severance allowance shall be in lieu of all other severance payable to Bergeland under Company severance policies. Said severance shall be paid in semi-monthly installments, subject to normal withholding taxes. c) Definition of "For Cause". For the purpose of this Agreement, termination of Bergeland's employment shall be deemed to have been for cause (and in which case the Company shall have no obligation to Bergeland whatsoever) only: 2 i) If termination of Bergeland's employment shall have been the result of an act or acts of fraud, theft or embezzlement on the part of Bergeland 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 Bergeland at the expense of the Company; or ii) If termination of Bergeland's employment results from Bergeland's willful and material misconduct, including willful and material failure to perform his duties, and Bergeland has been given written notice by the Company with respect to such and Bergeland does not cure within a reasonable time; or iii) If there has been a breach by Bergeland 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, Bergeland shall have substantially failed to remedy such alleged breach within thirty days from Bergeland's receipt of notice from the Company. d) Request and Release. In order to obtain the severance allowance provided for in this Agreement, Bergeland 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 Bergeland 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. Voluntary Termination by Bergeland. In the event of voluntary termination by Bergeland, the Company shall not owe Bergeland any severance allowance and Bergeland shall not, for a period of three (3) years from the date of termination, directly or indirectly participate anywhere in the continental United Sates in any activities which are in competition or conflict with the activities of the Company or any Company subsidiary of affiliate, including, but not limited to, managing, consulting, operating, controlling, owning or having an ownership interest in, being employed by, or being connected with the management, operation or control of, any business which is of the same or similar type of business in which the Company or any Company subsidiary or affiliate presently engage, or hereafter engage during the term of this Agreement, or which competes with, or reasonably could be expected to compete with, the Company or any Company subsidiary or affiliate. Notwithstanding any provision herein, Bergeland shall be entitled to receive, to the date of termination, base or fixed compensation plus a prorated amount of Executive Compensation. b. Death. In the event of Bergeland's death during the period of employment, the legal representative of Bergeland 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 to Bergeland's death. 3 c. Disability i) In the event of Bergeland's disability during the period of employment, Bergeland 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 excess of twelve (12) months from the beginning of the period that establishes such disability, as described in Paragraph 6(c)(iii) below. ii) The amount of any payments under Paragraph 6 (c)(i) shall be reduced by any payments to which Bergeland may be entitled for the same period because of disability under any disability or pension plan of Cenex Harvest States or of any division, subsidiary, or affiliate thereof, or as the result of worker's 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 Bergeland from performing the essential functions of his job under the 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 Bergeland from any disability policy or disability insurance. 7. 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. 8. 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. 9. Governing Laws This Agreement shall be governed by an construed and enforced in accordance with the laws of the State of Minnesota. 4 10. 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 Bergeland: Michael Bergeland 853 Amble Road Shoreview, MN 55126 If to the Company: John D. Johnson Cenex Harvest States Cooperatives P. O. Box 64089 St. Paul, MN 55164-0089 With a copy to: Richard L. Baldwin, Human Resources Cenex Harvest States Cooperatives P. O. Box 64089 St. Paul, MN 55164-0089 11. Entire Agreement 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 President and General Manager and Bergeland. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. CENEX HARVEST STATES COOPERATIVES _________________________ By: _______________________________ Michael Bergeland John D. Johnson President & General Manager EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Cenex Harvest States Cooperatives on Form S-8 (File No. 333-42153) of our report dated October 29, 1999, on our audits of the consolidated financial statements of Cenex Harvest States Cooperatives as of August 31, 1999 and 1998, and May 31, 1998 and for the year ended August 31, 1999, for the three months ended August 31, 1998, and for the years ended May 31, 1998 and 1997, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Minneapolis, Minnesota November 22, 1999 EX-23.2 7 INDEPENDENT AUDITORS' CONSENT Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-42153 of Harvest States Cooperatives on Form S-8 of our reports dated July 24, 1998 on (i) the consolidated financial statements of Harvest States Cooperatives; (ii) the financial statements of the Oilseed Processing and Refining Defined Business Unit; and (iii) the financial statements of the Wheat Milling Defined Business Unit, as of May 31, 1998 and for each of the two years in the period ended May 31, 1998, appearing in this Annual Report on Form 10-K of Cenex Harvest States Cooperatives for the year ended August 31, 1999. Deloitte & Touche, LLP Minneapolis, Minnesota November 19, 1999 EX-24.1 8 POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Noel K. Estenson and John Schmitz, and each of them his or her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to sign a Form 10-K under the Securities Act of 1933, as amended, of Cenex Harvest States Cooperatives, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or the substitutes for such attorneys-in-fact and agents, may lawfully do or cause to be done by virtue hereof.
Name Title Date - ---- ----- ---- /s/ Noel K. Estenson ___________________________ Chief Executive Officer November 2, 1999 Noel K. Estenson (principal executive officer) /s/ John Schmitz ___________________________ Senior Vice President -- Finance November 2, 1999 John Schmitz (principal financial officer) /s/ Gerald Kuster ___________________________ Co-Chairman of the Board of Directors November 2, 1999 Gerald Kuster /s/ Elroy Webster ___________________________ Co-Chairman of the Board of Directors November 2, 1999 Elroy Webster /s/ Bruce Anderson ___________________________ Director November 2, 1999 Bruce Anderson /s/ Robert Bass ___________________________ Director November 2, 1999 Robert Bass /s/ Steven Burnet ___________________________ Director November 2, 1999 Steven Burnet /s/ Steve Carney ___________________________ Director November 2, 1999 Steve Carney /s/ Curt Eischens ___________________________ Director November 2, 1999 Curt Eischens /s/ Robert Elliott ___________________________ Director November 2, 1999 Robert Elliott /s/ Edward Ellison ___________________________ Director November 2, 1999 Edward Ellison /s/ Sheldon Haaland ___________________________ Director November 2, 1999 Sheldon Haaland /s/ Fred Harris ___________________________ Director November 2, 1999 Fred Harris /s/ Jerry Hasnedl ___________________________ Director November 2, 1999 Jerry Hasnedl /s/ Edward Hereford ___________________________ Director November 2, 1999 Edward Hereford /s/ Douglas Johnson ___________________________ Director November 2, 1999 Douglas Johnson /s/ James Kile ___________________________ Director November 2, 1999 James Kile /s/ Leonard Larsen ___________________________ Director November 2, 1999 Leonard Larsen /s/ Tyrone Moos ___________________________ Director November 2, 1999 Tyrone Moos /s/ Gaylord Olson ___________________________ Director November 2, 1999 Gaylord Olson /s/ Duane Risan ___________________________ Director November 2, 1999 Duane Risan /s/ Denis Schilmoeller ___________________________ Director November 1, 1999 Denis Schilmoeller /s/ Duane Stenzel ___________________________ Director November 2, 1999 Duane Stenzel /s/ Michael Toelle ___________________________ Director November 2, 1999 Michael Toelle /s/ Richard Traphagen ___________________________ Director November 2, 1999 Richard Traphagen /s/ Russ Twedt ___________________________ Director November 2, 1999 Russell Twedt /s/ Merlin Van Walleghen ___________________________ Director November 2, 1999 Merlin Van Walleghen /s/ Arnold Weisenbeck ___________________________ Director November 2, 1999 Arnold Weisenbeck /s/ William Zarak ___________________________ Director November 2, 1999 William Zarak
EX-99.1 9 CAUTIONARY STATEMENT EXHIBIT 99.1 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 (the Farm Act), enacted in April of 1996, may affect crop production in several ways. The Farm Act more narrowly defines what will qualify as environmentally sensitive acreage for purposes of the conservation reduction program, with the result that 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 Farm Act also removes restrictions on the type of crops planted (other than fruit and vegetables), allowing farmers to plant crops having favorable prices and thereby increasing the production of those crops. Increased production may lower prices of certain crops but increase the amount available for export. However, the Farm Act also reduces Export Enhancement Program subsidies, which may adversely affect the ability of the U.S. exports to compete with those of other countries. Reduced demand for U.S. agricultural products may also adversely affect the demand for fertilizer, chemicals, and petroleum products sold by the Company and used to produce crops. 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. 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-99.2 10 INDEPENDENT AUDITORS' REPORT EXHIBIT 99.2 Board of Directors Harvest States Cooperatives Saint Paul, Minnesota We have audited the consolidated balance sheet of Harvest States Cooperatives and subsidiaries (the Company) as of May 31, 1998 and the related consolidated statements of earnings, capital, and cash flows (not presented herein) for each of the two years in the period ended May 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 31, 1998 and the results of its operations and its cash flows for each of the two years in the period ended May 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 16 to the consolidated financial statements, effective June 1, 1998, the Company merged with CENEX, Inc. to form Cenex Harvest States Cooperatives. DELOITTE & TOUCHE LLP Minneapolis, MN July 24, 1998 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS AUG-31-1999 AUG-31-1999 75,667 0 595,403 23,255 549,703 1,271,425 1,751,967 783,634 2,787,664 1,052,380 679,652 0 0 0 1,117,636 2,787,664 6,328,618 6,434,525 6,140,580 0 0 2,874 42,438 92,980 6,980 86,000 0 0 0 86,000 0 0
EX-27.2 12 RESTATED FINANCIAL DATA SCHEDULES
5 1,000 3-MOS 12-MOS 12-MOS AUG-31-1998 MAY-31-1998 MAY-31-1997 AUG-31-1998 MAY-31-1998 MAY-31-1997 120,008 68,798 73,504 0 0 0 474,454 494,270 559,987 23,315 24,868 23,092 479,734 533,948 569,370 1,108,965 1,152,506 1,263,298 1,640,363 1,546,463 1,422,495 724,593 678,390 623,738 2,469,103 2,436,515 2,422,564 824,513 916,786 1,043,903 457,315 430,854 477,084 0 0 0 0 0 0 0 0 0 1,065,877 1,029,973 944,798 2,469,103 2,436,515 2,422,564 1,518,253 8,345,175 9,658,052 1,542,635 8,514,082 9,814,512 1,473,243 8,149,605 9,475,682 0 0 0 0 0 0 873 2,384 3,103 12,311 34,620 33,368 18,831 196,916 171,181 2,895 19,615 19,280 15,936 177,301 151,901 0 0 0 0 0 0 0 0 0 15,936 177,301 151,901 0 0 0 0 0 0
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