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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2001 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
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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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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.
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INDEX
PAGE
NO.
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PART I.
Item 1. Business
The Company ........................................................................... 1
Energy ................................................................................ 2
Agronomy .............................................................................. 2
Grain Marketing ....................................................................... 3
Country Operations .................................................................... 8
Processed Grains and Foods ............................................................ 10
Membership in the Company and Authorized Capital ...................................... 16
Equity Participation Units ............................................................ 21
Cautionary Statement .................................................................. 22
Item 2. Properties ............................................................................ 23
Item 3. Legal Proceedings ..................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ................................... 24
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................. 25
Item 6. Selected Financial Data
Consolidated Company .................................................................. 25
Oilseed Processing and Refining Defined Business Unit ................................. 26
Wheat Milling Defined Business Unit ................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Consolidated Company .................................................................. 28
Oilseed Processing and Refining Defined Business Unit ................................. 35
Wheat Milling Defined Business Unit ................................................... 38
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk ............................ 42
Item 8. Financial Statements and Supplementary Data ........................................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .. 43
PART III.
Item 10. Directors and Executive Officers of the Registrant
Board of Directors .................................................................... 43
Executive Officers .................................................................... 47
Item 11. Executive Compensation ................................................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................ 53
Item 13. Certain Relationships and Related Transactions ........................................ 53
PART IV.
Item 14. Exhibits, Financial Statements and Reports Filed on Form 8-K .......................... 54
SUPPLEMENTAL INFORMATION ......................................................................... 57
SIGNATURES ....................................................................................... 58
PART I.
ITEM 1. BUSINESS
THE COMPANY
Cenex Harvest States Cooperatives (CHS or the Company) is a
producer-to-consumer cooperative system owned by farmers, ranchers and their
local co-ops from the Great Lakes to the Pacific Northwest and from the
Canadian border to Texas. CHS is a fully integrated agricultural foods
cooperative providing a wide variety of products and services ranging from
grain marketing to food processing to meet the needs of customers around the
world. We also operate petroleum refineries/pipelines and, through a broad
range of working partnerships, market and distribute energy products, agronomic
inputs and feed to rural America. CHS, based in Inver Grove Heights, Minnesota,
was created on June 1, 1998, through the merger of Cenex, Inc. and Harvest
States Cooperatives, both of which had organizational histories dating back to
the early 1930s.
The Company has authorized three classes of membership: Individual Members,
Cooperative Association Members and Defined Members. Individual Members are
producers of agricultural products who have done business with the Company
during its last fiscal year and have consented to take patronage into account
as contemplated by Section 1388 of the Internal Revenue Code. In the patronage
consent filed with the Company, the producer agrees to include both the cash
and noncash portion of any patronage refund in taxable income for federal
income tax purposes. 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 Oilseed 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.
In August 2001, the CHS Board of Directors approved and consummated a plan
to end the Defined Investment Program. The Company redeemed all of the Equity
Participation Units and allocated the assets of the Oilseed Processing and
Refining and Wheat Milling Defined Business Units to the Company as provided in
the plan.
The Company's businesses are organized into five segments. The segments
include Energy, Agronomy, Grain Marketing, Country Operations and Processed
Grains and Foods. The segment information for the Company is provided in Note
11 of the consolidated financial statements on pages F-20 and F-21.
1
ENERGY
The energy operations of the Company include a 55,000 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 medium, 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 and
other pipelines.
The McPherson refinery owned and 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. NCRA holds ownership interests
of 40% and 33%, respectively, in these two pipelines. Approximately 95% of the
crude oil processed is domestic from Kansas, Oklahoma and Texas, and 5% is
foreign 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 the Laurel refinery and from NCRA is marketed by
Country Energy, LLC (Country Energy), a petroleum marketing joint venture with
Farmland Industries, Inc. (Farmland) 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 lube oil, grease and petroleum equipment, as
well as providing propane for heating fuel and grain drying. The Company has
signed an agreement to purchase Farmland's wholesale energy business, including
their outstanding interest in Country Energy. The transaction will make Country
Energy the Company's wholly-owned subsidiary.
The Company also operates 36 convenience stores where it retails its own
brand of refined 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.
As of August 31, 2001, energy operations had 953 full time employees. Of
the 953 employees, 681 are employed by the Company and 272 are employed by
Country Energy.
AGRONOMY
Effective January 1, 2000, the Company, Farmland and Land O'Lakes, Inc.
(Land O'Lakes) created Agriliance, LLC (Agriliance), a distributor of crop
nutrients, crop protections products and other agronomy inputs and services. At
formation, Agriliance managed the agronomy marketing operations of
2
the Company, Farmland and Land O'Lakes, with the Company exchanging the right
to use its agronomy operations for 26.455% of the results of the jointly
managed operations. This agreement was subsequently terminated on July 31,
2000, as discussed further below.
In March 2000, the Company sold 1.455% of its economic interest in
Agriliance to Land O'Lakes, resulting in a gain of $7.4 million. On July 31,
2000, the Company exchanged its ownership in the Cenex/Land O'Lakes Agronomy
Company and in Agro Distribution, LLC, with a total investment of $64.7 million
for a 25% equity interest in Agriliance. Agriliance ownership also includes
Farmland (25%) and Land O' Lakes (50%). The interests of the Company and
Farmland are held through equal ownership in United Country Brands, LLC, a joint
venture holding company whose sole operations consist of the ownership of a 50%
interest in Agriliance. Equity in the joint venture was recorded at historical
carrying value of its ownership in Cenex/Land O'Lakes Agronomy Company and Agro
Distribution, LLC and no gain or loss was recorded on the exchange. Also in July
2000, Agriliance secured its own financing, which is without recourse to the
Company, and then purchased the net working capital related to agronomy
operations from each of its member owners, consisting primarily of trade
accounts receivable and inventories, net of accounts payables.
The Company retained its ownership in CF Industries, Inc. (CF Industries),
an interregional cooperative involved in the manufacture of crop nutrient
products, and a 25% interest in an agronomy distribution business in Canada.
With continued ownership, the Company is entitled to receive patronage dividends
paid by CF Industries.
Many of the risk factors related to the energy operations also apply to
Agriliance's 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 is
also intense. Supply and price of fertilizer ingredients fluctuates widely,
which exposes Agriliance 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 or eliminates the
patronage paid by CF Industries to the Company.
The agronomy business is seasonal with profits and sales coinciding with
the planting and input seasons.
GRAIN MARKETING
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 United States 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
3
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 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. Although the Unites States has experienced prices below the cost of
production, there has still been full production on Non-CRP (Crop Reduction
Program) land as a result of the Commodity Loan Program and also Loan
Deficiency Payments (LDP).
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 Operations locations, which are country
elevators owned by the Company. Grain purchased by Agri Operations locations is
usually sold to the Grain Marketing Division for resale. A small portion of
grain is handled on a consignment basis.
The Company sells grain 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 AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
-------------------------------------------- AUGUST 31, ----------------------------
2001 2000 1999 1998 1998 1997
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(BUSHELS IN THOUSANDS)
Member purchases ......... 837,239 866,619 785,999 172,180 720,421 757,705
Total purchases .......... 1,302,770 1,246,208 1,169,393 244,978 1,145,852 1,280,557
Percentage ............... 64.3% 69.5% 67.2% 70.3% 62.9% 59.2%
Substantially all of the grain purchased by the Company is grown in the
Midwest, Great Plains and Pacific Northwest. The Company also purchases grain
produced in other parts of the United States and other countries.
GRAINS HANDLED. The primary grains merchandised by the Company are wheat,
corn and soybeans. The Company also merchandises barley, milo, sunflowers and
oats as well as smaller quantities of canola, flax, rye, millet and others.
4
The number of bushels of grain purchased by the Company for the periods
indicated is set forth below:
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
------------------------------------------ AUGUST 31, --------------------------
2001 2000 1999 1998 1998 1997
------------ ------------ ------------ ------------------- ------------ -----------
(BUSHELS IN THOUSANDS)
Wheat .............. 453,979 444,800 412,967 100,941 416,067 478,979
Corn ............... 483,846 434,542 406,616 86,911 347,494 425,851
Soybeans ........... 258,559 264,809 230,239 36,220 229,558 219,687
Barley ............. 53,639 43,499 54,548 13,180 66,085 61,839
Milo ............... 31,504 38,886 40,826 4,426 37,816 51,723
Sunflowers ......... 6,731 6,775 7,814 549 28,789 14,603
Oats ............... 2,118 4,061 6,354 1,246 9,008 22,487
All other .......... 12,394 8,836 10,029 1,505 11,035 5,388
--------- --------- --------- ------- --------- ---------
1,302,770 1,246,208 1,169,393 244,978 1,145,852 1,280,557
========= ========= ========= ======= ========= =========
Sales of grain by the Company for the periods indicated are set forth
below:
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
--------------------------------------------- AUGUST 31, ----------------------------
2001 2000 1999 1998 1998 1997
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(DOLLARS IN MILLIONS)
Wheat ............. $ 1,101.6 $ 1,051.2 $ 1,169.8 $ 373.1 $ 1,794.4 $ 2,490.3
Corn .............. 1,091.2 1,013.1 896.6 215.0 989.8 1,558.4
Soybeans .......... 1,120.6 1,152.7 1,010.0 162.8 1,432.0 1,421.9
All other ......... 404.4 433.8 257.0 65.6 447.2 610.7
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Total ............. $ 3,717.8 $ 3,650.8 $ 3,333.4 $ 816.5 $ 4,663.4 $ 6,081.3
========== ========== ========== ======== ========== ==========
MERCHANDISING
The Company buys and sells grain through offices of its Grain Marketing
Division located in Portland, Oregon; Lincoln, Nebraska; Overland Park, Kansas;
St. Paul, Minnesota; Winona, Minnesota; Davenport, Iowa; and at its Agri
Operations locations.
Grain purchased through Agri Operations locations 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 10% of rail movement for Grain Merchandising
for the year ended August 31, 2001 was carried out through leased railcars
(either directly or by use of pools in which such leased railcars participate).
The use of "shuttle equipment" is reducing the need for leased cars, which the
Company is in the process of reducing its fleet. 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 freight agreements for approximately 50% of current needs.
Virtually all grain sold domestically is sold by employees while
approximately one quarter 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.
5
The Company has placed an employee in Europe to contact milling customers in
order to expand its wheat trade, and will continue to maintain that presence.
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 Operations
locations 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 (ADM), 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 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
throughout the world. The Company is considered among the top three U.S.
exporters of wheat.
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 192 Agri Operations locations, which are country
elevators, and 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.
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 operates the Kalama, Washington
terminal elevator owned by the Company, and the Vancouver, Washington terminal
of United Grain as well as markets 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.
6
Effective May 1, 2001, the Company entered into a 50/50 joint venture
agreement with Commodity Specialists Co. to form Grain Suppliers Co., LLC. This
joint venture will consolidate Commodity Specialists' grain merchandising
activities and pursue construction of a 110-car shuttle unloading facility to
serve the poultry feed business in Mississippi.
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 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.
7
EMPLOYEES
As of August 31, 2001, the Grain Marketing Division had 432 employees, of
which 67 were traders, 205 production staff, 12 management and 148 support
staff. Of these employees, 143 at seven locations are subject to collective
bargaining agreements expiring at various times through 2002. See "Country
Operations" with respect to employment by Agri Operations locations.
COUNTRY OPERATIONS
Country Operations supplies products and services to local cooperatives
and producers through the following business units and entities: Agri
Operations, Feed, Country Hedging, Inc., Ag States Agency, LLC, Fin-Ag, Inc.,
Financial Services, Field Services and CCC Services.
AGRI OPERATIONS Agri Operations 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
336 locations in the states of Minnesota, North Dakota, South Dakota, Nebraska,
Colorado, Montana, Idaho, Oregon and Washington. Not all locations provide
every product and service. Locations are grouped into 62 operating units, of
which 23 are regionalizations. These regionalizations have their own producer
board of directors and participate in separate patronage pools. The Agri
Operations group is also involved in 11 Limited Liability Companies to provide
farm supplies and services.
Agri Operations purchase grain and seed from member and non-member
producers and other elevators and grain dealers. Eighty-six 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
cooperatives in the respective areas whenever possible. The Agri Operations
group sells agronomy products through 164 locations. Feed products are sold
through 145 locations and energy products through 102 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, 2001, the Agri Operations group had 2,049 full time and 988
seasonal/temporary employees. Statistics for the periods indicated are as
follows:
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
------------------------ AUGUST 31, ---------------------
2001 2000 1999 1998 1998 1997
------ ------ ------ ------------------- --------- ---------
Number of centers ................. 336 334 317 245 239 253
Number of operating units ......... 62 67 65 70 73 71
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 five feed
plants, one retail operation and has joint venture agreements with four
additional plants.
The Company is involved in joint ventures of plants in Norfolk, Nebraska
and Tillamook, Hermiston and Harrisburg, Oregon.
On August 31, 2001 the feed manufacturing group had 166 full time and 11
part time employees in all operations.
Feed tons for the periods indicated are as follows:
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
--------------------------------- AUGUST 31, ---------------------
2001 2000 1999 1998 1998 1997
--------- --------- --------- ------------------- ---------- ---------
Manufactured feed (tons) ......... 268,980 523,864 591,510 133,381 377,000 326,000
For the fiscal years ended August 31, 2000 and 1999 and the three months
ended August 31, 1998, the feed tons included those of the Land O'Lakes/Harvest
States Feed, LLC.
8
The Company has entered into an agreement effective September 1, 2000,
with Land O'Lakes Farmland Feed, LLC to distribute wholesale feed in the trade
territories around the Company's plants in North Dakota, South Dakota and
Montana.
COUNTRY HEDGING, INC.
Country Hedging, Inc. offers full service commodity futures and options
brokerage. For the year ended August 31, 2001, over 50% of revenues were from
Cooperative Association Members. 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,
2001, it had 44 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, 80% 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, 2001, substantially all of its revenues were from
agricultural businesses. Ag States Agency, LLC competes with other insurance
agencies. On August 31, 2001 Ag States Agency, LLC had 57 full time employees.
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, and disability insurance primarily to local cooperatives for their
employees. Effective October 1, 2001 Ag States Agency, LLC purchased the
outstanding 50% interest of Ag States Benefits, LLC owned by the other member.
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 National Bank for
Cooperatives (CoBank), on which the Company bears residual exposure. The
Company's exposure at August 31, 2001, was approximately $26.8 million. Under
the Company's borrowing arrangements, the maximum amount of the loans
outstanding at any one time may not exceed $125.0 million. On August 31, 2001
the total number of full time employees was 21.
FINANCIAL SERVICES
Financial Services 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 CoBank. Participation by
CoBank is subject to credit approval on a loan-by-loan basis by CoBank, subject
to an overall limit of participation of $150,000,000. In addition to financing,
the open account between the Company and an affiliated association is used as a
clearing account for settlement of grain purchases and as a cash management
tool. Open account financing has been provided to more than 150 Cooperative
Association Members in the past year.
During the year ended August 31, 2001, average aggregate loan balances
outstanding were approximately $61.0 million (of which CoBank's participation
was approximately $23.0 million and the highest aggregate loan balance
outstanding at any one time was approximately $84.0 (of which CoBank's
participation was approximately $33.0 million). 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.
FIELD SERVICES
Field Services acts as a liaison between cooperative association members
and the Company, providing consulting services in marketing, management,
operations, accounting, tax, finance and government regulations.
9
CCC SERVICES
CCC Services provides services to enhance member cooperatives interaction
between their members and government programs dealing with agricultural
production. They also provide warehouse licensing support.
PROCESSED GRAINS AND FOODS
OILSEED PROCESSING AND REFINING
The soybean crushing industry converts soybeans into meal used for feeding
animals, soyflour used for specialty foods and other purposes and crude soybean
oil. The vegetable oil 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 crushing plants. Oil is
shipped throughout the United States and for export.
Per capita domestic consumption of soybean oil has increased sizeably in
recent years (up 15% over 5 years). Exports of soybean oil are variable but
generally are a minor portion of total production. In recent years, exports have
varied widely, which dramatically influenced margins in both crushing and
refining.
Usage of meal is contingent 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 industry competitors of the Company include ADM, Cargill, Ag
Processing, Inc. (AGP), Central Soya and Bunge. Price, transportation costs,
service and product quality drives competition. The industry is highly
competitive. These and other competitors have acquired other processors and have
expanded existing plants both domestically and internationally. Inefficient or
out-of-position facilities have closed, allowing for better 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 will generally track with the soybeans, although not
necessarily on a one for one basis, therefore margins can be variable.
At its integrated crushing and refining facility in Mankato, Minnesota,
oilseed processing and refining operations process soybeans into soybean meal,
soyflour and crude soybean oil. The crude soybean oil, with additional
purchased crude oil, is refined.
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 oilseed processing and refining
operation'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 oilseed processing and refining operation's inventory
and purchase contracts for delivery to the Company may be substantial. Risk
management policy and procedures include net
10
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 operations when any trader is outside of position limits and
also triggers review by management of the Company if the oilseed processing and
refining operations are outside of position limits. The position limits are
reviewed at least annually with management of the Company. Current market
conditions are monitored 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 operation purchases virtually all of
the soybeans processed by it from Members. Because the operations have 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
operation does not hold significant inventories of raw beans; capacity for raw
bean storage is approximately three to four weeks of production. At any one
time, inventories of beans and contracts for future delivery represent two to
ten weeks of requirements. Inventories of raw beans and contracted purchases for
future delivery are substantially hedged.
Purchases of crude soybean oil are also made for processing at the
refinery. The oilseed processing and refining operations produce approximately
45% of the crude oil refined, and the balance is purchased. Major suppliers have
been AGP and South Dakota Soybean Processors. 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 operation has never experienced an inability to source soybeans.
CUSTOMERS
REFINED OILS. The oilseed processing and refining operation 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, 2001. The Company estimates that
of oil sold, 15% is used for margarine, 35% for shortening and bottled oils, 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, 2001, there
were over 150 customers, the largest of which was Ventura Foods, LLC (Ventura
Foods) described in the next paragraph. Sales of refined oil are made by Company
employees, and to a lesser extent by brokers.
The Company has a long-term supply agreement with Ventura Foods 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. As of
August 31, 2001, the Company holds a 50% interest in Ventura Foods. The Company
has agreed to supply and Ventura Foods 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
the option 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 is used for feeding livestock. During the
year ended August 31, 2001, the oilseed processing and refining operations sold
meal to over 500 customers, primarily feed lots and feed mills. During the year
ended August 31, 2001, six customers accounted for approximately 62% of meal
sold, and three customers of which would be difficult to replace, accounted for
approximately 49% of meal sold. For the year ended August 31, 2001, 74% of meal
was sold in Minnesota, 19% in
11
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 or refined oil.
COMPETITION
The Company believes that the Company has 6% to 8% of the domestic refined
soybean oil market and less than 3% of the domestic soybean crushing capacity.
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 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 Company 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 operation 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.
Originally announced in 1998, groundbreaking for a new soybean crushing
facility at Fairmont, Minnesota will be held in April 2002. The plant is
expected to be ready for operation for the 2003 harvest, and plans call for
daily production of 110,000 bushels. The facility is expected to cost
approximately $90.0 million.
EMPLOYEES
On August 31, 2001, oilseed processing and refining operations had 190
employees, 34 in the office in administration, sales and support service and
156 in the plant. Certain production workers are subject to collective
bargaining agreements with the American Federation of Grain Millers (133
employees) expiring in 2002 and the Pipefitters' Union (2 employees) expiring
in 2002.
WHEAT MILLING
INDUSTRY OVERVIEW
The Company's wheat milling operation mills durum wheat into flour and
semolina and mills spring and winter (hard) wheats into bread flour. The Company
is the largest miller of durum wheat in the United States and is among the top
seven U.S. millers overall as determined by hundred-weight. The Company had
historically concentrated on durum wheat milling at its Rush City, Minnesota and
Huron, Ohio facilities. With the opening of its Kenosha, Wisconsin mill in late
1995, which can produce durum and bakery flours, its Houston, Texas facility,
which began production in June 1997, Mount Pocono, Pennsylvania facility, which
began production in January 1999 and its Fairmount, North Dakota facility
purchased in April 2000, the Company has broadened its markets and significantly
increased its capacity. During the year ended August 31, 2001 the Company ceased
operations at the Huron facility.
12
In September 2001, the Company signed a non-binding letter of intent to
form a joint venture with Cargill, Inc. (Cargill) to engage in wheat flour
milling in North America. The joint venture will include five of the Company's
mills and 16 Cargill flour mills. The Company would initially hold a 24%
interest in the joint venture and Cargill would hold the remaining 76%. The
joint venture is contingent on the execution of a definitive agreement and
government approvals.
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 been flat 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 of the Company in the industry include U.S. Durum
Milling, Miller Milling Company and Minot 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, but is consolidating with the three largest
bakeries, Interstate, Earthgrains and Flowers Bakeries now comprising nearly
30% of the bakery business.
Demand for bakery flour had been increasing until 1998. Total production
and per capita consumption increased 2.0% from December 31, 1999 to December
31, 2000 to make 2000 the largest production year recorded. Dietary guidelines
established by the United States Department of Agriculture emphasize cereal
grains in the food pyramid. Demand for bakery flour per capita consumption
increased 1.3% in 2000 as the population base increased. Imports and exports of
bakery flour do not significantly affect the domestic business.
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.
At any one time the wheat milling operation's inventory and purchase
contracts for delivery to the Company may be substantial. The risk management
policy and procedures 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 operations when any trader is outside of position limits
and also triggers review by management of the Company if the wheat milling
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.
SUPPLY
Most of the durum, spring and winter wheats processed by the Company's
wheat milling operations are purchased from Members. Some grain is purchased
from Canada and a small percentage is purchased from the Southwest.
13
Semolina and durum flour sales are hedged to a significant extent by
buying durum at the time of pricing the semolina or flour. To minimize the
price volatility for winter and spring wheats, the Company 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 wheat milling operations. The
Company has never experienced a supply shortage of durum, but shortages have
affected prices.
CUSTOMERS
SEMOLINA & DURUM FLOUR. The wheat milling operation 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 20%
of the total durum milling demand. The Company's wheat milling operations would
be adversely affected by a decline in pasta production in the United States.
In 1999, American Italian Pasta Company (AIPC) began operation of a pasta
plant adjacent to the Company's mill in Kenosha, Wisconsin. AIPC is this
country's largest pasta manufacturer. Direct pipelines from the mill to the
pasta plant has reduced costs to transfer product, create efficiencies for both
companies, as well as provide a dedicated customer/supplier relationship.
The Company's products are primarily marketed by employees of the Company.
The Company 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 operation's bread flour
production. The Company believes because of the large number of potential
customers and the fact that it is not dependent on any customer, it would not
have substantial difficulty in replacing an existing customer.
The Company's first hard wheat milling unit (Kenosha) began production in
late 1995. In October 1996, the Company 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 mill began
production supplying flour to major bakery customers in the Northeast, and in
April 2000, the Company purchased a hard wheat mill in Fairmount, North Dakota.
COMPETITION
DURUM MILLING. The Company's largest competitors in durum milling are U.S.
Durum Milling 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 New Hope, Minnesota plant. Philadelphia Macaroni has completed a
semolina mill in Minot, North Dakota. Miller Milling has 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 competes with domestic manufacturers in the dry retail pasta market.
BREAD FLOUR. Competitors include ConAgra, ADM, Cargill, and Cereal Foods.
All of these competitors have multiple milling facilities with larger bakery
flour production capacity than the Company. In recent years the capacity for
hard wheat milling has been expanded faster than consumption, putting pressure
on margins. Many competitors have closed some older, less efficient mills in
response.
PROCESSING
The Company's wheat milling operation 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
14
somewhat seasonal in anticipation of reduced demand for pasta in summer months,
however, this is offset by greater bakery flour demand during the summer
months.
FACILITIES
The Company's wheat milling business has five milling facilities in
operation. 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
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
Mount Pocono, PA Spring and winter wheat 18,000 cwts/day 40,400 bu/day
Fairmount, ND Spring wheat 8,000 cwts/day 18,260 bu/day
--------------- --------------
Total 70,000 cwts/day 159,160 bu/day
=============== ==============
The Rush City, Kenosha, Mount Pocono and Fairmount 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.
Approximately 90% of the Company'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, 2001, the wheat milling
facilities ran at 86% of capacity based upon a year of 312 operating days being
100%, compared to 79% in 2000. This increase in run time was primarily due to
the full year of operation at the Fairmount, North Dakota mill.
EMPLOYEES
As of August 31, 2001, wheat milling operations employed the following
full time equivalents: production and plant management 165 and headquarters 21.
Of these, 24 production workers at the Rush City, Minnesota mill are subject to
a collective bargaining agreement with the American Federation of Grain Millers
expiring in 2002.
FOODS
The Foods Group primarily includes the Company's interest in Ventura Foods
and the Company's Mexican Foods operations.
VENTURA FOODS
Upon the formation of Ventura Foods in August 1996, the Company's initial
ownership was 40% and Wilsey Foods, Inc. owned 60% of the equity and rights to
distribution of profits. During the year ended August 31, 2000, the Company
purchased an additional 10% interest in Ventura Foods for approximately $25.6
million, and now holds a 50% interest in the equity and rights to distribution
of profits. The Company's total net investment in Ventura Foods, accounted for
under the equity method, is $101.1 million as of August 31, 2001. A committee
governs Ventura Foods, and the Company and Wilsey Foods each appoint 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 $25.0 million or is unable to discharge its
liabilities as they become due.
15
Ventura Foods is in the business of manufacturing, packaging and
distributing food products, including salad dressings, mayonnaise, margarine,
salad oils, syrups, soup bases and sauces. Its customers are national. Sales by
the Company to Ventura Foods are shown below:
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
-------------------------------------- AUGUST 31, ------------------------
2001 2000 1999 1998 1998 1997
---------- ----------- ----------- ------------------- ----------- ----------
(DOLLARS IN THOUSANDS)
Sales ................... $ 41,194 $ 59,369 $ 93,565 $ 22,685 $101,440 $110,679
Percentage of total
refinery sales ......... 21% 29% 36% 35% 39% 46%
MEXICAN FOODS
On June 1, 2000, the Company purchased Sparta Foods, Inc. (Sparta Foods) a
manufacturer and distributor of tortillas and tortilla chips, for approximately
$16.7 million. Sparta Foods sells branded retail products in supermarkets and
general merchandise retail stores located primarily in the Midwestern and
Southwestern United States, as well as food service products to food
distributors, who in turn, distribute their products to restaurants and retail
stores throughout the United States.
Sparta Foods leases manufacturing facilities located in New Brighton,
Minnesota and Phoenix, Arizona.
The tortilla and tortilla chip industry in the United States is comprised
of a large number of small regional producers and a few dominant producers.
Sparta Foods has approximately a 65% share and 20% share of the retail tortilla
market in the Minneapolis/St. Paul and Phoenix metropolitan areas,
respectively. Primary competitors are Resers Foods and Azteca Foods in the
Minneapolis/St. Paul market, and Mission Foods in the Phoenix market. Sparta
Foods has less than a 1% share of the national tortilla chip market.
In February 2001, the Company purchased Rodriguez Festive Foods, Inc. for
approximately $11.3 million. The operations include three Mexican foods
manufacturing plants in Ft. Worth, Texas, which process and package a
complimentary line of tortillas, tamales and prepared Mexican entrees.
Customers are primarily foodservice customers in the South Central states,
including Texas, New Mexico, Oklahoma, Arkansas and Louisiana.
On August 31, 2001, the Mexican Foods group employed the following full
time equivalents: production and plant management 755 and headquarters and
sales 45.
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 noncash
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 at the discretion of the
Board of Directors to member patrons and to non-member "consenting patrons"
16
(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.
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 17 directors. Various
rights and obligations of members are contained in its Articles of
Incorporation and By-Laws (together, the "governing documents"), each of which
was amended and restated in June 1998, and amended in December 2000. 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 By-Laws,
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.
The Board of Directors will terminate membership in the Company 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 By-Laws, 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
17
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; 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.
A Defined Member Board represents each Defined Business Unit. 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 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.
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
18
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.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Defined Investment Program. The Company redeemed
all of the Equity Participation Units and allocated the assets of the Oilseed
Processing and Refining and Wheat Milling Defined Business Units to the Company
as provided in the plan. Due to loss carry-forwards incurred by the Wheat
Milling Defined Business Unit the plan also provided for the cancellation of all
outstanding Preferred Capital Certificates issued to the EPU holders, totaling
$0.2 million. The plan further provided to the Oilseed Processing and Refining
Defined Member EPU holders for the redemption of all outstanding Preferred
Capital Certificates issued and a 100% cash distribution during 2002 for the
patronage refunds earned for the fiscal year ended August 31, 2001.
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. As of August 31, 2001 the Company's outstanding capital
included Capital Equity Certificates, Non-Patronage Equity Certificates and
certain capital reserves.
The Company's By-Laws provide the following securities which 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.
The Board of Directors has authorized the sale and issuance of up to 50
million shares of 8% Preferred Stock at a price of $1.00 per share. The Company
filed a registration statement on Form S-2 with the Securities and Exchange
Commission registering the Preferred Stock. The registration statement was
declared effective on October 31, 2001.
19
OTHER. The Board of Directors may issue other debt or equity instruments.
The By-Laws contain no restrictions on the issuance or the terms of such other
debt or equity instruments.
Voting rights arise by virtue of membership in the Company, not because of
holding any instrument. The Board of Directors may issue "Preferred Equities"
and other debt or equity instruments to individuals who are not members or
patrons of the Company. The Board of Directors has the discretion to establish
and designate one or more series of Preferred Equities and to fix the relative
rights, preferences and privileges of such Preferred Equities. Any Preferred
Equities will not carry voting rights. No such Preferred Equities are presently
outstanding, and the Board of Directors has no present plan or intent to issue
Preferred Equities. However, if it were to do so, it could establish rights,
preferences and privileges relative to the holders of the Units and other
securities of the Company. Such preferences could include provisions for
priority in payment. The Board of Directors may authorize the issuance of
Preferred Capital Certificates pertaining to a particular Defined Business Unit.
If such Certificates were issued, they could have a preference in payment over
patronage refunds of a particular Business Unit.
TRANSFER OF PATRONS' EQUITIES. Debt or equity instruments held by the
Company's members and patrons, including Equity Participation Units, Capital
Equity Certificates, Certificates of Indebtedness, Non-Patronage 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 were 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 By-Laws, 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 By-Laws 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.
20
As a cooperative, the Company is not taxed on amounts withheld from its
members in the form of qualified unit retains or patronage dividends, or in the
amount distributed in the form of patronage payments. Consequently, such
amounts are taxed only at the patron level. However, the amounts of any
non-qualified unit retains or patronage dividends are taxable to the Company
when allocated. Upon redemption of any such non-qualified unit retains or
patronage dividends, the amount is deductible to the Company and taxable at the
member level.
Income derived by the Company from non-patronage sources is not entitled
to the "single tax" benefit of Subchapter T and is taxed to the Company at
corporate income tax rates.
EQUITY PARTICIPATION UNITS
Only Defined Members may hold Equity Participation Units (Units). 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 Board of
Directors may amend the Resolutions, 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.
During 2001, the Company's Board of Directors adopted a resolution to
issue, at no charge, to each Defined Member of the Oilseed Processing and
Refining Defined Business Unit an additional 1/4 Equity Participation Unit
(EPU), for each EPU held, due to increased crush volume.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Defined Investment Program. The Company redeemed
all the Equity Participation Units (EPU) and allocated the assets of the
Oilseed Processing and Refining and Wheat Milling Defined Business Units to the
Company as provided in the plan. Due to loss carryforwards incurred by the
Wheat Milling Defined Business Unit the plan also provided for the cancellation
of all outstanding Preferred Capital Certificates issued to the EPU holders.
The plan further provided to the Oilseed Processing Defined Member EPU holders
for the redemption of all outstanding Preferred Capital Certificates issued and
a 100% cash distribution during 2002 for the patronage refunds earned for the
fiscal year ended August 31, 2001.
WHEAT MILLING DEFINED BUSINESS UNIT
Holders of Equity Participation Units in the Wheat Milling Defined
Business Unit had 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 was 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 was allocated to each Defined Member
proportionate to the wheat delivered pursuant to the Agreement.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Holders of Equity Participation Units in the Oilseed Processing and
Refining Defined Business Unit had 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.
21
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, was 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 was allocated to each Defined
Member proportionate to the soybeans delivered pursuant to the Agreement.
ADDITIONAL EQUITY PARTICIPATION UNITS; SALE
The Board of Directors from time to time may authorize the sale by the
Company of Units deemed owned by the Company for the account of the Company
provided that sales shall be at a price determined by the Board of Directors
taking into account such matters as the Board of Directors and its financial
advisers, if any, deem relevant.
The Board of Directors may authorize the creation, issuance and sale of
additional Equity Participation Units from time to time on such terms and for
such consideration, as it shall deem appropriate. Any proceeds from the sale of
such additional Equity Participation Units shall be allocated to the applicable
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 Company through the Board of Directors, officers and management of the
Company shall carry out the operations of a Defined Business Unit. The capital
assets of a Defined Business Unit may be disposed of in the ordinary course of
business and the Board of Directors may authorize the disposition of any
substantial portion of the assets of a Defined Business Unit as an entirety.
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."
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, 2001, 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
22
uncertainties include, but are not limited to: supply and demand forces, price
risks, business competition, taxation of cooperatives, environmental laws, food
safety and quality, and volatility of oil and natural gas prices. 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, food
manufacturing 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 21 locations in Iowa, Idaho, Minnesota, 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, South
Repair Facilities Dakota, Washington and Wisconsin, 2 of which are leased
Petroleum & Asphalt 11 locations in Kansas, Montana, North Dakota, Washington and
Terminals/Storage Facilities Wisconsin
Pump Stations 10 locations in Montana and North Dakota
Pipelines
Cenex Pipeline, LLC Laurel, Montana to Fargo, North Dakota
Front Range Pipeline, LLC Canadian Border to Laurel, Montana
Convenience Stores/Gas Stations 36 locations in Iowa, Minnesota, Montana, South Dakota and
Wyoming
Lube Plants/Warehouses 2 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
GRAIN MARKETING
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)
Myrtle Grove, Louisiana(1)
St. Paul, Minnesota(2)
Savage, Minnesota(1)
Spokane, Washington(1)
Superior, Wisconsin(1)
Winona, Minnesota(1)
- ------------------
(1) Owned
(2) Leased
23
COUNTRY OPERATIONS
AGRI OPERATIONS
The Company owns 336 Agri Operations locations (of which some of the
facilities are on leased land) located in Minnesota, Nebraska, North Dakota,
South Dakota, Montana, Washington, Oregon, Idaho 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
Norfolk, Nebraska
PROCESSED GRAINS AND FOODS
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, Minnesota(1)
Huron, Ohio(2)
Kenosha, Wisconsin(1)
Houston, Texas(1)
Mount Pocono, Pennsylvania(1)
Fairmount, North Dakota(1)
- ------------------
(1) Owned
(2) Owned equipment, leased land and facilities
FOODS
The Company leases a manufacturing facility in New Brighton, Minnesota and
also Phoenix, Arizona and owns 3 manufacturing facilities in Ft. Worth, Texas
related to Mexican Foods operations.
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.
24
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No equity securities were sold by the Registrant during the three years
ended August 31, 2001 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 subsequent to August 31, 1998
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 AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
----------------------------------------- AUGUST 31, ---------------------------
2001 2000 1999 1998 1998 1997
------------- ------------- ------------- ------------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Income Statement Data:
Revenues:
Net sales ................... $7,753,012 $8,497,850 $6,381,334 $1,531,124 $8,410,030 $9,732,274
Patronage dividends ......... 5,977 5,494 5,876 5,111 70,387 71,070
Other revenues .............. 116,254 97,471 81,180 17,706 85,127 74,473
---------- ---------- ---------- ---------- ---------- ----------
7,875,243 8,600,815 6,468,390 1,553,941 8,565,544 9,877,817
---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of goods sold ............ 7,470,203 8,300,494 6,193,287 1,475,407 8,209,448 9,546,622
Marketing, general and
administrative ............... 184,046 155,266 152,031 34,998 126,061 126,297
Interest ...................... 61,436 57,566 42,438 12,311 34,620 33,368
Equity (income) loss from
investments .................. (28,494) (28,325) (22,363) 9,142 (8,381) (7,635)
Minority interests ............ 35,098 24,546 10,017 3,252 6,880 7,984
---------- ---------- ---------- ---------- ---------- ----------
7,722,289 8,509,547 6,375,410 1,535,110 8,368,628 9,706,636
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ..... 152,954 91,268 92,980 18,831 196,916 171,181
Income taxes ................... (25,600) 3,880 6,980 2,895 19,615 19,280
---------- ---------- ---------- ---------- ---------- ----------
Net income ..................... $ 178,554 $ 87,388 $ 86,000 $ 15,936 $ 177,301 $ 151,901
========== ========== ========== ========== ========== ==========
Balance Sheet Data (at end
of period):
Working capital .............. $ 305,280 $ 214,223 $ 219,045 $ 284,452 $ 235,721 $ 219,395
Net property, plant and
equipment ................... 1,023,872 1,034,768 968,333 915,770 868,073 798,757
Total assets ................. 3,057,319 3,172,680 2,787,664 2,469,103 2,436,515 2,422,564
Long-term debt, including
current maturities .......... 559,997 510,500 482,666 456,840 378,408 335,737
Total equities ............... 1,261,153 1,164,426 1,117,636 1,065,877 1,029,973 944,798
25
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
subsequent to August 31, 1998 should be read in conjunction with the Defined
Business Unit's financial statements and notes thereto included elsewhere in
this filing.
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
------------------------------------------ AUGUST 31, -----------------------
2001 2000 1999 1998 1998 1997
-------------- ------------- ------------- ------------------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER BUSHEL AMOUNTS)
Income Statement Data:
Revenues:
Processed oilseed sales ......... $ 349,498 $ 340,557 $ 370,610 $ 102,293 $422,414 $454,174
Other revenues and
(costs) ........................ 189 160 30 1,115 1,746 (1,660)
----------- ---------- ---------- --------- -------- --------
349,687 340,717 370,640 103,408 424,160 452,514
----------- ---------- ---------- --------- -------- --------
Costs and expenses:
Cost of goods sold ................ 330,540 315,563 350,954 98,678 391,300 418,227
Marketing, general and
administrative ................... 6,009 5,131 5,095 1,257 4,730 4,342
Interest .......................... 42 18 557 251 380 322
----------- ---------- ---------- --------- -------- --------
336,591 320,712 356,606 100,186 396,410 422,891
----------- ---------- ---------- --------- -------- --------
Income before income taxes ......... 13,096 20,005 14,034 3,222 27,750 29,623
Income taxes ....................... 245 1,330 800 525 1,825 2,100
----------- ---------- ---------- --------- -------- --------
Net income ......................... $ 12,851 $ 18,675 $ 13,234 $ 2,697 $ 25,925 $ 27,523
=========== ========== ========== ========= ======== ========
Operating Data:
Quantities processed
Soybeans (bu.) .................. 39,050 39,405 36,759 9,467 32,626 32,232
Crude oil (lbs.) ................ 1,059,988 1,058,739 1,024,900 226,024 953,359 960,407
Production:
Meal (tons) ...................... 893 904 841 217 754 742
Flour (tons) ..................... 48 39 33 10 32 36
Refined oil (lbs.) ............... 1,056,801 1,055,535 996,176 219,918 948,797 957,398
Balance Sheet Data (at end
of period):
Working capital .................. $ 11,389 $ 24,583 $ 22,193 $ 22,881 $ 23,111 $ 20,306
Net property, plant and
equipment ....................... 48,541 40,270 39,001 35,596 34,953 33,085
Total assets ..................... 92,611 95,748 80,735 82,868 91,482 92,416
Total equity ..................... 60,427 64,853 61,194 58,477 58,064 53,391
Other Data(1):
Pretax income .................... $ 13,096 $ 20,005 $ 14,034 $ 3,222 $ 27,750 $ 29,623
(Loss) earnings from
purchased oil ................... 357 (5,103) (2,907) (58) (3,265) (7,015)
Non-patronage joint venture (153) (976) (738) (615)
Book to tax differences .......... 147 13 (121) (384) 2,210
----------- ---------- ---------- --------- -------- --------
Patronage income ................. $ 13,453 $ 14,896 $ 11,140 $ 2,067 $ 23,363 $ 24,203
=========== ========== ========== ========= ======== ========
Bushels processed ................ 39,050 39,405 36,759 9,467 32,626 32,232
Income per bushel ................ $ 0.34 $ 0.38 $ 0.30 $ 0.22 $ 0.72 $ 0.75
YEAR ENDED
AUGUST 31, 2001
---------------
Equity Participation Units delivered (bushels) ......... 1,046
Patronage rate ......................................... $ 0.34
-------
Income to holders ...................................... $ 360
=======
- ------------------
(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.
26
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 subsequent to August 31,
1998 should be read in conjunction with the Defined Business Unit's financial
statements and notes thereto included elsewhere in this filing.
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
----------------------------------------- AUGUST 31, -------------------------
2001 2000 1999 1998 1998 1997
------------- ------------- ------------- ------------------- ------------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER BUSHEL AMOUNTS)
Income Statement Data:
Revenues:
Processed grain sales ...... $ 257,084 $ 234,467 $ 186,148 $ 50,011 $ 219,446 $212,815
Other revenues ............. 1,820
--------- --------- --------- -------- --------- --------
257,084 234,467 186,148 50,011 221,266 212,815
--------- --------- --------- -------- --------- --------
Costs and expenses:
Cost of goods sold ........... 247,739 225,605 182,525 46,830 203,778 195,302
Marketing, general and
administrative .............. 8,938 9,385 10,610 2,071 8,072 6,749
Loss on assets held for
disposal .................... 7,548
Interest ..................... 7,842 6,876 5,184 843 3,122 5,230
Other ........................ 137 170 826 162 2,000
--------- --------- --------- -------- --------- --------
272,204 242,036 199,145 49,744 215,134 209,281
--------- --------- --------- -------- --------- --------
(Loss) income before income
taxes ........................ (15,120) (7,569) (12,997) 267 6,132 3,534
Income taxes (benefit) ........ (3,940) (965) (1,125) 25 475 300
--------- --------- --------- -------- --------- --------
Net (loss) income ............. $ (11,180) $ (6,604) $ (11,872) $ 242 $ 5,657 $ 3,234
========= ========= ========= ======== ========= ========
Operating Data:
Wheat used (bu.) durum ...... 11,103 12,683 15,863 4,453 19,307 21,372
Spring ...................... 27,175 19,296 11,144 2,251 8,891 6,732
Winter ...................... 8,768 12,636 9,368 1,453 3,165
Shipments (cwt):
Semolina/flour .............. 7,892 6,313 9,258 2,351 10,505 11,168
Baking flour ................ 17,597 14,170 7,671 1,389 4,270 2,599
Balance Sheet Data (at end
of period):
Working capital ............. $ (35,317) $ (30,672) $ (25,112) $ (1,361) $ 12,787 $ (1,939)
Net property, plant and
equipment .................. 124,571 128,151 110,547 97,428 85,627 69,130
Total assets ................ 186,831 189,856 165,471 162,461 146,311 120,918
Long-term debt, including
current maturities ......... 40,507 47,510 38,515 48,520 51,209 61,214
Total equity ................ 56,468 65,727 66,340 68,033 67,958 27,797
Other Data(1):
Pretax (loss) income ........ $ (15,120) $ (7,569) $ (12,997) $ 267 $ 6,132 $ 3,534
Book to tax differences ..... 1,646 2,249 103 690 2,376
--------- --------- --------- -------- --------- --------
Patronage (loss) income ..... $ (15,120) $ (5,923) $ (10,748) $ 370 $ 6,822 $ 5,910
========= ========= ========= ======== ========= ========
Bushels milled .............. 47,046 44,615 36,375 8,156 31,363 28,104
(Loss) income per bushel .... $ (0.32) $ (0.13) $ (0.30) $ 0.05 $ 0.22 $ 0.21
- ------------------
(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.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED COMPANY
Effective September 1, 2000, the Company's Board of Directors approved a
resolution providing for the computation of patronage distributions based on
earnings for financial statement purposes rather than tax basis earnings. On
December 1, 2000, this resolution was ratified by the Company's members, the
by-laws were amended and beginning with fiscal year 2001 patronage
distributions are based on financial statement earnings.
The Company markets refined petroleum products including gasoline, diesel
fuels, propane and lubricants under the Cenex brand through Country Energy, LLC,
a joint sales, marketing and distribution venture with Farmland Industries. The
Company has signed an agreement to purchase Farmland's wholesale energy
business, including their outstanding interest in Country Energy. The
transaction will make Country Energy a wholly-owned subsidiary.
In September 2001, the Company signed a non-binding letter of intent to
form a joint venture with Cargill, Incorporated to engage in wheat flour
milling in North America. The Company would hold a 24% interest in the joint
venture. The transaction is subject to definitive agreement and government
approvals.
The Board of Directors has authorized the sale and issuance of up to 50
million shares of 8% Preferred Stock at a price of $1.00 per share. The Company
filed a registration statement on Form S-2 with the Securities and Exchange
Commission registering the Preferred Stock. The registration statement was
declared effective on October 31, 2001.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED AUGUST 31, 2001 AND 2000
The Company's consolidated net income of $178.6 million for the year ended
August 31, 2001 represents a $91.2 million (104%) increase compared to the year
ended August 31, 2000. This net increase in profitability is primarily
attributable to an increase in income from the Company's Energy segment, which
was partially offset by decreases from the Agronomy, Grain Marketing, and
Corporate and Other segments.
Consolidated net sales of $7.8 billion for the year ended August 31, 2001
represent a $744.8 million (9%) decrease compared to the year ended August 31,
2000.
Company-wide grain and oilseed net sales of $3.7 billion increased $67.0
million (2%) during the year ended August 31, 2001 compared to the year ended
August 31, 2000. Sales for the year ended August 31, 2001 were $3,514.3 million
and $913.4 million from Grain Marketing and Country Operations segments,
respectively. Sales for the year ended August 31, 2000 were $3,453.8 million
and $819.0 million from Grain Marketing and Country Operations segments,
respectively. The Company eliminated all intracompany sales from the Country
Operations segment to the Grain Marketing segment of $709.9 million and $622.0
million for the years ended August 31, 2001 and 2000, respectively. This
increase in sales was primarily due to an increase of $0.06 per bushel in the
average sales price while volumes were essentially unchanged on all grain and
oilseed marketed by the Company compared to the prior year.
Energy net sales of $2.7 billion decreased $194.5 million (7%) during the
year ended August 31, 2001 compared to the year ended August 31, 2000. Sales
for the years ended August 31, 2001 and 2000 were $2,781.2 million and $2,959.6
million, respectively. The Company eliminated all intracompany sales from the
Energy segment to the Country Operations segment of $71.8 million and $55.7
million for the year ended August 31, 2001 and 2000, respectively. The decrease
is primarily attributable to a net volume decrease compared to the year ended
August 31, 2000 due to the dissolution of Cooperative Refining, LLC (CRLLC)
effective December 31, 2000. The Company owned 58% of CRLLC through its 75%
ownership in National Cooperative Refining Association (NCRA) and therefore
consolidated CRLLC
28
business activity up to the time of dissolution. The decrease related to the
dissolution was partially offset by refined fuels rack sales increases of $0.12
per gallon in the average sales price and 2% in volume compared to the year
ended August 31, 2000. In addition, propane volumes increased by 39% and the
average sales price of propane increased by $0.21 per gallon compared to the
year ended August 31, 2000.
The Company did not record Agronomy sales during the year ended August 31,
2001 compared to sales of $768.4 million net of intracompany eliminations of
$40.3 million from the Agronomy segment to the Country Operations segment for
the year ended August 31, 2000. During 2000, the Company exchanged its agronomy
operations for an ownership interest in Agriliance, LLC, owned indirectly
through United Country Brands, LLC. As of July 31, 2000, the Company recorded
results of its 25% ownership in Agriliance on the equity method, and as such,
income or losses are reflected in equity income from investments.
Country Operations farm supply sales of $663.9 million increased $73.0
million (12%) for the year ended August 31, 2001 compared to the year ended
August 31, 2000. The net increase is primarily attributable to average price
increases in agronomy and energy products and additional volumes from
acquisitions.
Processed Grains and Foods sales of $662.7 million increased $78.6 million
(13%) for the year ended August 31, 2001 compared to the year ended August 31,
2000. This increase is primarily due to Foods acquisitions, which increased
sales by $47.3 million compared to the prior year. In addition, sales of
processed wheat increased by $22.6 million compared to the prior year,
primarily due to increased volumes from the acquisition of a wheat mill in
April 2000 and an increase in the average sales price of all wheat products.
Sales of processed oilseed increased by $8.8 million primarily due to volume
and price increases compared to the prior year.
Other revenues of $116.3 million increased $18.8 million (19%) for the
year ended August 31, 2001 compared to the year ended August 31, 2000. The most
significant changes were gains from the sale of feed plants and other assets,
which were partially offset by a reduction in service revenues within the
Country Operations segment, in addition to increases in other revenues within
the Grain Marketing segment. These increases were partially offset by a prior
year gain, which was recorded in March 2000 in the Agronomy segment, of $7.4
million from the sale of 1.455% of the Company's economic interest in
Agriliance.
Cost of goods sold of $7.5 billion decreased $830.3 million (10%) during
the year ended August 31, 2001 compared to the year ended August 31, 2000. The
decrease was primarily attributable to the impact of recording the Company's
share of its agronomy operations on the equity method in 2001 as previously
discussed, which caused a reduction in cost of goods sold of $764.7 million
compared to the year ended August 31, 2000. In addition, during the year ended
August 31, 2001 the cost of goods sold of the Energy segment decreased by 11%
primarily due to a decrease in volume as a result of the dissolution of CRLLC,
which was partially offset by volume and price increases on refined fuels rack
purchases and propane products. The cost of all grains and oilseed procured by
the Company through its Grain Marketing and Country Operations segments
increased 2% compared to the previous year end primarily due to a $0.06 cost
per bushel increase with volumes remaining essentially unchanged. Country
Operations farm supply cost of goods sold increased by 14% during the year
ended August 31, 2001 compared to the year ended August 31, 2000, primarily due
to cost increases in agronomy and energy products and higher volumes due to
acquisitions. Cost of goods sold within the Processed Grains and Foods segment
increased by 13% due to volume increases primarily as a result of acquisitions.
Marketing, general and administrative expenses of $184.0 million for the
year ended August 31, 2001 increased by $28.7 million (19%) compared to the
year ended August 31, 2000. This increase is primarily due to an increase in
expenses within the Processed Grains and Foods segment of $23.4 million, which
is primarily due to additional expenses of $12.9 million related to
acquisitions and a loss on assets held for disposal of $7.5 million related to
the closing of a wheat mill compared to the prior year. In addition, expenses
within the Country Operations segment increased by $9.4 million primarily due
to acquisitions. These increases were partially offset by a decrease in
expenses of $12.3 million in the Agronomy segment.
29
Interest expense of $61.4 million for the year ended August 31, 2001
increased by $3.8 million (7%) compared to the year ended August 31, 2000. The
average level of short-term borrowings increased by 11% and the average
short-term interest rate decreased by 0.55% during the year ended August 31,
2001 compared to the previous year. Interest expense also increased due to an
additional $80.0 million of long-term debt from a private placement.
Equity income from investments of $28.5 million for the year ended August
31, 2001 increased by $0.2 million (1%) compared to the year ended August 31,
2000. The increase was primarily attributable to increases in earnings from
investments within the Agronomy and Processed Grains and Foods segments of
$11.7 million and $11.1 million, respectively, during the year ended August 31,
2001 compared to the prior year. The Company records its 25% share of its
Agronomy segment investment in Agriliance on the equity method as previously
discussed. The net increase was partially offset by losses from technology
investments of $15.1 million and decreased earnings of $4.9 million and $1.9
million from Energy and Grain Marketing segment investments, respectively.
Minority interests of $35.1 million for the year ended August 31, 2001
increased by $10.6 million (43%) compared to the year ended August 31, 2000.
Substantially all minority interests were related to NCRA. This net change in
minority interests was reflective of more profitable operations within the
Company's majority-owned subsidiaries during the year ended August 31, 2001
compared to the previous year.
An income tax benefit of $25.6 million for the year ended August 31, 2001
compares to expense of $3.9 million for the year ended August 31, 2000
resulting in effective tax rates of 16.7% benefit and 4.3% expense,
respectively. The federal and state statutory rate applied to nonpatronage
business activity was 38.9% for the years ended August 31, 2001 and 2000. An
income tax benefit of $34.2 million for the year ended August 31, 2001 resulted
from a change in the tax rate applied to the Company's cumulative temporary
differences between income for financial statement purposes and income used for
tax reporting purposes. The Company's change in the calculation of its
patronage distribution using earnings for financial statement purposes rather
than tax basis earnings prompted the rate change. The Company recorded an
income tax expense of $8.6 million and $3.9 million for the years ended August
31, 2001 and 2000 excluding the effects of the adjustment. Income tax expense
and effective tax rates vary each year based upon profitability and
nonpatronage business activity during each of the comparable years.
COMPARISON OF THE YEARS ENDED AUGUST 31, 2000 AND 1999
The Company's consolidated net income of $87.4 million for the year ended
August 31, 2000 represents a $1.4 million (2%) increase compared to the year
ended August 31, 1999. This increase in profitability was primarily
attributable to the Company's Agronomy, Processed Grains and Foods and Country
Operations segments. These increases were partially offset by decreases in the
Energy and Grain Marketing segments.
Consolidated net sales of $8.5 billion for the year ended August 31, 2000
represent a $2.1 billion (33%) increase compared to the year ended August 31,
1999.
Company-wide grain and oilseed net sales of $3.7 billion for the year
ended August 31, 2000 represents a $317.3 million (10%) increase compared to
the year ended August 31, 1999. Sales for the year ended August 31, 2000 were
$3,453.8 million and $819.0 million from Grain Marketing and Country Operations
segments, respectively. Sales for the year ended August 31, 1999 were $3,200.6
million and $718.4 million from Grain Marketing and Country Operations
segments, respectively. The Company eliminated all intracompany sales from the
Country Operations segment to the Grain Marketing segment of $622.0 million and
$585.5 million, for the year ended August 31, 2000 and 1999, respectively. This
increase was primarily due to an increase in grain volumes of approximately 6%
and an increase of $0.09 per bushel in the average sales price of all grain and
oilseed marketed by the Company compared to the prior year.
Energy net sales of $2.9 billion increased $1.6 billion (116%) for the
year ended August 31, 2000 compared to the year ended August 31, 1999. Sales
for the year ended August 31, 2000 and 1999 were $2,959.6 million and $1,381.3
million, respectively. The Company eliminated all intracompany sales from the
Energy segment to the Country Operations segment of $55.7 million and $35.5
million for the years
30
ended August 31, 2000 and 1999, respectively. This increase was primarily
attributable to the formation of a refinery joint venture whereby the Company,
through its 75% ownership in NCRA, which in turn owned 58% of the refining
joint venture CRLLC, consolidated the sales of CRLLC. In addition, the average
sales price of refined fuels and propane increased $0.30 and $0.15 per gallon,
respectively, which were partially offset by a 2% and 11% decrease in volume,
respectively.
Agronomy net sales of $768.4 million increased $174.5 million (29%) for
the year ended August 31, 2000 compared to the year ended August 31, 1999.
Sales for the year ended August 31, 2000 and 1999 were $808.7 million and
$653.6 million, respectively. The Company eliminated all intracompany sales
from the Agronomy segment to the Country Operations segment of $40.3 million
and $59.7 million for the years ended August 31, 2000 and 1999, respectively.
Crop protection sales increased 25% in 2000 compared to 1999 primarily due to
increased volumes from acquisitions. In addition a crop nutrients volume
increase of 41% was partially offset by a decrease in the average selling price
of $15 per ton compared to the prior year. Effective January 1, 2000, the
Company exchanged its agronomy operations for a 25% equity ownership in
Agriliance, owned indirectly through United Country Brands. As of July 31,
2000, the Company recorded results of its 25% ownership in Agriliance on the
equity method.
Country Operations farm supply sales of $590.9 million increased $39.2
million (7%) for the year ended August 31, 2000 compared to the year ended
August 31, 1999. The growth in sales was primarily attributable to increased
volumes from new acquisitions and market share growth and price increases
primarily in agronomy and energy products.
Processed Grains and Foods sales of $584.1 million increased $27.3 million
(5%) for the year ended August 31, 2000 compared to the year ended August 31,
1999. This increase was primarily attributable to a 21% growth in sales volume
and a price increase of $0.21 per hundredweight in milled wheat products. These
increases were partially offset by a decrease in oilseed sales. A reduction in
the sales price for refined oilseed of approximately $0.06 per pound was
partially offset by an increase of approximately $17 per ton for processed
soybean products, an 8% increase in sales volume for processed soybean
products, and a 4% increase in sales volume for refined oilseed during the year
ended August 31, 2000 compared to the prior year.
Other revenues of $97.5 million increased $16.3 million (20%) for the year
ended August 31, 2000 compared to the year ended August 31, 1999. Service and
miscellaneous revenues increased $12.2 million primarily in the Country
Operations segment compared to the prior year. In addition, in March 2000 the
Agronomy segment recorded a gain of $7.4 million from the sale of 1.455% of the
Company's economic interest in Agriliance.
Cost of goods sold of $8.3 billion increased $2.1 billion (34%) during the
year ended August 31, 2000 compared to the year ended August 31, 1999. The
increase was primarily attributable to the Energy segment's consolidation of
CRLLC, which was previously discussed, as well as an increase in the purchase
price of energy crude oil. During the year ended August 31, 2000, the average
cost of refined fuels and propane increased by $0.31 and $0.15 per gallon,
respectively. Also, during the year ended August 31, 2000, the Agronomy
segment's cost of goods increased by 23% compared to 1999, primarily due to
increased volume from acquisitions. The cost of all grains and oilseed procured
by the Company through its Grain Marketing and Country Operations segments
increased by 9%, primarily due to a 6% increase in volume, which was partially
offset by a decrease in the cost of grain of $0.09 per bushel compared to year
ended 1999. The Processed Grain and Foods segment experienced a slight increase
in cost of goods compared to the year ended 1999. Increases in wheat milling
and processed oilseed expenses, primarily due to volumes processed, was
partially offset by a reduced average cost of processed oilseed, compared to
the year ended 1999.
Marketing, general and administrative expenses of $155.3 million for the
year ended August 31, 2000 increased by $3.2 million (2%) compared to the year
ended 1999. This increase was primarily related to additional locations and
expansion of many of the Company's business segments, which was partially
offset by expense synergies realized during 2000.
Interest expense of $57.6 million for the year ended August 31, 2000
increased by $15.1 million (36%) compared to the year ended 1999. During 2000,
the average seasonal borrowings increased
31
primarily as a result of higher working capital needs and long-term borrowings,
which reflected financial activities related to the acquisition of property,
plant and equipment.
Equity income from investments of $28.3 million for the year ended August
31, 2000 increased by $6.0 million (27%) compared to the year ended 1999. The
increase was primarily attributable to an increase in the earnings of a
Processed Grains and Foods segment investment of $12.2 million during the year
ended August 31, 2000 compared to the prior year. This increase was partially
offset by increased losses of $3.0 million from Agronomy segment investments
and decreased losses of $3.9 million from Energy segment investments as
compared to the prior year.
Minority interests of $24.5 million for the year ended August 31, 2000
increased by $14.5 million (145%) compared to the year ended 1999.
Substantially all minority interests are related to NCRA. This net change in
minority interests during the current year was reflective of more profitable
operations within the Company's majority owned subsidiaries compared to the
same period of a year ago.
Income tax expense of $3.9 million and $7.0 million for the years ended
August 31, 2000 and 1999, respectively, resulted in effective tax rates of 4.3%
and 7.5%, respectively. The federal and state statutory rate applied to
nonpatronage business activity was 38.9% for the years ended August 31, 2000
and 1999. Income tax expense and effective tax rates vary each year based upon
profitability and nonpatronage business activity during each of the comparable
years. The decreased effective tax rate was primarily due to nonpatronage
business losses.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company provided net cash of $252.8 million
during the year ended August 31, 2001. Net income of $178.6 million, net
non-cash expenses of $50.5 million and decreased working capital requirements
of $23.7 million provided this net cash from operating activities.
Operating activities of the Company provided net cash of $128.4 million
during the year ended August 31, 2000. Net income of $87.4 million and net
non-cash expenses of $79.7 million were partially offset by increased working
capital requirements of $38.7 million.
Operating activities of the Company used net cash of $21.8 million during
the year ended August 31, 1999. Net income of $86.0 million and net non-cash
expenses of $28.4 million were offset by increased working capital requirements
of $136.2 million.
CASH FLOWS FROM INVESTING ACTIVITIES
For the years ended August 31, 2001, 2000 and 1999, the net cash flows used
in the Company's investing activities totaled $69.1 million, $184.9 million and
$170.8 million, respectively.
The acquisition of property, plant and equipment comprised the primary use
of cash totaling $97.6 million, $153.8 million and $124.5 million for the years
ended August 31, 2001, 2000 and 1999, respectively. For the year ended August
31, 2002 the Company expects to spend approximately $153.6 million for the
acquisition of property, plant and equipment, which includes $22.7 million of
expenditures for the construction of an oilseed processing facility in
Fairmont, Minnesota. Total expenditures related to the construction of the
facility are projected to be approximately $90.0 million. Capital expenditures
at NCRA primarily related to the EPA low sulfur fuel regulations required by
2006, are expected to be approximately $200.0 million over the next five years.
Investments for the years ended August 31, 2001, 2000 and 1999 totaled
$14.2 million, $35.3 million and $63.3 million, respectively. Investments
during the year ended August 31, 2000 included the purchase of an additional
10% interest in Ventura Foods, LLC, the Company's foods joint venture, for
$25.6 million. The Company has a 50% interest in that joint venture. 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 at the
time, purchased approximately 310 agronomy facilities from Terra International,
Inc., at a price of approximately $350.0 million. In conjunction with the
purchase transaction, the Company invested $51.5 million in the Entities.
Financing arrangements of the Entities are without recourse to the Company.
32
Acquisitions of intangibles were $7.3 million and $26.5 million for the
years ended August 31, 2001 and 2000, respectively. The intangibles resulted
primarily from the purchase of Rodriguez Festive Foods, Inc. in fiscal 2001 and
the purchase of Sparta Foods, Inc. and the wholesale propane marketing business
of Williams Energy Marketing and Trading Company in fiscal 2000.
Distributions to minority owners for the years ended August 31, 2001, 2000
and 1999 were $19.3 million, $21.1 million and $2.3 million, respectively, and
were primarily related to NCRA. For the years ended August 31, 2001 and 2000,
NCRA's distributions also included the distributions made by CRLLC.
Partially offsetting cash outlays in investing activities were proceeds
from the disposition of property, plant and equipment of $35.3 million, $7.7
million and $6.8 million for the years ended August 31, 2001, 2000 and 1999,
respectively. During the year ended August 31, 2001 the proceeds were primarily
from the sale of feed plants and other assets in the Country Operations
segment. Also partially offsetting cash usage were distributions received from
joint ventures and investments totaling $31.8 million, $43.9 million and $11.2
million for the years ended August 31, 2001, 2000 and 1999, respectively.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company finances its working capital needs through short-term lines of
credit with a syndication of banks. In May 2001, the Company renewed and
expanded its 364-day credit facility to $550.0 million committed. In addition
to these lines of credit, the Company has a 364-day credit facility dedicated
to NCRA, with a syndication of banks in the amount of $30.0 million committed.
On August 31, 2001 and 2000, the Company had total short-term indebtedness
outstanding on these various facilities and other short-term notes payable
totaling $97.2 million and $217.9 million, respectively.
In June 1998, the Company established a five-year revolving credit
facility with a syndication of banks, with $200.0 million committed. The
Company had an outstanding balance of $45.0 million categorized as long-term
debt on August 31, 2001 and 2000. This outstanding balance was drawn during the
third quarter of the year ended August 31, 2000. In January 2001, an additional
$35.0 million was drawn and then subsequently repaid in March 2001 with
proceeds from a note purchase and private shelf agreement.
The Company has financed its long-term capital needs in the past,
primarily for the acquisition of property, plant and equipment, with long-term
agreements through the banks for cooperatives. In June 1998, the Company
established a long-term credit agreement through the banks for cooperatives.
This facility committed $200.0 million of long-term borrowing capacity to the
Company, with repayments through fiscal year 2009. The commitment expired on
May 31, 1999. The amount outstanding on this credit facility was $150.9 million
and $157.4 million on August 31, 2001 and 2000, respectively. Repayments of
$6.6 million were made on this facility during each of the years ended August
31, 2001 and 2000.
Also in June 1998, the Company issued a private placement with several
insurance companies for long-term debt in the amount of $225.0 million.
Repayments will be made in equal annual installments of $37.5 million each in
the years 2008 through 2013.
In January 2001, the Company entered into a note purchase and private
shelf agreement with Prudential Insurance Company. The long-term note in the
amount of $25.0 million will be repaid in equal annual installments of
approximately $3.6 million, in the years 2005 through 2011. Proceeds from the
note were used to repay debt on the 364-day facility. A subsequent note for
$55.0 million was issued in March 2001, related to the private shelf facility.
The $55.0 million note will be repaid in equal annual installments of
approximately $7.9 million, in the years 2005 through 2011. Proceeds from the
March 2001 note were used to repay debt of $35.0 million on the five-year
revolving loan and $20.0 million on the 364-day facility.
During the year ended August 31, 1999, the Company, through NCRA, borrowed
an additional $10.0 million with equal annual repayments through the year 2009.
On August 31, 2001, the Company had total long-term debt outstanding of
$560.0 million, of which $239.4 million was bank financing, $305.0 million was
private placement proceeds and $15.6 million was
33
industrial development revenue bonds, capitalized leases and other notes and
contracts payable. On August 31, 2000, the Company had long-term debt
outstanding of $510.5 million.
During the years ended August 31, 2001, 2000 and 1999, the Company
borrowed on a long-term basis $116.9 million, $49.9 million and $40.0 million,
respectively, and during the same periods repaid long-term debt of $67.4
million, $22.5 million and $14.6 million, respectively.
In accordance with the by-laws and by action of the Board of Directors,
annual net earnings from patronage sources are distributed to consenting
patrons following the close of each fiscal year. Effective September 1, 2000,
patronage refunds are calculated based on earnings for financial statement
purposes rather than based on amounts reportable for federal income tax
purposes as had been the Company's practice prior to this date. This change was
authorized through a by-law amendment at the Company's annual meeting on
December 1, 2000. The patronage earnings from the fiscal year ended August 31,
2000 were distributed in January 2001. The cash portion of this distribution,
deemed by the Board of Directors to be 75% for Equity Participation Units and
30% for other patronage earnings, was $26.1 million. During the years ended
August 31, 2000 and 1999, the Company distributed cash patronage of $17.9
million and $43.8 million, respectively.
Cash patronage for the year ended August 31, 2001, deemed by the Board of
Directors to be 100% for Equity Participation Units and 30% for other patronage
earnings, to be distributed in fiscal year 2002, is expected to be
approximately $38.7 million and is classified as a current liability on the
August 31, 2001 consolidated balance sheet.
For the years ended August 31, 2001, 2000 and 1999, the Company redeemed
patronage related equities in accordance with authorization from the Board of
Directors in the amounts of $18.7 million, $28.7 million and $23.8 million,
respectively.
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 that 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. Total redemptions
related to the year ended August 31, 2001, to be distributed in fiscal year
2002, are expected to be approximately $33.5 million and are classified as a
current liability on the August 31, 2001consolidated 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 gave the holder the
right and obligation to deliver to the Company a stated number of bushels in
return for a prorata share of the undiluted grain based patronage earnings of
these respective Defined Business Units. The offering resulted in the issuance
of such equity with a stated value of $13,870,000 and generated additional
capital and cash of $10,837,000, after issuance cost and conversion privileges.
Conversion privileges allowed a member to elect to use outstanding patrons'
equities for the payment of up to one-sixth the purchase price of the EPUs.
During 2001, the Company's Board of Directors adopted a resolution to issue, at
no charge, to each Defined Member of the Oilseed Processing and Refining
Defined Business Unit an additional 1/4 Equity Participation Unit (EPU) for
each EPU held, due to increased crush volume.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Defined Investment Program. The Company redeemed
all of the EPUs and allocated the assets of the Oilseed Processing and Refining
and Wheat Milling Defined Business Units to the Company as provided in the
plan. Due to loss carry-forwards incurred by the Wheat Milling Defined Business
Unit the plan also provided for the cancellation of all outstanding Preferred
Capital Certificates issued to the EPU holders, totaling $0.2 million. The plan
further provided to the Oilseed Processing Defined Member EPU holders for the
redemption of all outstanding Preferred Capital Certificates issued and a 100%
cash distribution during 2002 for the patronage refunds earned for the fiscal
year ended August 31, 2001.
34
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
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, a standard
related to the accounting for derivative transactions and hedging activities,
effective September 1, 2000. The effect of the adoption did not have a material
effect on the Company's earnings or financial position, since the contracts
utilized were considered by the Company to be derivative financial instruments
and were carried at fair value under the Company's previous accounting.
Emerging Issues Task Force (EITF) 00-10, "Accounting for Shipping and
Handling Fees and Costs", is effective for all fiscal years beginning after
December 15, 1999. EITF 00-10 states that all amounts billed to a customer in a
sale transaction related to shipping and handling represents revenues earned
for the goods provided and should be classified as revenue. Accordingly, the
Company has presented such amounts as a component of net sales for the year
ended August 31, 2001, and reclassified, primarily from cost of goods sold,
$62.0 million and $52.7 million for the years ended August 31, 2000 and 1999,
respectively, to conform to the current-year presentation. Costs incurred for
shipping and handling are reported as a component of cost of goods sold.
In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets," which are effective for fiscal
years beginning after December 15, 2001, with early adoption permitted. These
statements, in summary, eliminate the use of the pooling method of accounting
for business combinations occurring in the future, and discontinue the
amortization of acquired goodwill, subject to periodic impairment testing. The
Company expects to adopt these new standards in the first fiscal quarter of
2002. The adoption is not expected to have a material effect on the Company.
The Company is currently reviewing and analyzing the effects of SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Cenex Harvest States Cooperatives' (the Company) Oilseed Processing and
Refining Defined Business Unit (the Defined Business Unit) is a Defined
Business Unit of 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.
During 2001, the Company's Board of Directors adopted a resolution to
issue, at no charge, to each Defined Member of the Oilseed Processing and
Refining Defined Business Unit an additional 1/4 Equity Participation Unit
(EPU), for each EPU held, due to increased crush volume.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Oilseed Processing and Refining Defined
Investment Program. The Company redeemed all of the Equity Participation Units
(EPUs). The assets of the Oilseed Processing and Refining Defined Business Unit
were allocated to the Company as provided in the plan. The plan included the
buy back of the outstanding Oilseed Processing and Refining Defined Member EPUs
at the original price of $4.00 per unit. The plan also provided to the Defined
Member EPU holders for the redemption of all outstanding Preferred Capital
Certificates issued and a 100% cash distribution during 2002 for the patronage
refunds earned for the fiscal year ended August 31, 2001.
See the Management's Discussion and Analysis for the Company in regard to
new accounting pronouncements.
35
RESULTS OF OPERATIONS
Effective September 1, 2000, patronage distributions from the Oilseed
Processing and Refining Defined Business Unit are calculated on the basis of
financial statement earnings per bushel. Prior to September 1, 2000, patronage
refunds from the Oilseed Processing and Refining Defined Business Unit were
calculated on the basis of tax earnings per bushel.
Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of processed
oilseed sales, except processing margins which are presented on a per unit
basis. Because of the volatility of commodity prices, the Company believes that
processing margins are a better measure of the Oilseed Processing and Refining
Defined Business Unit's performance than gross margin percentages.
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
------------------------------------ AUGUST 31, -----------------------
2001 2000 1999 1998 1998 1997
---------- ---------- ---------- ------------------- ---------- ----------
Gross margin
percentage ............. 5.42% 7.34% 5.30% 3.53% 7.37% 7.91%
Marketing, general and
administrative ......... 1.72% 1.51% 1.37% 1.23% 1.12% 0.96%
Interest ................ 0.01% 0.01% 0.15% 0.25% 0.09% 0.07%
Processing margins
Crushing/bu ............ $ .29 $ .21 $ .18 $ .14 $ .57 $ .59
Refining/lb ............ $ .0071 $ .0155 $ .0127 $ .0099 $ .0133 $ .0173
COMPARISON OF THE YEARS ENDED AUGUST 31, 2001 AND 2000
The Oilseed Processing and Refining Defined Business Unit net income of
$12.9 million for the year ended August 31, 2001 represents a $5.8 million
decrease (31%) compared to the year ended August 31, 2000. A $3.8 million
increase in plant expenses, primarily related to higher energy prices, and
lower margins in processing and refining of $2.2 million were the main factors
in this unfavorable variance in net income for the year ended August 31, 2001,
compared to the same period ended 2000. During the year ended August 31, 2001,
there was also a change in the tax rate applied to the Oilseed Processing and
Refining Defined Business Unit's cumulative temporary differences between
earnings for financial statement purposes and tax basis earnings which resulted
in an increase in deferred tax benefit of $1.0 million. The Oilseed Processing
and Refining Defined Business Unit's calculation of its patronage distribution
using earnings for financial statement purposes rather than tax basis earnings
prompted this rate change. Effective September 1, 2000, the Company's Board of
Directors approved a resolution to compute patronage distributions based on
accounting methods and principles used by the Company in preparation of its
annual audited earnings for financial statement purposes rather than tax basis
earnings. The resolution was ratified by the members at the Company's December
2000 annual meeting.
Processed oilseed sales of $349.5 million for the year ended August 31,
2001 increased by $8.9 million (3%) compared to the year ended August 31, 2000.
An increase in the average sales price for processed soybeans of $14 per ton
and a 3% increase of refined oil volumes were partially offset by $0.01 per
pound reduction in the average sales price for refined oil and 1% net volume
decrease in processed soybeans during the year ended August 31, 2001 compared
to the same period of a year ago.
Other revenues increased $29 thousand (18%) during the year ended August
31, 2001 compared to the year ended August 31, 2000.
Cost of goods sold of $330.5 million for the year ended August 31, 2001
increased $15.0 million (5%) compared to the year ended August 31, 2000. An
increase in crude soybean oil averaging $0.01 per pound, refining net volume
increase of 5% (28.5 million pounds), higher plant expense of $3.8 million and
an increase in cost for soybeans averaging $0.03 per bushel were partially
offset by soybean crush net volume decrease of 1% (355 thousand bushels) during
the year ended August 31, 2001 compared to the same period of a year ago.
Marketing, general and administrative expenses of $6.0 million for the
year ended August 31, 2001 increased $878 thousand (17%) compared to the year
ended August 31, 2000, and is primarily related to increases in administrative
and technology expenses.
36
The Oilseed Processing and Refining Defined Business Unit incurred $42
thousand of interest expense for the year ended August 31, 2001 compared to $18
thousand for the year ended August 31, 2000. During the year ended August 31,
2001, the Oilseed Processing and Refining Defined Business Unit capitalized
$460 thousand in interest expense.
Income taxes of $245 thousand for the year ended August 31, 2001 includes
a tax benefit of $1.0 million related to a change in the tax rate applied to
the Oilseed Processing and Refining Defined Business Unit's cumulative
temporary differences between income for financial statement purposes and
income used for tax reporting purposes. The Oilseed Processing and Refining
Defined Business Unit's calculation of its patronage distribution using
earnings for financial statement purposes rather than tax basis earnings
prompted this rate change. The benefit was offset by tax expense for the year
ended August 31, 2001 of $1.3 million, which compares to $1.3 million for the
same period in 2000. The effective tax rate exclusive of the tax benefit during
the year ended August 31, 2001 was 9.6% and compares to 6.7% for the same
period ended August 31, 2000. The income tax benefit or expense and effective
tax rate varies each year based upon the Defined Business Unit's profitability
and non-patronage business activity during each of the comparable years.
COMPARISON OF THE YEARS ENDED AUGUST 31, 2000 AND 1999
The Oilseed Processing and Refining Defined Business Unit's net income of
$18.7 million for the year ended August 31, 2000 represents a $5.4 million
increase (41%) compared to the year ended August 31, 1999. This improvement in
net income for the year ended August 31, 2000 compared to the year ended August
31, 1999 was a result of an increase in gross margin for refined oil of 3
tenths of a cent per pound, an increase in refined oil volume of 4%, and an
increase in processed soybean product volume of 8%, which was partially offset
by higher plant expense.
Net sales of $340.6 million for the year ended August 31, 2000 decreased
by $30.1 million (8%) compared to the year ended August 31, 1999. A reduction
in the sales price for refined oil of $0.06 per pound was partially offset by
an increase of $18 per ton for processed soybean products, an 8% increase in
sales volume for processed products, and a 4% increase in sales volume for
refined oil during the year ended August 31, 2000 compared to the prior year.
Other revenues increased $0.1 million during the year ended August 31,
2000 compared to the year ended August 31, 1999. During the year ended August
31, 2000, the Oilseed Processing and Refining Defined Business Unit received
$0.2 million from an oilseed joint venture partially offset by a net loss on
disposal of property, plant and equipment. During the year ended August 31,
1999, the Oilseed Processing and Refining Defined Business Unit recorded a net
loss on disposal of property, plant and equipment of $0.2 million, and did not
receive any joint venture income during that period.
Cost of goods sold of $315.6 million for the year ended August 31, 2000
decreased $35.4 million (10%) compared to the year ended August 31, 1999.
Reduced cost for crude soybean oil averaging $0.08 per pound, and reduced cost
for soybeans of averaging $0.17 per bushel, during the year ended August 31,
2000 compared to the year ended August 31, 1999, were partially offset by a 7%
increase in crush volume (2.6 million bushels) and a 2% increase in refining
volume (10.7 million pounds).
Marketing, general and administrative expenses of $5.1 million for the
year ended August 31, 2000 were essentially unchanged compared to the year
ended August 31, 1999.
Interest expense for the year ended August 31, 2000 was minimal, compared
with $0.6 million for the year ended August 31, 1999. This favorable variance
is primarily attributable to the lower price of raw material and finished
products, which resulted in reduced borrowings on average outstanding daily
balances.
Income tax expense of $1.3 million and $0.8 million for the years ended
August 31, 2000 and 1999, respectively, resulted in effective tax rates of 6.7%
and 5.7%, respectively. The income tax benefit or expense and effective tax
rate varies each year based upon the Defined Business Unit's profitability and
non-patronage business activity during each of the comparable years.
LIQUIDITY AND CAPITAL RESOURCES
The Oilseed Processing and Refining Defined Business Unit's cash
requirements relate primarily to capital improvements and a need to finance
inventories and receivables based on raw material costs and levels. These cash
needs are expected to be fulfilled by the Company.
37
CASH FLOWS FROM OPERATIONS
Operating activities for the year ended August 31, 2001 provided net cash
of $29.2 million. Net income of $12.9 million, a decrease in working capital
requirements of $14.7 million and net noncash expenses of $1.6 million resulted
in this net cash from operating activities.
Operating activities for the year ended August 31, 2000 provided net cash
of $12.6 million. Net income of $18.7 million and net noncash expenses of $2.6
million, were partially offset by an increase in working capital requirements
of $8.7 million resulted in this net cash from operating activities.
Operating activities for the year ended August 31, 1999 provided net cash
of $22.0 million. Net income of $13.2 million, a decrease in working capital
requirements of $6.3 million and net noncash expenses of $2.5 million resulted
in this net cash from operating activities.
CASH FLOWS FROM INVESTING
Cash flows expended for the acquisition of property, plant, and equipment
during the years ended August 31, 2001, 2000 and 1999, totaled $11.1 million,
$3.9 million and $5.9 million, respectively.
CASH FLOWS FROM FINANCING
The Oilseed Processing and Refining Defined Business Unit's financing
activities are coordinated through the Company's cash management department.
Cash from the Oilseed Processing and Refining Defined Business Unit's
operations is deposited with the Company's cash management department and
disbursements are made centrally. As a result, the Oilseed Processing and
Refining Defined Business Unit maintains a zero cash position. Financing is
available from the Company to the extent of the Company's working capital
position and corporate loan agreements with various banks, and the cash
requirements of all other Company operations.
Working capital requirements for a Defined Business Unit of the Company
are reviewed on a periodic basis, and could potentially be restricted based
upon management's evaluation of the prevailing business conditions and
availability of funds.
The Oilseed Processing and Refining Defined Business Unit had debt
outstanding to the Company of $15.1 million and $15.9 million on August 31,
2001 and 2000, respectively. These interest-bearing balances reflect working
capital and fixed asset financing requirements at the end of the respective
periods.
As previously described, in August 2001, the Oilseed Processing and
Refining Defined Business Unit redeemed all of the outstanding EPUs totaling
$5.2 million and Preferred Capital Certificates of $0.2 million.
WHEAT MILLING DEFINED BUSINESS UNIT
Cenex Harvest States Cooperatives' (the Company) Wheat Milling Defined
Business Unit (the Defined Business Unit) is a Defined Business Unit of 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.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Wheat Milling Defined Investment Program. The
Company redeemed all of the Equity Participation Units (EPUs). The Wheat
Milling Defined Business Unit assets were allocated to the Company as provided
in the plan. The plan included the buy back of the outstanding Wheat Milling
Defined Member EPUs at the original price of $2.00 per unit. Due to loss
carry-forwards incurred by the Wheat Milling Defined Business Unit the plan
also provided for the cancellation of all outstanding Preferred Capital
Certificates issued to the Equity Participation Unit (EPU) holders.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported Wheat Milling Defined Business Unit net
income or equity.
38
See the Management's Discussion and Analysis for the Company in regard to
new accounting pronouncements.
RESULTS OF OPERATIONS
Effective September 1, 2000, patronage distributions from the Wheat
Milling Defined Business Unit are calculated on the basis of financial
statement earnings per bushel. Prior to September 1, 2000, patronage refunds
from the Wheat Milling Defined Business Unit were calculated on the basis of
tax earnings per bushel.
Certain operating information pertaining to the Wheat Milling Defined
Business Unit is set forth below, as a percentage of sales, except for margins
per hundred weights (Margins/cwt). Because of the volatility of commodity
prices, the Company believes that margins per hundred weights (manufacturing
margins) are a better measure of the Defined Business Unit's performance than
gross margin percentages.
YEARS ENDED AUGUST 31, THREE MONTHS ENDED YEARS ENDED MAY 31,
------------------------------------ AUGUST 31, -----------------------
2001 2000 1999 1998 1998 1997
---------- ---------- ---------- ------------------- ---------- ----------
Gross margin ............ 3.63% 3.78% 1.95% 6.36% 7.14% 8.23%
Marketing, general and
administrative ......... 3.48% 4.00% 5.70% 4.14% 3.68% 3.17%
Interest ................ 3.05% 2.93% 2.78% 1.69% 1.42% 2.46%
Margins/cwt ............. $ .33 $ .33 $ .16 $ .64 $ .82 $ 1.00
COMPARISON OF THE YEARS ENDED AUGUST 31, 2001 AND 2000
The Wheat Milling Defined Business Unit incurred a net loss of $11.2
million for the year ended August 31, 2001 compared to a net loss of $6.6
million for the year ended August 31, 2000, for a net loss variance of $4.6
million. This net loss variance in operating results is primarily attributable
to a loss on assets held for disposal of $7.5 million during the year ended
August 31, 2001 related to the closing of the Company's Huron, Ohio mill. Also
during the year ended August 31, 2001 there was a change in the tax rate
applied to the Wheat Milling Defined Business Unit's cumulative temporary
differences between earnings for financial statement purposes and tax basis
earnings which resulted in an increase in deferred tax benefit of $407
thousand. The Wheat Milling Defined Business Unit's calculation of its
patronage distribution using earnings for financial statement purposes rather
than tax basis earnings prompted this rate change. Effective September 1, 2000,
the Company's Board of Directors approved a resolution to compute patronage
distributions based on accounting methods and principles used by the Company in
preparation of its annual earnings for financial statement purposes rather than
tax basis earnings. The resolution was ratified by the members at the Company's
December 2000 annual meeting.
Net sales of $257.1 million for the year ended August 31, 2001 increased
$22.6 million (10%) compared to the year ended August 31, 2000. This increase
is attributable to a 5% net increase in volume, resulting primarily through
business generated at the Fairmount, North Dakota mill, which was acquired in
April 2000 and an average sales price per hundred-weight of all products
increase of $0.38 per hundred weight in the year ended August 31, 2001 compared
to the same period in 2000.
Cost of goods sold of $247.7 million for the year ended August 31, 2001
increased $22.1 million (10%) compared to the year ended August 31, 2000. An
increase in bushel volume of 2.4 million (5%) and a $0.15 per bushel increase
in the average price for these bushels accounted for this increase as compared
with the business activity conducted during the year ended August 31, 2000. The
milling expense increase of $4.1 million (15%) in the year ended August 31,
2001 compared to the same period in 2000 was primarily attributable to the
additional volume mostly at the Fairmount mill.
Marketing, general and administrative expenses of $8.9 million for the
year ended August 31, 2001 decreased $447 thousand (5%) compared to the same
period ended in 2000.
In May 2001, management, in efforts to consolidate its manufacturing
facilities, approved a plan to cease operations and to dispose of the assets at
its Huron, Ohio mill. Discussions with potential buyers indicate that the
carrying amounts of the related assets exceed the estimated net realizable
value and, as
39
such, the financial statements reflect a loss on assets held for disposal of
$7.5 million for the year ended August 31, 2001, primarily related to
identifiable intangible assets and goodwill.
Interest expense of $7.8 million for the year ended August 31, 2001
increased $1.0 million (14%) compared to the year ended August 31, 2000. Most
of this increase is attributable to the interest on the long-term debt used to
finance the acquisition of the Fairmount mill, purchased in April 2000 for
$19.9 million.
The income tax benefit of $3.9 million for the year ended August 31, 2001
included a change in the tax rate applied to the Wheat Milling Defined Business
Unit cumulative temporary differences between income for financial statement
purposes and income used for tax reporting purposes. The Wheat Milling Defined
Business Unit's calculation of its patronage distribution using financial
statement earnings rather than tax basis earnings prompted this rate change. In
addition to the $407 thousand tax benefit from the change in patronage
determination, an additional tax benefit for the twelve-month period in 2001 of
$3.5 million was recorded based on a taxable loss attributable to non-patronage
business activities which primarily includes a tax benefit related to a loss on
assets held for disposal. This amount exceeds the federal and state statutory
rate of 38.9% due to the non-deductibility of goodwill in prior periods for
which tax benefits have now been recognized. This compares to a $1.0 million
tax benefit for the same period in 2000 on losses attributable to non-patronage
activities. The income tax benefit or expense and net effective tax rate varies
each year based upon the Defined Business Unit's level of profitability and
nonpatronage business activity during each of the comparable years.
COMPARISON OF THE YEARS ENDED AUGUST 31, 2000 AND 1999
The Wheat Milling Defined Business Unit incurred a net loss of $6.6
million for the year ended August 31, 2000 compared to a net loss of $11.9
million for the year ended August 31, 1999, an improvement of $5.3 million
(44%). This improvement in operating results is primarily attributable to a
$0.16 per hundred weight increase in the average gross margin for primary
product and a 23% increase in volume.
Net sales of $234.5 million for the year ended August 31, 2000 increased
$48.3 million (26%) compared to the year ended August 31, 1999. This increase
is primarily attributable to a 23% increase in volume, resulting from the
operation of the Mount Pocono mill for a full fiscal year compared to a partial
year of operations during fiscal 1999, and the acquisition of the Fairmount,
North Dakota mill in April of 2000. In addition to the volume increase, the
average sales price per hundred weights increased $0.22 per hundred weights
during the year ended August 31, 2000 compared to the year ended August 31,
1999.
Cost of goods sold of $225.6 million for the year ended August 31, 2000
increased $43.1 million (24%) compared to the year ended August 31, 1999. An
increase in volume of 8.2 million bushels, purchased at an average price of
$0.04 cents per bushel more than the 1999 price, produced an increase of $36.2
million in the raw material component of cost of goods sold. Milling expense,
related to this additional volume, increased $5.2 million during the year ended
August 31, 2000 compared to the same period ended in 1999.
Marketing, general and administrative expenses of $9.4 million for the
year ended August 31, 2000 increased $1.2 million (12%) compared to the year
ended August 31, 1999. This increase is primarily attributable to activities of
the Mount Pocono mill, which operated on a limited basis during the 1999
period.
Interest expense of $6.9 million for the year ended August 31, 2000
increased $1.7 million (33%) compared to the year ended August 31, 1999. Most
of this increase is attributable to financing the costs for the Mount Pocono
mill (total cost of approximately $35.5 million) and the Fairmount mill (total
cost of approximately $19.9 million). Interest costs related to the
construction of the Mount Pocono mill were capitalized throughout construction
until the mill was operational in January 1999. The Fairmount mill (an
established mill) was purchased in April 2000.
An income tax benefit of $1.0 million for the year ended August 31, 2000
is based upon an effective tax rate of 12.8% benefit applied to the pretax loss
of $7.6 million. For the year ended August 31, 1999, an income tax benefit of
$1.1 million was based upon an effective tax rate 8.7% benefit applied against
40
a pretax loss of $13.0 million. The income tax benefit or expense and net
effective tax rate varies each year based upon the Defined Business Unit's
level of profitablity and nonpatronage business activity during each of the
comparable years.
LIQUIDITY AND CAPITAL RESOURCES
The Wheat Milling Defined Business Unit's cash requirements relate
primarily to capital improvements and a need to finance inventories and
receivables based on raw material costs and levels. These cash needs are
expected to be fulfilled by the Company.
CASH FLOWS FROM OPERATIONS
Operating activities for the year ended August 31, 2001 used net cash of
$4.4 million. The net loss of $11.2 million was partially offset by net noncash
expenses of $4.0 million and decreased working capital requirements of $2.8
million to generate this net cash used in operating activities. Included in the
non-cash expenses of the year ended August 31, 2001 was $7.5 million
attributable to a loss on assets held for disposal associated with the closing
of the Huron, Ohio mill.
Operating activities for the year ended August 31, 2000 used net cash of
$10.0 million. The net loss of $6.6 million and increased working capital
requirements of $10.9 million were partially offset by net noncash expenses of
$7.5 million to generate this net cash used in operating activities.
Operating activities for the year ended August 31, 1999 provided net cash
of $2.9 million. The net loss of $11.9 million was offset by, net noncash
expenses of $6.7 million and decreased working capital requirements of $8.1
million.
CASH FLOWS USED FOR INVESTING ACTIVITIES
Cash flows expended for the acquisition of property, plant, and equipment
during the years ended August 31, 2001, 2000 and 1999, totaled $4.0 million,
$24.1 million and $18.7 million, respectively.
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 the
Wheat Milling Defined Business Unit's operations is deposited with the
Company's cash management department and disbursements are made centrally. As a
result, the Wheat Milling Defined Business Unit maintains a zero cash position.
Financing is available from the Company to the extent of the Company's working
capital position and corporate loan agreements with various banks, and the cash
requirements of all other Company operations.
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 $81.4 million and $68.0 million on August 31,
2001 and 2000, respectively. The net increase in short-term debt from August
31, 2000 is primarily attributable to the Wheat Milling Defined Business Unit
operating losses and changes in working capital requirements.
The Wheat Milling Defined Business Unit had long-term debt outstanding to
the Company of $40.5 million and $47.5 million on August 31, 2001 and 2000,
respectively. On August 31, 2001, the Defined Business Unit had $7.2 million
due to the Company within the next twelve months. This debt, net of subsequent
repayments, was incurred for the acquisition, expansion and construction of
certain mills within the Wheat Milling Defined Business Unit. During the year
ended August 31, 2001 the Wheat Milling Defined Business Unit made principal
payments to the Company of $7.4 million. During the same period the Company, on
behalf of the Wheat Milling Defined Business Unit assumed an 'interest free'
Rural Economic Development Loan in conjunction with the Fairmount, North Dakota
mill acquisition totaling $450 thousand. This non-interest bearing loan,
payable in monthly installments over nine years, has been discounted at 8% to
reflect a present value principal balance due of $320 thousand and an interest
discount of $130 thousand. The Company also incurred long-term debt during the
first quarter of 2001 on behalf of the Defined Business Unit in the amount of
$116 thousand, payable to the
41
Minnesota Department of Transportation quarterly over 120 months at 5.7%
interest for the purpose of rail track rehabilitation at the Rush City mill.
During the year ended August 31, 2000, the Defined Business Unit borrowed $19.0
million from the Company, due in April 2003, for the purchase of the Fairmount,
North Dakota mill. During that same period, the Wheat Milling Defined Business
Unit made repayments of long-term debt totaling approximately $10.0 million.
As previously described, in August 2001, the Wheat Milling Defined
Business Unit redeemed all of the outstanding EPUs totaling $9.1 million. Due
to loss carryforwards incurred by the Wheat Milling Defined Business the plan
to end the Wheat Milling Defined Investment Program provided for the
cancellation of all outstanding Preferred Capital Certificates issued to the
Wheat Milling Defined Member Equity Participation Unit holders of $0.2 million.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE 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 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 as a
component of net income 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.
Through August 31, 2000, unrealized gains and losses on futures contracts
and options used to hedge energy inventories and fixed priced contracts were
deferred until such future contracts and options were closed. Effective
September 1, 2000 those gains and losses are recognized as a component of net
income for financial reporting. The inventories hedged with these derivatives
are valued at lower of cost or market, and effective September 1, 2000, the
fixed priced contracts are marked to market.
A 10% adverse change in market prices would not materially effect the
Company's results of operations, financial position or liquidity.
INTEREST RATE RISK
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, 2001 was approximately
6.9%; a 10% adverse change in market rates would not materially effect the
Company's results of operations, financial position or liquidity.
FOREIGN CURRENCY RISK
The Company conducts essentially all of its business in U.S. dollars and
has no risk regarding foreign currency fluctuations on August 31, 2001. Foreign
currency fluctuations do, however, impact the ability
42
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.
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, 2001.
DIRECTOR
NAME AND ADDRESS AGE DISTRICT SINCE
---------------- --- -------- -----
Bruce Anderson 49 3 1995
13500 42nd St NE
Glenburn, ND 58740-9564
Robert Bass 47 5 1994
E 639 1 Bass Road
Reedsburg, WI 53959
Steven Burnet 61 6 1983
94699 Monkland Lane
Moro, OR 97039-9705
Curt Eischens 49 1 1990
2153 330th St North
Minneota, MN 56264-1880
Robert Elliott 51 8 1996
324 Hillcrest
Alliance, NE 69301
Robert Grabarski 52 5 1999
1770 Highway 21
Arkdale, WI 54613
Jerry Hasnedl 55 1 1995
RR 1, Box 39
St. Hilaire, MN 56754
Glen Keppy 54 7 1999
21316 - 155th Avenue
Davenport, IA 52804
James Kile 53 6 1992
508 W Bell Lane
St. John, WA 99171
43
DIRECTOR
NAME AND ADDRESS AGE DISTRICT SINCE
---------------- --- -------- -----
Gerald Kuster 66 3 1979
780 First Ave. N.E.
Reynolds, ND 58275-9742
Leonard Larsen 65 3 1993
5128-11th Ave. N.
Granville, ND 58741-9595
Richard Owen 47 2 1999
PO Box 129
Geraldine, MT 59446
Duane Stenzel 55 1 1993
RR 2, Box 173
Wells, MN 56097
Michael Toelle 39 1 1992
RR 1 Box 190
Browns Valley, MN 56219
Richard Traphagen 56 4 1983
39555 124th Street
Columbia, SD 57433
Merlin Van Walleghen 65 4 1993
24106-408th Avenue
Letcher, SD 57359-6021
Elroy Webster 68 1 1982
Route 2 Box 123
Nicollet, MN 56074
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. Mr.
Anderson and his wife 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 wife and brother near Reedsburg, Wisconsin. Mr. Bass
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.
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. Mr. Burnet 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. Mr. Burnet and his wife grow dryland wheat and barley, and
support a cow/calf and yearling operation with irrigated hay and pasture.
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. Mr. Eischens and his
wife 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 operate a 5,000-acre farm near Alliance, Nebraska. Mr. Elliott 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.
ROBERT GRABARSKI was elected to the board in 1999. He has a long history
of cooperative leadership, including 25 years on the Farmers Union Co-op
Services, Adams, Wisconsin, board of directors. For the
44
last 13 years, he has served as chairman of this local cooperative's board. Mr.
Grabarski has also served on the Alto Co-op Creamery Board, Waupun, Wisconsin,
for the past seven years, and currently holds the first vice chair position. He
is active in a wide range of civic organizations, including serving on the fire
department in the Adams Volunteer Fire District, as well as volunteer
auctioneering for local charitable organizations. He and his wife operate a
1,200-acre farm and milk a 65-head herd of registered Holstein dairy cattle.
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. He and his wife raise wheat, barley, corn, soybeans,
sunflowers and alfalfa on their northern Minnesota farm.
GLEN KEPPY was elected to the board in 1999. Active in a wide range of
agricultural and civic organizations, Mr. Keppy has served on the boards of the
Iowa and National Pork Producer Associations. He is a three-time Master Soybean
Grower contest winner and the recipient of the Iowa Farm Bureau's distinguished
service award. A graduate of the University of Wisconsin-Platteville with a
degree in technical agriculture, Mr. Keppy was drafted by the Pittsburgh
Steelers and also played for the Detroit Lions and Green Bay Packers. He and
his wife operate a third-generation family farm consisting of a
farrow-to-finish hog operation and 1,000 acres of corn, soybeans, oats and
alfalfa hay.
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 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 was past chairman. Mr.
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. He and his wife operate a 4,000-acre
farm with their son.
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. He and his wife and a son, farm a grain, sunflower, canola and flax
operation.
RICHARD OWEN was elected to the board in 1999. His involvement in
agriculture and civic organizations includes serving as secretary of the
Central Montana Co-op, Geraldine, Mont., since 1994. Mr. Owen has served as
president of the Equity Co-op Association, Geraldine, Mont., and vice chair of
the Montana International Agricultural Exchange Association. He is a graduate
of Montana State University, Bozeman, and has served on the university's board
of directors. Mr. Owen and his wife operate a 2,200-acre dryland wheat, barley
and safflower operation.
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.
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
45
chairman of the Finance & Investment Committee for the Cenex Harvest States
Foundation. He and his wife 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. Mr. Traphagen and his wife operate a
1,600-acre corn, soybean and wheat farm.
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. Mr. Van Walleghen 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. He and his wife 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. Mr. 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. He is an active farmer with a corn and soybean
operation near Nicollet, Minnesota.
Elections are for three-year terms and are open to any eligible candidate.
To be eligible, a candidate must meet the following qualifications:
* At the time of the election, the individual must be less than the age
of 68.
* The individual must be a member of this cooperative or a member of a
Cooperative Association Member.
* The individual must reside in the Region from which he or she is to be
elected.
* 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.
* 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.
* 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.
The following seats are up for re-election in 2001:
Region 1 (Minnesota) Incumbent Michael Toelle
Region 3 (North Dakota) Incumbent Gerald Kuster
Region 4 (South Dakota) Incumbent Richard Traphagen
Region 5 (Connecticut, Indiana, Illinois, Incumbent Robert Bass
Kentucky, Michigan, Ohio, Wisconsin)
46
EXECUTIVE OFFICERS
The table below lists the executive officers and other senior officers of
the Company as of August 31, 2001, none of whom holds any equity in the
Company. Officers are elected annually by the Board of Directors.
NAME AGE POSITION
- ---- --- ------------------------------------------------
John D. Johnson 53 President and Chief Executive Officer
Michael H. Bergeland 57 Executive Vice President -- Corporate
Patrick Kluempke 53 Executive Vice President -- Corporate Planning
Tom Larson 53 Executive Vice President -- Public Affairs
Mark Palmquist 44 Executive Vice President/Chief Operating Officer-
Grains and Foods
John Schmitz 51 Executive Vice President and Chief Financial
Officer
Leon E. Westbrock 54 Executive Vice President/Chief Operating Officer-
Energy and Crop Inputs
JOHN D. JOHNSON was born in Rhame, North Dakota, and grew up in Spearfish,
South Dakota. 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 GTA 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 and was named President and
Chief Executive Officer on June 1, 2000. Mr. Johnson serves on Ventura Foods
and NCRA boards of directors.
MICHAEL H. BERGELAND was Executive Vice President Corporate and special
advisor to the leadership team through August 31, 2001. 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, Minnesota;
Great Falls, Montana; and Portland Oregon. 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 and in 1999 he was appointed to
the position he held through August 31, 2001.
PATRICK KLUEMPKE, Executive 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 Executive Vice President, Public 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 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
47
more than two dozen Cenex-owned agricultural supply outlets. Mr. Larson was
named to his current position -- Executive Vice President, Public 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.
MARK PALMQUIST is the Executive Vice President and Chief Operating Officer
of Grains & Foods. He is responsible for all related areas of grains including
country operations, terminal operations, exports, logistics, transportation and
grain marketing joint ventures. He is also responsible for the operations of
wheat milling, oilseed processing and refining, and food manufacturing and
packaging. Mr. Palmquist has worked for Cenex Harvest States for 20 years.
Starting as a grain buyer and moving into merchandising, he 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, Minnesota, graduating in 1979. He also attended
the Master of Business Administration program at the University of Minnesota.
JOHN SCHMITZ is the Executive 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.
LEON E. WESTBROCK is the Executive Vice President and Chief Operating
Officer of Energy and Crop Inputs for the Company. He joined the cooperative
system in 1976 and managed three local cooperatives before joining the regional
system. At the regional level, Mr. Westbrock served in the Merchandising
Department at Cenex, and then later as Manager of the Lubricants Department and
as Director of Retailing. Since January 1, 1987, he served as Vice President
and Executive Vice president in the Petroleum Division of the Company. On
January 1, 2000 he was named President of Country Energy, LLC, an energy sales,
distribution and marketing alliance between Cenex Harvest States and Farmland
Industries. On March 1, 2000 Mr. Westbrock was appointed to his current
position. He serves as Chairman of National Cooperative Refinery Association.
He also serves as Vice Chairman of Universal Cooperatives, Inc. and is a member
of the Agriliance Board. Mr. Westbrock received a Bachelor's Degree from St.
Cloud State University and served a tour in the U.S. Army.
48
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 executive
officers of the Company whose total salary and bonus or similar incentive
payment earned during the year ended August 31, 2001, exceeded $100,000 (the
Named Executive Officers):
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------------------------- -------------
NAME AND OTHER ANNUAL ALL OTHER LTIP
PRINCIPAL POSITION YEAR ENDED SALARY(1) BONUS(1) COMPENSATION(2) COMPENSATION(3) PAYOUTS(1)
- ------------------ ------------ ----------- ---------- ----------------- ----------------- -------------
John. D. Johnson 8/31/01 $787,500 $747,338 $ 8,600 $ 9,606
President and Chief Executive 8/31/00 600,000 540,000 14,672 12,720 $719,280
Officer 8/31/99 583,347 235,971 8,622 13,468
Michael H. Bergeland 8/31/01 300,000 225,000 21,418 10,781 225,000
Executive Vice President- 8/31/00 300,000 235,125 10,829 8,585 470,250
Corporate 8/31/99 273,765 227,100 7,172 16,757
Patrick Kluempke 8/31/01 200,000 162,675 3,780 6,010
Executive Vice President- 8/31/00 176,500 68,664 8,194 7,068 92,995
Corporate Planning 8/31/99 157,530 50,681 10,253 11,809
Tom Larson 8/31/01 200,000 167,850 16,130 8,189
Executive Vice President- 8/31/00 182,768 71,665 6,240 7,160 97,060
Public Affairs 8/31/99 166,710 50,681 520 12,757
Mark Palmquist 8/31/01 375,000 232,680 14,111 5,863
Executive Vice President and 8/31/00 262,932 235,168 2,620 7,068 184,273
Chief Operating Officer- 8/31/99 201,255 85,965 9,460 10,144
Grains and Foods
John Schmitz 8/31/01 275,000 232,500 2,520 7,080
Executive Vice President and 8/31/00 210,583 100,377 82 8,566 135,947
Chief Financial Officer 8/31/99 149,475 67,095 7,526 10,145
Leon E. Westbrock 8/31/01 375,000 332,400 7,320 5,116
Executive Vice President and 8/31/00 323,750 86,745 4,808 184,273
Chief Operating Officer- 8/31/99 313,269 125,972 723 11,066
Energy and Crop Inputs
- ------------------
(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.
On September 1, 2000, the Company entered into an employment agreement
with John D. Johnson, the President and CEO. The employment agreement provides
for a rolling three-year period of employment commencing on September 1, 2000
at an initial base salary of at least $787,500, subject to annual review.
Either party, subject to the rights and obligations set forth in the employment
agreement may terminate Mr. Johnson's employment at any time. 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 severance allowance of 2.99
times his base salary and target bonus in the event of the consolidation of the
Company's business with the business of any other entity, if Johnson is not
offered the position of Chief Executive Officer of the combined entity. The
contract provides for a gross-up for any possible excise tax. Mr. Johnson has
also agreed to a non-compete clause of two years, in the event of his
termination.
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
49
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 has agreed to a
three-year non-compete clause.
THE FOLLOWING SUMMARIZES CERTAIN BENEFITS IN EFFECT AS OF AUGUST 31, 2001
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, 2001. The Incentive Program is based on Company, group or division
performance and individual performance. These amounts will be paid after August
31, 2001. The target incentive is 50% of base compensation except for the
President and Chief Executive Officer, where target incentive is 66% of base
compensation.
LONG-TERM INCENTIVE PLAN
Each Named Executive Officer is eligible to participate in the Long-Term
Incentive Plan. The plan consists of a three-year performance period. Award
opportunities are expressed as a percentage of a participating employee's
position mid-point. Company performance must meet a minimum level of pre-tax
earnings per unit of sales and net income levels before any grants are made
from this plan. Awards from the plan are grants to the Company's share option
plan at the end of each plan period.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
MATURATION
NAME AND PRINCIPAL POSITION AWARD OF AWARD THRESHOLD TARGET MAXIMUM
- --------------------------- ----------- ----------- ----------- ----------- ------------
John. D. Johnson 2001-2003 $78,750 $527,625 $ 787,500
President and Chief Executive Officer
Michael H. Bergeland $225,000 2001 22,500 150,750 225,000
Executive Vice President -- Corporate
Patrick Kluempke 2001-2003 16,268 108,992 162,675
Executive Vice President -- Corporate
Planning
Tom Larson 2001-2003 16,785 112,460 167,850
Executive Vice President -- Public Affairs
Mark Palmquist 2001-2003 33,240 222,708 332,400
Executive Vice President and Chief
Operating Officer -- Grains and Foods
John Schmitz 2001-2003 23,250 155,775 232,500
Executive Vice President and Chief
Financial Officer
Leon E. Westbrock 2001-2003 33,240 222,708 332,400
Executive Vice President and Chief
Operating Officer -- Energy and Crop
Inputs
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
50
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, 2001, 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%
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, 2000, the dollar value of the account and years of
service for each of the Named Executive Officers was:
DOLLAR VALUE YEARS OF SERVICE
------------ ----------------
John D. Johnson .................... $734,520 25
Michael H. Bergeland ............... 547,736 33
Patrick Kluempke ................... 360,682 18
Tom Larson ......................... 275,339 24
Mark Palmquist ..................... 373,652 21
John Schmitz ....................... 339,983 26
Leon Westbrock ..................... 342,168 20
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.
SHARE OPTION PLAN
In October 1997, the Company adopted a Share Option Plan. Participants in
the plan, which include all Named Executive Officers, are select management of
the Company who have been designated as eligible by the President of the
Company to participate in such plan. The Share Option Plan allows participants
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 are fully vested after three years of service in
any Company matching contribution made on the participant's behalf.
51
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 eligible by
the President of the Company to participate in such plan. Compensation waived
under the Share Option Plan is not eligible for Pay 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, 2000, the dollar value of the account of each of the
Named Executive Officers was approximately:
John D. Johnson ............................ $1,757,429
Michael H. Bergeland ....................... 1,464,941
Patrick Kluempke ........................... 216,266
Tom Larson ................................. 59,095
Mark Palmquist ............................. 276,902
John Schmitz ............................... 171,915
Leon Westbrock ............................. 842,330
DIRECTORS' COMPENSATION
The Board of Directors met monthly during the year ended August 31, 2001.
Through August 31, 2001 the Company provided its directors with compensation of
$42,000, paid in twelve monthly payments, with the Chairman 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.
Twelve directors who elected to take the early retirement option effective
December 1999 are receiving $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 President and Chief Executive Officer 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 President and Chief Executive Officer and the terms of the
employment agreement with the President and Chief Executive Officer. The
President and Chief Executive Officer determined the compensation for all other
executive officers.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Defined Investment Program. The Company redeemed
all of the Equity Participation Units and allocated the assets of the Oilseed
Processing and Refining and Wheat Milling Defined Business Units to the Company
as provided in the plan.
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 the period
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, 2001
---- ---------------
Curt Eischens .............................. $ 87,239
Jerry Hasnedl .............................. 348,313
Gerald Kuster .............................. 129,364
Leonard Larsen ............................. 76,644
Merlin Van Walleghen ....................... 185,019
53
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS FILED ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and the Reports of Independent
Accountants are filed as part of this Form 10-K.
PAGE NO.
---------
I. CENEX HARVEST STATES COOPERATIVES
Consolidated Balance Sheets as of August 31, 2001 and 2000 .............................. F-1
Consolidated Statements of Operations for the years ended August 31, 2001, 2000 and 1999 F-2
Consolidated Statements of Equities and Comprehensive Income for the years ended
August 31, 2001, 2000 and 1999 . ...................................................... F-4
Consolidated Statements of Cash Flows for the years ended August 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements .............................................. F-7
Report of Independent Accountants ....................................................... F-23
II. OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Balance Sheets as of August 31, 2001 and 2000 ........................................... F-24
Statements of Operations for the years ended August 31, 2001, 2000 and 1999 ............. F-25
Statements of Defined Business Unit Equity and Comprehensive Income for the years ended
August 31, 2001, 2000 and 1999 ........................................................ F-26
Statements of Cash Flows for the years ended August 31, 2001, 2000 and 1999 ............. F-27
Notes to Financial Statements ........................................................... F-28
Report of Independent Accountants ....................................................... F-35
III. WHEAT MILLING DEFINED BUSINESS UNIT
Balance Sheets as of August 31, 2001 and 2000 ........................................... F-36
Statements of Operations for the years ended August 31, 2001, 2000 and 1999 ............. F-37
Statements of Defined Business Unit Equity and Comprehensive Income (Loss) for the years
ended August 31, 2001, 2000 and 1999 .................................................. F-38
Statements of Cash Flows for the years ended August 31, 2001, 2000 and 1999 ............. F-39
Notes to Financial Statements ........................................................... F-40
Report of Independent Accountants ....................................................... F-48
IV. VENTURA FOODS, LLC, A NON-CONSOLIDATED 50% OWNED EQUITY INVESTMENT
Independent Auditors' Report ............................................................ F-49
Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 and 1999 ......... F-50
Consolidated Statements of Income for the three months ended March 31, 2001 and the years
ended December 31, 2000, 1999 and 1998 ................................................ F-51
Consolidated Statement of Members' Capital for the three months ended March 31, 2001 and
the years ended December 31, 2000, 1999 and 1998 ...................................... F-52
Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and the
years ended December 31, 2000, 1999 and 1998 .......................................... F-53
Notes to Consolidated Financial Statements .............................................. F-54
- ------------------
*Audited financial statements for Ventura Foods, LLC, as of and for the year
ended March 31, 2002 will be filed by an amendment to this Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because they are not applicable
or the required information is shown in the financial statements or notes
thereto.
(a)(3) EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Amended and Restated By-Laws of the Company. (1)
4.1 Resolutions of the Board of Directors creating the Equity
Participation Units (Oilseed Processing and Refining). (2)
4.2 Resolutions of the Board of Directors creating the Equity
Participation Units (Wheat Milling). (2)
54
4.3 Cenex Harvest States Cooperatives Certificate of Designations for the
8% Preferred Stock. (14)
10.1 Lease Agreement between Peavey Company and Amber Milling Company, a
division of Harvest States Cooperatives, effective as of August 31,
1994. (*) (2)
10.2 Lease between the Port of Kalama and North Pacific Grain Growers,
Inc., dated November 22, 1960. (2)
10.3 Limited Liability Company Agreement for the Wilsey-Holsum Foods, LLC
dated July 24, 1996. (2)
10.4 Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and
Harvest States Cooperatives dated August 30, 1996. (*) (2)
10.5 Tacoma Export Marketing Company Amended and Restated Partnership
Agreement Between Cargill, Incorporated and Cenex Harvest States
Cooperatives dated as of July 12, 1999. (7)
10.6 Cenex Harvest States Supplemental Savings Plan. (11)
10.7 Cenex Harvest States Supplemental Executive Retirement Plan. (11)
10.8 Cenex Harvest States Senior Management Compensation Plan. (11)
10.9 Cenex Harvest States Executive Long-Term Variable Compensation Plan.
(11)
10.10 Cenex Harvest States Share Option Plan. (11)
10.10A Amendment to Cenex Harvest States Share Option Plan, dated June 28,
2001. (14)
10.11 Lease Agreement between the Port of Houston Authority of Harris
County, Texas and Harvest States Cooperatives, dated October 3, 1995.
(2 )
10.12 Lease Agreement between Lackawanna County Railroad Authority and Amber
Milling Company, a division of Harvest States Cooperatives dated June
1, 1997. (3)
10.13 Limited Liability Company Agreement of Country Energy, LLC dated June
29, 1998 between Cenex Harvest States Cooperatives and Farmland
Industries, Inc. (4)
10.14 Addendum to Limited Liability Company Agreement of Country Energy, LLC
dated July 23, 1998 by Cenex Harvest States Cooperatives and Farmland
Industries, Inc. (4)
10.15 $225,000,000 Note Agreement (Private Placement Agreement) dated as of
June 19, 1998 among Cenex Harvest States Cooperatives and each of the
Purchases of the Notes. (4)
10.16 $400 Million 364-day and $200 Million 5-Year Revolving Loan Credit
Agreement dated as of June 1, 1998 among Cenex Harvest States
Cooperatives, CoBank, ACB, St. Paul Bank for Cooperatives, et al.,
including Exhibit 2.4 (form of 364-Day Facility Note) and Exhibit 3.4
(form of 5-Year Note). (4)
10.16A First Amendment to Credit Agreement (Revolving Loan), effective as of
May 31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB,
NationsBank, N.A. and St. Paul Bank for Cooperatives. (6)
10.16B Second Amendment to Credit Agreement (Revolving Loan) dated May 23,
2000 by and among Cenex Harvest States Cooperatives, CoBank, ACB, Bank
of America, Sun Trust Bank and the Syndication Parties. (10)
10.16C Third Amendment to Credit Agreement (Revolving Loan) dated May 23,
2001 among Cenex Harvest States Cooperatives, CoBank, ACB, Cooperative
Centrale Raiffeisen- Boerenleenbank, B.A., SunTrust Bank, BNP Paribas
and the Syndication Parties. (13)
55
10.17 $200 Million Term Loan Credit Agreement dated as of June 1, 1998 among
Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for
Cooperatives, including Exhibit 2.4 (form of $200 Million Promissory
Note). (4)
10.17A First Amendment to Credit Agreement (Term Loan), effective as of May
31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB, and St.
Paul Bank for Cooperatives. (6)
10.17B Second Amendment to Credit Agreement (Term Loan) dated May 23, 2000 by
and among Cenex Harvest States Cooperatives, CoBank, ACB, St. Paul
Bank for Cooperatives and the Syndication Parties. (10)
10.17C Third Amendment to Credit Agreement (Term Loan) dated May 23, 2001
among Cenex Harvest States Cooperatives, CoBank, ACB, and the
Syndication Parties. (13)
10.18 Limited Liability Agreement of United Harvest, LLC dated November 9,
1998 between United Grain Corporation and Cenex Harvest States
Cooperatives. (5)
10.19 Employment Agreement between Michael Bergeland and Cenex Harvest
States Cooperatives dated May 1 1999. (7)
10.20 $50 Million 364-Day Revolving Loan Credit Agreement dated as of
December 21, 1999 among National Cooperative Refinery Association,
CoBank, ACB, Mercantile Bank and Bank of America, N.A. (8)
10.20A First Amendment to Credit Agreement (364-Day Revolving Loan) dated
December 19, 2000 by and among National Cooperative Refinery
Association, CoBank, ACB and Firstar Bank, N.A. (15)
10.21 Joint Venture Agreement for Agriliance LLC, dated as of January 1,
2000 among Farmland Industries, Inc., Cenex Harvest States
Cooperatives, United Country Brands, LLC and Land O' Lakes, Inc. (9)
10.22 Employment Agreement dated as of January 14, 2000 between Noel K.
Estenson and Cenex Harvest States Cooperatives. (9)
10.23 Employment Agreement dated September 1, 2000 by and between John D.
Johnson and Cenex Harvest States Cooperatives. (11)
10.24 Note purchase and Private Shelf Agreement dated as of January 10, 2001
between Cenex Harvest States Cooperatives and The Prudential Insurance
Company of America. (12)
10.24A Amendment No. 1 to Note Purchase and Private Shelf Agreement, dated as
of March 2, 2001. (12)
21.1 Subsidiaries of the Registrant. (15)
23.1 Consent of Independent Accountants. (15)
23.2 Independent Auditors' Consent. (15)
24.1 Power of Attorney. (15)
99.1 Cautionary Statement. (15)
- ------------------
(*) Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibits 10.1 and 10.4 have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
(1) Incorporated by reference to the Company's Form 8-K filed June 10, 1998.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-17865), effective February 14, 1997.
(3) Incorporated by reference to the Company's Form 10-K for the year ended May
31, 1997, filed August 26, 1997.
56
(4) Incorporated by reference to the Company's Form 10-Q Transition Report for
the period June 1, 1998 to August 31, 1998, filed October 14, 1998.
(5) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended November 30, 1998, filed January 13, 1999.
(6) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended May 31, 1999, filed July 13, 1999.
(7) Incorporated by reference to the Company's Form 10-K for the year ended
August 31, 1999, filed November 22, 1999.
(8) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended November 30, 1999, filed January 12, 2000.
(9) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended February 29, 2000 filed April 11, 2000.
(10) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended May 31, 2000, filed July 10, 2000.
(11) Incorporated by reference to the Company's Form 10-K for the year ended
August 31, 2000, filed November 22, 2000.
(12) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended February 28, 2001, filed April 10, 2001.
(13) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended May 31, 2001, filed July 3, 2001.
(14) Incorporated by reference to the Company's Registration Statement on Form
S-2 (File No. 333-65364), effective October 31, 2001.
(15) Filed herewith.
(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, 2001.
(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.
57
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 19, 2001.
CENEX HARVEST STATES COOPERATIVES
By: /s/ JOHN D. JOHNSON
-------------------------------------
John D. Johnson
PRESIDENT AND 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 19, 2001:
SIGNATURE TITLE
--------- -----
/s/ JOHN D. JOHNSON President and Chief Executive Officer
- ------------------------------- (principal executive officer)
John D. Johnson
/s/ JOHN SCHMITZ Executive Vice President and Chief Financial
- ------------------------------- Officer (principal financial officer)
John Schmitz
/s/ JODELL HELLER Vice President and Controller
- ------------------------------- (principal accounting officer)
Jodell Heller
Steven Burnet* Chairman of the Board of Directors
Bruce Anderson* Director
Robert Bass* Director
Curt Eischens* Director
Robert Elliott* Director
Robert Grabarski* Director
Jerry Hasnedl* Director
Glen Keppy* Director
James Kile* Director
Gerald Kuster* Director
Leonard Larsen* Director
Richard Owen* Director
Duane Stenzel* Director
Michael Toelle* Director
Richard Traphagen* Director
Merlin Van Walleghen* Director
Elroy Webster* Director
* By: /s/ JOHN D. JOHNSON
-----------------------------
John D. Johnson
ATTORNEY-IN-FACT
58
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2001 and 2000
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 113,458 $ 56,393
Receivables ................................................ 686,140 834,743
Inventories ................................................ 510,443 602,385
Other current assets ....................................... 60,995 37,777
---------- ----------
Total current assets ..................................... 1,371,036 1,531,298
Investments ................................................. 467,953 451,211
Property, plant and equipment ............................... 1,023,872 1,034,768
Other assets ................................................ 194,458 155,403
---------- ----------
TOTAL ASSETS ............................................. $3,057,319 $3,172,680
========== ==========
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .............................................. $ 97,195 $ 217,926
Current portion of long-term debt .......................... 17,754 30,173
Customer credit balances ................................... 38,486 36,779
Customer advance payments .................................. 109,135 131,935
Checks and drafts outstanding .............................. 87,808 84,086
Accounts payable ........................................... 495,198 624,772
Accrued expenses ........................................... 148,026 147,710
Patronage dividends and equity retirements payable ......... 72,154 43,694
---------- ----------
Total current liabilities ................................ 1,065,756 1,317,075
Long-term debt .............................................. 542,243 480,327
Other liabilities ........................................... 99,906 84,929
Minority interests in subsidiaries .......................... 88,261 125,923
Commitments and contingencies
Equities .................................................... 1,261,153 1,164,426
---------- ----------
TOTAL LIABILITIES AND EQUITIES ........................... $3,057,319 $3,172,680
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
2001 2000 1999
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
REVENUES:
Net sales ..................................... $7,753,012 $8,497,850 $6,381,334
Patronage dividends ........................... 5,977 5,494 5,876
Other revenues ................................ 116,254 97,471 81,180
---------- ---------- ----------
7,875,243 8,600,815 6,468,390
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of goods sold ............................ 7,470,203 8,300,494 6,193,287
Marketing, general and administrative ......... 184,046 155,266 152,031
Interest ...................................... 61,436 57,566 42,438
Equity income from investments ................ (28,494) (28,325) (22,363)
Minority interests ............................ 35,098 24,546 10,017
---------- ---------- ----------
7,722,289 8,509,547 6,375,410
---------- ---------- ----------
INCOME BEFORE INCOME TAXES ..................... 152,954 91,268 92,980
INCOME TAXES ................................... (25,600) 3,880 6,980
---------- ---------- ----------
NET INCOME ..................................... $ 178,554 $ 87,388 $ 86,000
========== ========== ==========
DISTRIBUTION OF NET INCOME:
Patronage refunds ............................. $ 128,900 $ 87,400 $ 57,500
Unallocated capital reserve ................... 49,654 (12) 28,500
---------- ---------- ----------
Net income .................................. $ 178,554 $ 87,388 $ 86,000
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
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F-3
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
CAPITAL NONPATRONAGE WHEAT OILSEED PROCESSING
EQUITY EQUITY MILLING & REFINING
CERTIFICATES CERTIFICATES EPUS EPUs
------------ ------------ --------- ------------------
(DOLLARS IN THOUSANDS)
BALANCES, SEPTEMBER 1, 1998 .......................... $ 829,240 $29,805 $ 9,472 $ 4,194
Patronage and equity retirement determination ....... 19,412
Patronage distribution .............................. 99,052 (612)
Equities retired .................................... (23,700) (97)
Equities issued ..................................... 14,714
Other, net .......................................... (674) (311) (214) (6)
Comprehensive income:
Net income .........................................
Other comprehensive loss ...........................
Total comprehensive income ..........................
Cash patronage and equity retirement provisions ..... (25,750)
--------- ------- -------- ---------
BALANCES, AUGUST 31, 1999 ............................ 912,294 28,785 9,258 4,188
Patronage and equity retirement determination ....... 25,750
Patronage distribution .............................. 41,182
Equities retired .................................... (28,615) (82)
Equities issued ..................................... 7,921
Other, net .......................................... (178) (194) (12) (6)
Comprehensive income:
Net income .........................................
Other comprehensive loss ...........................
Total comprehensive income ..........................
Cash patronage and equity retirement provisions ..... (17,474)
--------- ------- -------- ---------
BALANCES, AUGUST 31, 2000 ............................ 940,880 28,509 9,246 4,182
Patronage and equity retirement determination ....... 17,474
Patronage distribution .............................. 60,304
Equities retired .................................... (18,662) (74)
Equities issued ..................................... 5,481
Equity Participation Units issued ................... 1,045
Equity Participation Units redeemed ................. (9,066) (5,227)
Other, net .......................................... (120) (277) (180)
Comprehensive income:
Net income .........................................
Other comprehensive income .........................
Total comprehensive income ..........................
Cash patronage and equity retirement provisions ..... (33,484)
--------- ------- -------- ---------
BALANCES, AUGUST 31, 2001 ............................ $ 971,873 $28,158 $ -- $ --
========= ======= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
UNALLOCATED ACCUMULATED OTHER ALLOCATED
PATRONAGE CAPITAL COMPREHENSIVE CAPITAL TOTAL
REFUNDS RESERVE INCOME (LOSS) RESERVE EQUITIES
----------- ----------- ----------------- ---------- ------------
(DOLLARS IN THOUSANDS)
$ 99,778 $ 85,295 $ (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 28,500 86,000
(1,071) (1,071)
----------
84,929
----------
(17,250) (43,000)
---------- -------- -------- ------ ----------
40,250 115,883 (1,170) 8,148 1,117,636
17,250 43,000
(57,500) (1,588) (17,906)
(28,697)
7,921
453 (28) 35
87,400 (12) 87,388
(1,257) (1,257)
----------
86,131
----------
(26,220) (43,694)
---------- -------- -------- ------ ----------
61,180 114,736 (2,427) 8,120 1,164,426
26,220 43,694
(87,400) 967 (26,129)
(18,736)
5,481
(1,045) --
(14,293)
445 (70) (202)
128,900 49,654 178,554
512 512
----------
179,066
----------
(38,670) (72,154)
---------- -------- -------- ------ ----------
$ 90,230 $164,757 $ (1,915) $8,050 $1,261,153
========== ======== ======== ====== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
2001 2000 1999
------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 178,554 $ 87,388 $ 86,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................... 109,180 92,699 81,246
Noncash net income from equity investments ....................... (28,494) (28,325) (22,363)
Minority interests ............................................... 35,098 24,546 10,017
Adjustment of inventories to market value ........................ (35,346)
Noncash portion of patronage dividends received .................. (3,896) (6,825) (4,847)
(Gain) loss on sale of property, plant and equipment ............. (13,941) 1,167 (1,706)
Deferred tax (benefit) expense ................................... (46,625) (467) 1,197
Other, net ....................................................... (801) (3,130) 196
Changes in operating assets and liabilities:
Receivables ..................................................... 147,641 (229,067) (133,641)
Inventories ..................................................... 37,543 1,717 (34,623)
Other current assets and other assets ........................... (24,129) (7,041) (30,680)
Customer credit balances ........................................ 1,707 (8,191) 3,646
Customer advance payments ....................................... (22,800) 4,180 (20,266)
Accounts payable and accrued expenses ........................... (129,258) 202,980 66,968
Other liabilities ............................................... 13,050 (3,244) 12,383
---------- ---------- ----------
Net cash provided by (used in) operating activities ............ 252,829 128,387 (21,819)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ....................... (97,610) (153,796) (124,471)
Proceeds from disposition of property, plant and equipment ......... 35,263 7,655 6,785
Investments ........................................................ (14,247) (35,297) (63,324)
Equity investments redeemed ........................................ 30,104 41,250 8,829
Investments redeemed ............................................... 1,672 2,638 2,412
Changes in notes receivable ........................................ 533 600 334
Acquisitions of intangibles ........................................ (7,328) (26,513)
Distribution to minority owners .................................... (19,256) (21,089) (2,255)
Other investing activities, net .................................... 1,775 (339) 926
---------- ---------- ----------
Net cash used in investing activities .......................... (69,094) (184,891) (170,764)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable ........................................... (120,731) 20,940 196,511
Long-term debt borrowings .......................................... 116,861 49,914 40,000
Principal payments on long-term debt ............................... (67,364) (22,502) (14,585)
Changes in checks and drafts outstanding ........................... 3,722 35,481 (6,137)
Retirements of equity .............................................. (18,736) (28,697) (23,797)
Equity Participation Units redeemed ................................ (14,293)
Cash patronage dividends paid ...................................... (26,129) (17,906) (43,750)
---------- ---------- ----------
Net cash (used in) provided by financing activities ............ (126,670) 37,230 148,242
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................................... 57,065 (19,274) (44,341)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD .......................................................... 56,393 75,667 120,008
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 113,458 $ 56,393 $ 75,667
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Cenex Harvest States Cooperatives (CHS Cooperatives or the
Company) is an agricultural cooperative organized for the mutual benefit of its
members. Members of the cooperative are located throughout the United States.
In addition to grain marketing, wheat milling and oilseed processing and
refining, the Company provides its patrons with energy and agronomy products as
well as other farm supplies. Sales are both domestic and international.
Effective September 1, 2000, the Company's Board of Directors approved a
resolution providing for the computation of patronage distributions based on
earnings for financial statement purposes rather than tax basis earnings. On
December 1, 2000, this resolution was ratified by the Company's members, the
by-laws were amended and beginning with fiscal 2001 patronage distributions are
based on financial statement earnings. The by-laws further provide that an
amount of up to 10% of the distributable annual net savings from patronage
sources be added to the unallocated capital reserve as determined by the Board
of Directors. See also Note 8.
CONSOLIDATION -- The consolidated financial statements include the
accounts of CHS Cooperatives and all of its wholly-owned and majority-owned
subsidiaries and limited liability companies, including National Cooperative
Refinery Association (NCRA). The effects of all significant intercompany
transactions have been eliminated.
On September 1, 1999, NCRA and Farmland Industries, Inc. (Farmland) formed
Cooperative Refining, LLC (CRLLC), which was established to operate and manage
the refineries and related pipelines and terminals of NCRA and Farmland. On
December 31, 2000, NCRA and Farmland signed an Agreement of Dissolution and
dissolved CRLLC. The Agreement of Dissolution outlines the process by which the
assets, primarily inventory and cash, of CRLLC were distributed.
During 2000, the Company entered into a series of transactions the result
of which was the exchange of its agronomy operations, consisting primarily of
its interests in and ownership of the Cenex/Land O'Lakes Agronomy Company and
Agro Distribution, LLC and related entities for a 25% equity ownership interest
in Agriliance, LLC (Agriliance). Agriliance is a distributor of crop nutrients,
crop protection products and other agronomy inputs and services formerly owned
by the Company, Land O'Lakes, Inc. (Land O'Lakes) and Farmland.
During 2001 and 2000, the Company had various immaterial acquisitions,
which have been accounted for using the purchase method of accounting.
Operating results of the acquisitions are included in the consolidated
financial statements since the respective acquisition dates. The respective
purchase prices were allocated to the assets and liabilities acquired based
upon the estimated fair values. The excess purchase price over the estimated
fair values of the net assets acquired has been reported as identifiable
intangible assets and goodwill.
CASH EQUIVALENTS -- Cash equivalents include short-term highly liquid
investments with original maturities of three months or less at date of
acquisition.
INVENTORIES -- Grain, processed grain, oilseed and processed oilseed are
stated at net realizable values which approximates market values. All other
inventories are stated at the lower of cost or market. The cost of certain
energy inventories (wholesale refined products, crude oil and asphalt) is
determined on the last-in, first-out (LIFO) method; all other energy
inventories are valued on the first-in, first-out (FIFO) and average cost
methods.
DERIVATIVE FINANCIAL INSTRUMENTS -- 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. Futures and options contracts used
for hedging are purchased and sold through regulated commodity exchanges.
Fluctuations in inventory valuations, 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
F-7
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
exposure from expected price fluctuations. The Company also manages its risks
by entering into fixed price purchase contracts with preapproved producers and
establishing appropriate limits for individual suppliers. Fixed price sales
contracts are entered into with customers of acceptable creditworthiness, as
internally evaluated. The Company is exposed to loss in the event of
nonperformance by the counterparties to the contracts. However, the Company
does not anticipate nonperformance by counterparties.
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 the derivative instruments described above
reduces the effects of price volatility, thereby protecting against adverse
short-term price movements while somewhat limiting the benefits of short-term
price movements. Changes in market value of the derivative instruments
described above are recognized in the consolidated statements of operations in
the period such changes occur. The fair value of futures and option contracts
are determined primarily from quotes listed on regulated commodity exchanges.
Fixed price purchase and sales contracts are with various counterparties, and
the fair values of such contracts are determined from the market price of the
underlying product. The unrealized gains and losses of the Company's derivative
financial instruments were not material as of August 31, 2001 or 2000.
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, a standard
related to the accounting for derivative transactions and hedging activities,
effective September 1, 2000. The effect of the adoption did not have a material
effect on the Company's earnings or financial position, since each of the
contracts described above were considered by the Company to be derivative
financial instruments and were carried at fair value under the Company's
previous accounting.
INVESTMENTS -- Investments in cooperatives are stated at cost, plus
patronage dividends received in the form of capital stock and other equities.
Patronage dividends are recorded at the time qualified written notices of
allocation are received. Joint ventures and other investments, in which the
Company has significant ownership and influence, but not control, are accounted
for in the consolidated financial statements under the equity method of
accounting. Investments in other debt and equity securities are considered
available for sale financial instruments and are stated at market value, with
unrealized amounts included as a component of 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 three to 50 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. Expenditures for
maintenance and repairs and minor renewals are expensed while costs of major
renewals and betterments are capitalized.
The Company periodically reviews 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 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.
The Company's policy for planned major maintenance activities is to accrue
for those estimated costs, which primarily consist of direct maintenance
expenses. The planned major maintenance activities are primarily related to the
Company's energy refinery operations.
F-8
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION -- Grain and oilseed sales are recorded at time of
settlement. All other sales are recognized upon shipment and transfer of title
to customers. During 2001, the Company adopted the provisions of the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." The effect was not material to the
Company.
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. Recoveries, if any, are recorded in
the period in which recovery is considered probable. 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 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.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
RECENT ACCOUNTING PRONOUNCEMENTS -- Emerging Issues Task Force (EITF)
00-10, "Accounting for Shipping and Handling Fees and Costs," is effective for
all fiscal years beginning after December 15, 1999. EITF 00-10 states that all
amounts billed to a customer in a sale transaction related to shipping and
handling represents revenues earned for the goods provided and should be
classified as revenue. Accordingly, the Company has presented such amounts as a
component of net sales for the year ended August 31, 2001, and reclassified,
primarily from cost of goods sold, $62.0 million and $52.7 million for the
years ended August 31, 2000 and 1999, respectively, to conform to the
current-year presentation. Costs incurred for shipping and handling are
reported as a component of cost of goods sold.
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets," which are effective for fiscal years beginning after
December 15, 2001, with early adoption permitted. These statements, in summary,
eliminate the use of the pooling method of accounting for business combinations
occurring in the future, and discontinue the amortization of acquired goodwill,
subject to periodic impairment testing. The Company expects to adopt these new
standards in the first fiscal quarter of 2002. The adoption is not expected to
have a material effect on the Company.
The Company is currently reviewing and analyzing the effects of SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
F-9
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECEIVABLES
Receivables as of August 31, 2001 and 2000 are as follows:
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)
Trade ....................................... $682,593 $834,349
Other ....................................... 28,864 23,643
-------- --------
711,457 857,992
Less allowances for doubtful accounts ....... 25,317 23,249
-------- --------
$686,140 $834,743
======== ========
All international sales are denominated in U.S. dollars. International
sales for the years ended August 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
--------- --------- ---------
(DOLLARS IN MILLIONS)
Africa .............................. $ 138 $ 191 $ 158
Asia ................................ 403 552 310
Europe .............................. 255 304 358
North America ....................... 317 324 198
South America ....................... 101 119 122
------ ------ ------
$1,214 $1,490 $1,146
====== ====== ======
3. INVENTORIES
Inventories as of August 31, 2001 and 2000 are as follows:
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)
Grain and oilseed ........................... $237,498 $215,570
Energy ...................................... 163,710 286,276
Feed and farm supplies ...................... 76,570 63,909
Processed grain and oilseed ................. 28,648 32,993
Other ....................................... 4,017 3,637
-------- --------
$510,443 $602,385
======== ========
As of August 31, 2001, the Company valued approximately 28% of
inventories, primarily related to energy, using the lower of cost, determined
on the LIFO method, or market (40% as of August 31, 2000). If the FIFO method
of accounting for inventories had been used, inventories would have been higher
than the reported amount by $34.0 million and $86.3 million at August 31, 2001
and 2000, respectively. The LIFO liquidation in fiscal 2001 was not material.
The liquidation of certain LIFO layers in fiscal 2000 decreased cost of goods
sold by $4.3 million. The inventories in these LIFO layers were acquired in
prior years at lower costs.
F-10
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
Investments as of August 31, 2001 and 2000 are as follows:
2001 2000
----------- ----------
(DOLLARS IN THOUSANDS)
Cooperatives:
CF Industries, Inc. ............................. $152,996 $152,996
National Bank for Cooperatives (CoBank) ......... 33,080 32,817
Ag Processing, Inc. ............................. 24,967 23,036
Land O'Lakes, Inc. .............................. 24,604 21,967
Joint Ventures:
Ventura Foods, LLC .............................. 101,089 87,315
United Country Brands, LLC ...................... 74,457 70,099
Tacoma Export Marketing Company ................. 11,638 9,378
Other ........................................... 45,122 53,603
-------- --------
$467,953 $451,211
======== ========
The following provides summarized information for Ventura Foods, LLC,
balance sheets as of August 31, 2001 and 2000 and statements of operations for
the twelve months ended August 31, 2001, 2000 and 1999:
2001 2000
----------- ----------
(DOLLARS IN THOUSANDS)
Current assets ................................... $159,062 $133,112
Non-current assets ............................... 221,000 222,334
Current liabilities .............................. 114,883 107,570
Non-current liabilities .......................... 104,144 117,822
2001 2000 1999
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Net sales ......................... $925,962 $896,941 $902,682
Gross profit ...................... 161,405 143,394 107,326
Net income ........................ 71,148 55,115 30,475
In March 2000, the Company purchased an additional 10% interest in Ventura
Foods, LLC, its consumer products and packaging joint venture, for $25.6
million. The Company has a 50% interest in this joint venture.
Effective January 1, 2000, CHS Cooperatives, Farmland and Land O'Lakes
created Agriliance, a distributor of crop nutrients, crop protection products
and other agronomy inputs and services. At formation, Agriliance managed the
agronomy marketing operations of CHS Cooperatives, Farmland and Land O'Lakes,
with the Company exchanging the right to use its agronomy operations for
26.455% of the results of the jointly managed operations. This agreement was
subsequently terminated on July 31, 2000 as discussed further below.
In March 2000, the Company sold 1.455% of its economic interest in
Agriliance to Land O'Lakes, resulting in a gain of $7.4 million. On July 31,
2000, the Company exchanged its ownership interest in the Cenex/Land O'Lakes
Agronomy Company and in Agro Distribution, LLC, with a total investment of
$64.7 million, for a 25% equity interest in Agriliance. Agriliance ownership
also includes Farmland (25%) and Land O'Lakes (50%). The interests of the
Company and Farmland are held through equal ownership in United Country Brands,
LLC, a joint venture holding company whose sole operations
F-11
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
consist of the ownership of a 50% interest in Agriliance. Equity in the joint
venture was recorded at historical carrying value of its ownership in
Cenex/Land O'Lakes Agronomy Company and Agro Distribution, LLC and no gain or
loss was recorded on the exchange. Also in July 2000, Agriliance secured its
own financing, which is without recourse to the Company. Agriliance in July
2000, purchased the net working capital related to agronomy operations from
each of its member owners, consisting primarily of trade accounts receivable
and inventories, net of accounts payable.
The following provides summarized information for Agriliance, balance
sheets as of August 31, 2001 and 2000 and statement of operations for the year
ended August 31, 2001:
2001 2000
----------- ------------
(DOLLARS IN THOUSANDS)
Current assets ................................. $955,032 $1,341,889
Non-current assets ............................. 158,107 203,040
Current liabilities ............................ 832,700 1,220,645
Non-current liabilities ........................ 110,963 160,851
2001
----------------------
(DOLLARS IN THOUSANDS)
Net sales ....................................... $4,079,313
Gross profit .................................... 65,261
Net income ...................................... 25,053
The Company's contribution of its equity interest in Agriliance occurred
on July 31, 2000, and as such, net sales, gross profits and net income for the
one month ended August 31, 2000 have been excluded from the above summarized
information of statement of operations, as it was not material.
Disclosure of the fair value of financial instruments to which the Company
is a party includes estimates and assumptions which may be subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Financial instruments are carried at
amounts that approximate estimated fair value. Investments in cooperatives and
joint ventures have 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 CHS Cooperatives 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-12
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, 2001 and
2000 are as follows:
ESTIMATED
USEFUL LIFE
IN YEARS 2001 2000
------------ ------------- -------------
(DOLLARS IN THOUSANDS)
Energy refineries ...................................... 3-40 $ 724,841 $ 682,823
Grain terminals and country facilities ................. 3-50 474,234 447,030
Grain processing plants ................................ 3-40 257,724 241,687
Energy pipelines and terminals ......................... 3-40 245,900 230,756
Distribution and general ............................... 3-40 191,812 207,412
Construction in progress ............................... 38,723 79,163
---------- ----------
1,933,234 1,888,871
Less accumulated depreciation and amortization ......... 909,362 854,103
---------- ----------
$1,023,872 $1,034,768
========== ==========
6. OTHER ASSETS
Other assets as of August 31, 2001 and 2000 are as follows:
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)
Goodwill, less accumulated amortization of $4,040 and
$3,109, respectively ...................................................... $ 29,153 $ 23,835
Intangible assets, less accumulated amortization of $4,788 and
$13,644, respectively ..................................................... 10,099 21,069
Prepaid pension and other benefit assets ................................... 100,727 92,767
Deferred tax asset ......................................................... 44,316 4,130
Notes receivable ........................................................... 5,629 5,201
Other assets ............................................................... 4,534 8,401
-------- --------
$194,458 $155,403
======== ========
F-13
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, 2001 and 2000 consisted
of the following:
INTEREST RATES
AT AUGUST 31,
2001 2001 2000
----------------- ---------- ----------
(DOLLARS IN THOUSANDS)
Notes payable (a)(g) .............................. 4.00% to 5.38% $ 97,195 $217,926
======== ========
Long-term debt:
Revolving term loans from cooperative and
other banks, payable in installments through
2009, when the balance is due (b)(c)(g) ......... 4.06% to 13.00% $239,392 $259,657
Private placement, payable in equal
installments beginning in 2008 through
2013 (d)(g) ..................................... 6.81% 225,000 225,000
Private placement, payable in equal
installments beginning in 2005 through
2011 (e)(g) ..................................... 7.43% to 7.90% 80,000
Industrial Revenue Bonds, payable in
installments through 2011 (f) ................... 5.23% to 8.33% 10,025 18,535
Other notes and contracts ........................ 4.00% to 12.00% 5,580 7,308
-------- --------
Total long-term debt .............................. 559,997 510,500
Less current portion ............................. 17,754 30,173
-------- --------
Long-term portion ................................. $542,243 $480,327
======== ========
- ------------------
(a) The Company finances its working capital needs through short-term lines of
credit with a syndication of banks. The Company has a 364-day credit
facility of $550.0 million, all of which is committed, and of which $96.0
million was outstanding on August 31, 2001. In addition to this short-term
line of credit, the Company has a 364-day credit facility dedicated to NCRA
with a syndication of banks in the amount of $30.0 million, all of which is
committed, with no amounts outstanding on August 31, 2001. Other
miscellaneous notes payable totaled $1.2 million at August 31, 2001.
(b) In June 1998, the Company established a $200.0 million five-year revolving
credit facility with a syndication of banks. On August 31, 2001, the
Company had an outstanding balance of $45.0 million.
(c) In June 1998, the Company established a long-term credit agreement which
committed $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. On August 31, 2001, $150.9 million was
outstanding. NCRA term loans of $23.8 million are collateralized by NCRA's
investment in CoBank.
(d) In June 1998, the Company entered into a private placement with several
insurance companies for long-term debt in the amount of $225.0 million.
(e) In January 2001, the Company entered into a note purchase and private shelf
agreement with Prudential Insurance Company. A long-term note was issued
for $25.0 million. A subsequent note for $55.0 million was issued in March
2001, related to the private shelf facility.
(f) Industrial Revenue Bonds are collateralized by property, plant and
equipment, primarily energy refinery equipment, with a cost of $155.7
million, less accumulated depreciation of $109.9 million and $103.6 million
as of August 31, 2001 and 2000, respectively.
(g) Restrictive covenants under various agreements have requirements for
maintenance of minimum working capital levels and other financial ratios.
The fair value of long-term debt approximates book value as of August 31,
2001 and 2000.
F-14
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
For the years ended August 31, 2001, 2000 and 1999, the Company
capitalized interest of $1.2 million, $2.7 million and $1.7 million,
respectively.
The aggregate amount of long-term debt payable as of August 31, 2001 is as
follows (dollars in thousands):
2002 .............................................................. $ 17,754
2003 .............................................................. 59,083
2004 .............................................................. 15,119
2005 .............................................................. 34,553
2006 .............................................................. 34,984
Thereafter ........................................................ 398,504
--------
$559,997
========
8. INCOME TAXES
As a result of the Company's by-law change to distribute patronage based
on financial statement earnings (see Note 1), the statutory rate applied to the
cumulative differences between financial statement earnings and tax basis
earnings, has been changed. In connection with this change the Company recorded
a deferred tax benefit of $34.2 million.
The provision for income taxes for the years ended August 31, 2001, 2000
and 1999 is as follows:
2001 2000 1999
---------- --------- ---------
(DOLLARS IN THOUSANDS)
Current ................................... $ 21,025 $4,347 $5,783
Deferred .................................. (46,625) (467) 1,197
--------- ------ ------
Income taxes .............................. $ (25,600) $3,880 $6,980
========= ====== ======
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of August 31, 2001 and 2000
are as follows:
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Accrued expenses and valuation reserves ............... $52,719 $10,970
Postretirement health care and pension liabilities .... 12,127 3,282
Alternative minimum tax credit and patronage loss
carryforward ......................................... 4,540 4,842
Property, plant and equipment ......................... 9,570
Other ................................................. 13,189 5,718
------- -------
Total deferred tax assets ............................ 92,145 24,812
------- -------
Deferred tax liabilities:
Property, plant and equipment ......................... 3,345
Equity method investments ............................. 27,893 11,405
Other ................................................. 10,854 3,289
------- -------
Total deferred tax liabilities ....................... 38,747 18,039
------- -------
Net deferred tax asset ................................ $53,398 $ 6,773
======= =======
As of August 31, 2001, net deferred tax assets of $9.1 million and $44.3
million are included in other current assets and other assets, respectively
($2.7 million and $4.1 million, respectively, as of August 31, 2000).
F-15
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 tax rate for the years ended August 31, 2001, 2000 and 1999 is as
follows:
2001 2000 1999
------------ ---------- ----------
Statutory federal income tax rate ............................ 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ................................................. 3.9 3.9 3.9
Patronage earnings ........................................... (32.8) (37.3) (24.1)
Tax effect of changes in deferred patronage .................. 4.4 (6.8)
Change in patronage determination ............................ (22.4)
Rate changes on deferred tax assets and liabilities .......... (2.5) 0.5
Other ........................................................ (0.4) 0.8 (1.0)
----- ----- -----
Effective tax rate ........................................... (16.7)% 4.3% 7.5%
===== ===== =====
The principal differences between financial statement income and taxable
income for the years ended August 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Income before income taxes .............................. $ 152,954 $ 91,268 $ 92,980
Financial reporting/tax differences:
Environmental reserves ................................. 4,453 (728) 1,343
Oil and gas activities, net ............................ (22,230) 2,600 18,005
Energy inventory market reserves ....................... (2,441) (19) (48,445)
Other, net ............................................. 45,514 3,255 9,258
Patronage refund provisions ............................ (128,900) (87,400) (57,500)
---------- --------- ---------
Taxable income .......................................... $ 49,350 $ 8,976 $ 15,641
========== ========= =========
9. EQUITIES
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 using financial
statement earnings. The cash portion of the patronage 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 nonpatronage 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 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 who 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
F-16
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EQUITIES (CONTINUED)
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.
Retirements of patrons' equities attributable to EPUs, was at the discretion of
the Board of Directors, and it was the Board's goal to retire such equity on a
revolving basis seven years after declaration.
During 2001, the Company's Board of Directors adopted a resolution to
issue, at no charge, to each Defined Member of the Oilseed Processing and
Refining Defined Business Unit an additional 1/4 Equity Participation Unit
(EPU), for each EPU held, due to increased crush volume.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Defined Investment Program. The Company redeemed
all of the EPUs and allocated the assets of the Oilseed Processing and Refining
and Wheat Milling Defined Business Units to the Company as provided in the
plan. The amounts redeemed to the Oilseed Processing and Refining and Wheat
Milling Defined Member EPU holders were $5.2 million and $9.1 million,
respectively. Due to loss carry-forwards incurred by the Wheat Milling Defined
Business Unit the plan also provided for the cancellation of all outstanding
Preferred Capital Certificates issued to the Wheat Milling EPU holders,
totaling $0.2 million. The plan further provided to the Oilseed Processing and
Refining Defined Member EPU holders for the redemption of all outstanding
Preferred Capital Certificates issued of $0.2 million and a 100% cash
distribution during 2002 for the patronage refunds earned for the fiscal year
ended August 31, 2001.
The Company had previously followed 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
resulted from the fact that patronage distributions were primarily determined
on the basis of taxable income rather than net income as reported in the
consolidated financial statements. Deferred patronage consisted of items, which
had been included in the computation of net income for financial statement
purposes, but not for income tax or patronage purposes. As these items
reversed, patronage refunds and deferred patronage were affected. With the
by-law change providing for the computation method of patronage based on
financial statement earnings (see Note 1), the previously reported deferred
patronage amounts are included in unallocated capital reserve. The August 31,
2000 and 1999 deferred patronage amounts included, as a component of
unallocated capital reserve, in the consolidated statements of equities and
comprehensive income, were a contra-equity of $114.6 million and $89.7 million,
respectively.
F-17
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
The Company has various pension and other defined benefit and defined
contribution plans, in which substantially all employees may participate.
Financial information on changes in benefit obligation and plan assets
funded and balance sheet status as of August 31, 2001 and 2000 is as follows:
PENSION BENEFITS OTHER BENEFITS
--------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of period ......... $ 258,059 $ 266,651 $ 21,439 $ 28,543
Service cost ...................................... 8,506 8,777 566 657
Interest cost ..................................... 18,487 18,058 1,569 1,470
Plan amendments ................................... 6 251 (1,005) (7,679)
Transfers ......................................... (2,387)
Actuarial (gain) loss ............................. (2,842) (13,616) 1,902 226
Assumption change ................................. 2,534
Settlements ....................................... 643
Benefits paid ..................................... (29,442) (22,062) (1,804) (1,778)
--------- --------- --------- ---------
Benefit obligation at end of period ............... $ 253,564 $ 258,059 $ 22,667 $ 21,439
========= ========= ========= =========
Change in plan assets:
Fair value of plan assets at beginning
of period ........................................ $ 266,896 $ 259,360
Actual (loss) return on plan assets ............... (16,206) 22,240
Company contributions ............................. 11,669 7,358 $ 1,804 $ 1,778
Net transfers ..................................... (2,796)
Benefits paid ..................................... (29,442) (22,062) (1,804) (1,778)
--------- --------- --------- ---------
Fair value of plan assets at end of period ........ $ 230,121 $ 266,896 $ -- $ --
========= ========= ========= =========
Funded status ....................................... $ (23,443) $ 8,837 $ (22,667) $ (21,439)
Employer contributions after measurement date ..... 1,262 4,586 264 2,618
Unrecognized actuarial loss (gain) ................ 47,368 11,976 (6,363) (9,046)
Unrecognized transition (asset) obligation ........ (708) (1,570) 11,133 12,069
Unrecognized prior service cost ................... 9,639 10,821 (1,534) (660)
--------- --------- --------- ---------
Prepaid benefit cost (accrued) .................... $ 34,118 $ 34,650 $ (19,167) $ (16,458)
========= ========= ========= =========
Amounts recognized on balance sheets
consist of:
Prepaid benefit cost .............................. $ 43,918 $ 43,516
Accrued benefit liability ......................... (12,214) (12,253) $ (19,167) $ (16,458)
Intangible asset .................................. 1,055 2,148
Accumulated other comprehensive loss .............. 1,359 1,239
--------- --------- --------- ---------
Net amounts recognized ............................ $ 34,118 $ 34,650 $ (19,167) $ (16,458)
========= ========= ========= =========
F-18
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the year ended August 31,
2001. The rate was assumed to decrease gradually to 6.0% for 2003 and remain at
that level thereafter. Components of net periodic benefit costs for the years
ended August 31, 2001, 2000 and 1999 are as follows:
PENSION BENEFITS OTHER BENEFITS
------------------------------------------ -----------------------------------
2001 2000 1999 2001 2000 1999
------------ ------------ ------------ ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Components of net periodic
benefit cost:
Service cost .............................. $ 8,506 $ 8,777 $ 8,733 $ 566 $ 657 $1,421
Interest cost ............................. 18,487 18,058 17,817 1,569 1,470 1,769
Expected return on assets ................. (22,855) (20,485) (26,552)
Prior service cost amortization ........... 1,193 1,182 812 (131) (77) (38)
Actuarial loss (gain) amortization ........ 375 (530) 8,145 (538) (604) (82)
Transition amount amortization ............ (861) (1,120) (1,248) 936 936 936
Other ..................................... 275 (22)
--------- --------- --------- ------ ------ ------
Net periodic benefit cost ................. $ 4,845 $ 5,882 $ 7,982 $2,380 $2,382 $4,006
========= ========= ========= ====== ====== ======
Weighted-average assumptions:
Discount rate ............................. 7.30% 7.50% 7.30% 7.30% 7.50% 7.30%
Expected return on plan assets ............ 9.00% 9.00% 8.50% N/A N/A N/A
Rate of compensation increase ............. 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
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, 2001 and
2000:
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)
Projected benefit obligation ................................................... $23,247 $13,500
Accumulated benefit obligation ................................................. 18,599 12,253
Fair value of plan assets ...................................................... 6,385 --
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 service and interest cost components ........................ $ 175 $ (149)
Effect on postretirement benefit obligation .................................... 1,367 (1,145)
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 $6.1 million, $4.6 million and $4.5 million, for the years ended August
31, 2001, 2000 and 1999, respectively.
F-19
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT REPORTING
Effective September 1, 2000, the Company's management reorganized the way
its businesses are managed and internally reported. A new segment named Country
Operations was created. This new segment includes the former Farm Marketing &
Supply business previously included in the Grain Marketing and Farm Marketing &
Supply segment, and also the Country Services, hedging and insurance services
formerly included in Corporate and Other. With the reorganization there are
five business segments. These segments, which are based on products and
services, include Agronomy, Energy, Grain Marketing, Country Operations, and
Processed Grains and Foods. Reconciling Amounts represent the elimination of
intracompany sales between segments. The prior period's segment information has
been restated to reflect the change in segments. Due to cost allocations and
intersegment activity, management does not represent that these segments, if
operated independently, would report the income before income taxes and other
financial information as presented.
Segment information for the years ended August 31, 2001, 2000 and 1999 is
as follows:
PROCESSED CORPORATE
GRAIN COUNTRY GRAINS AND AND RECONCILING
AGRONOMY ENERGY MARKETING OPERATIONS FOODS OTHER AMOUNTS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
For the year ended
August 31, 2001:
Net sales .................. $2,781,243 $3,514,314 $1,577,268 $ 662,726 $ (782,539) $7,753,012
Patronage dividends ........ $ 196 712 840 3,683 339 $ 207 5,977
Other revenues ............. 4,036 22,964 80,365 (238) 9,127 116,254
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
196 2,785,991 3,538,118 1,661,316 662,827 9,334 (782,539) 7,875,243
Cost of goods sold ......... 2,549,099 3,514,575 1,569,884 619,184 (782,539) 7,470,203
Marketing, general and
administrative ............ 8,503 48,432 20,851 54,848 44,870 6,542 184,046
Interest ................... (4,529) 25,097 8,144 15,695 13,026 4,003 61,436
Equity (income) loss from
investments ............... (7,360) 4,081 (4,519) (246) (35,505) 15,055 (28,494)
Minority interests ......... 34,713 385 35,098
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes ..................... $ 3,582 $ 124,569 $ (933) $ 20,750 $ 21,252 $ (16,266) $ -- $ 152,954
========== ========== ========== ========== ========== ========== ========== ==========
Total identifiable assets at
August 31, 2001 ........... $ 230,051 $1,154,036 $ 345,696 $ 679,053 $ 430,871 $ 217,612 $3,057,319
========== ========== ========== ========== ========== ========== ========== ==========
For the year ended
August 31, 2000:
Net sales .................. $ 808,659 $2,959,622 $3,453,807 $1,409,892 $ 584,052 $ (718,182) $8,497,850
Patronage dividends ........ 224 311 861 3,830 100 $ 168 5,494
Other revenues ............. 5,817 2,792 15,440 68,322 (10) 5,110 97,471
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
814,700 2,962,725 3,470,108 1,482,044 584,142 5,278 (718,182) 8,600,815
Cost of goods sold ......... 764,744 2,862,715 3,439,863 1,404,120 547,234 (718,182) 8,300,494
Marketing, general and
administrative ............ 20,832 43,332 19,956 45,478 21,462 4,206 155,266
Interest ................... (3,512) 27,926 8,701 12,782 9,851 1,818 57,566
Equity loss (income) from
investments ............... 4,336 (856) (6,452) (1,007) (24,367) 21 (28,325)
Minority interests ......... 24,443 103 24,546
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes ..................... $ 28,300 $ 5,165 $ 8,040 $ 20,568 $ 29,962 $ (767) $ -- $ 91,268
========== ========== ========== ========== ========== ========== ========== ==========
Total identifiable assets at
August 31, 2000 ........... $ 228,277 $1,379,019 $ 321,813 $ 660,358 $ 391,286 $ 191,927 $3,172,680
========== ========== ========== ========== ========== ========== ========== ==========
F-20
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT REPORTING (CONTINUED)
PROCESSED CORPORATE
GRAIN COUNTRY GRAINS AND AND RECONCILING
AGRONOMY ENERGY MARKETING OPERATIONS FOODS OTHER AMOUNTS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
For the year ended
August 31, 1999:
Net sales .................. $ 653,629 $1,381,282 $3,200,629 $1,270,123 $ 556,757 $ (681,086) $6,381,334
Patronage dividends ........ 184 (1,236) (393) 7,146 (492) $ 667 5,876
Other revenues ............. 717 17,267 60,606 3 2,587 81,180
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
653,813 1,380,763 3,217,503 1,337,875 556,268 3,254 (681,086) 6,468,390
Cost of goods sold ......... 621,165 1,264,995 3,183,434 1,271,300 533,479 (681,086) 6,193,287
Marketing, general and
administrative ............ 16,605 51,057 22,419 41,307 17,852 2,791 152,031
Interest ................... 1,413 16,584 7,510 10,184 6,561 186 42,438
Equity loss (income) from
investments ............... 1,386 (4,741) (5,145) (1,250) (12,193) (420) (22,363)
Minority interests ......... 9,889 128 10,017
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes . $ 13,244 $ 42,979 $ 9,285 $ 16,206 $ 10,569 $ 697 $ -- $ 92,980
========== ========== ========== ========== ========== ========== ========== ==========
12. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL -- The Company is required to comply with various
environmental laws and regulations incidental 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. 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 such matters will not have a material adverse
effect on the consolidated financial position, results of operations or cash
flows 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, results of operations or
cash flows 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 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, results of
operations or cash flows of the Company.
GRAIN STORAGE -- As of August 31, 2001 and 2000, the Company stored grain
and processed grain products for third parties totaling $177.0 million and
$127.0 million, respectively. Such stored commodities and products are not the
property of the Company and therefore are not included in the Company's
inventories.
GUARANTEES -- The Company is a guarantor for lines of credit for related
companies totaling up to $76.7 million, of which $30.5 million was outstanding
as of August 31, 2001. All outstanding loans with respective creditors are
current as of August 31, 2001.
LEASE COMMITMENTS -- The Company leases approximately 2,300 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.
F-21
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rental expense for all operating leases, net of rail car mileage
credits received from the railroad and sublease income was $34.1 million, $38.0
million and $29.8 million for the years ended August 31, 2001, 2000 and 1999,
respectively. Mileage credits and sublease income were $11.0 million, $10.6
million and $12.8 million for the years ended August 31, 2001, 2000 and 1999,
respectively.
Minimum future lease payments, required under noncancellable operating
leases as of August 31, 2001, are as follows:
EQUIPMENT
RAIL CARS VEHICLES AND OTHER TOTAL
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
2002 ........................................ $12,939 $ 6,085 $16,445 $ 35,469
2003 ........................................ 8,976 4,100 13,227 26,303
2004 ........................................ 4,781 2,740 9,249 16,770
2005 ........................................ 3,051 1,461 2,968 7,480
2006 ........................................ 1,537 656 2,778 4,971
Thereafter .................................. 4,948 87 7,802 12,837
------- ------- ------- --------
Total minimum future lease payments ......... $36,232 $15,129 $52,469 $103,830
======= ======= ======= ========
13. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended August 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Net cash paid during the period for:
Interest ......................................... $ 63,034 $57,062 $42,765
Income taxes ..................................... 11,709 3,785 8,161
Other significant noncash transactions:
(Distributions)/contributions of inventories of
minority interest ............................... (54,399) 54,399
Capital equity certificates issued in exchange for
elevator properties ............................. 5,481 7,921 14,714
Equity Participation Units issued ................ 1,045
14. SUBSEQUENT EVENTS
The Company markets refined petroleum products including gasoline, diesel
fuels, propane and lubricants under the Cenex brand through Country Energy,
LLC, a joint sales, marketing and distribution venture with Farmland
Industries. The Company has signed a letter of intent to purchase Farmland's
wholesale energy business in early fiscal 2002, including their outstanding
interest in Country Energy. The transaction, subject to a definitive agreement,
will make Country Energy a wholly-owned subsidiary.
In September 2001, the Company signed a non-binding letter of intent to
form a joint venture with Cargill, Incorporated to engage in wheat flour
milling in North America. The Company would hold a 24% interest in the joint
venture. The transaction is subject to definitive agreement and government
approvals.
Effective October 31, 2001, the Company filed a Registration Statement on
Form S-2/A with the Securities and Exchange Commission, which offers for sale
fifty million shares of 8% preferred stock with an offering price of $1.00 per
share.
F-22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members and Patrons of
Cenex Harvest States Cooperatives:
In our opinion, 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,
2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended August 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 19, 2001
F-23
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
AUGUST 31,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Receivables ...................................... $27,936 $30,011
Inventories ...................................... 14,930 25,449
Other current assets ............................. 707 18
------- -------
Total current assets ............................ 43,573 55,478
Property, plant and equipment ..................... 48,541 40,270
Other assets ...................................... 497
------- -------
TOTAL ASSETS .................................... $92,611 $95,748
======= =======
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $15,073 $15,891
Accounts payable ................................. 11,293 9,028
Accrued expenses ................................. 5,818 5,976
------- -------
Total liabilities ............................... 32,184 30,895
Commitments and contingencies
Defined Business Unit equity ...................... 60,427 64,853
------- -------
TOTAL LIABILITIES AND DEFINED BUSINESS
UNIT EQUITY .................................... $92,611 $95,748
======= =======
The accompanying notes are an integral part of the financial statements.
F-24
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
REVENUES:
Net sales ..................................... $349,498 $340,557 $370,610
Other revenues ................................ 189 160 30
-------- -------- --------
349,687 340,717 370,640
-------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 330,540 315,563 350,954
Marketing, general and administrative ......... 6,009 5,131 5,095
Interest ...................................... 42 18 557
-------- -------- --------
336,591 320,712 356,606
-------- -------- --------
INCOME BEFORE INCOME TAXES ..................... 13,096 20,005 14,034
INCOME TAXES ................................... 245 1,330 800
-------- -------- --------
NET INCOME ................................... $ 12,851 $ 18,675 $ 13,234
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-25
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 YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)
BALANCE, SEPTEMBER 1, 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
Net and comprehensive income .................................... 18,675
Defined Business Unit equity distributed to the Company ......... (15,016)
---------
BALANCE, AUGUST 31, 2000 ......................................... 64,853
Equity Participation Units redeemed ............................. (5,472)
Net and comprehensive income .................................... 12,851
Defined Business Unit equity distributed to the Company ......... (11,805)
---------
BALANCE, AUGUST 31, 2001 ......................................... $ 60,427
=========
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 CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 12,851 $ 18,675 $ 13,234
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .......................................... 2,851 2,609 2,330
Loss on sale of property, plant and equipment ......... 35 204
Deferred income tax benefit ........................... (1,196)
Changes in operating assets and liabilities:
Receivables ........................................... 2,075 (5,361) 4,053
Inventories ........................................... 10,519 (8,365) 1,485
Other current assets and other assets ................. 10 (18)
Accounts payable and accrued expenses ................. 2,107 5,009 675
--------- --------- ---------
Net cash provided by operating activities ............ 29,217 12,584 21,981
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ............ (11,122) (3,936) (5,939)
Proceeds from disposition of property, plant and
equipment .............................................. 23
--------- --------- ---------
Net cash used in investing activities ................. (11,122) (3,913) (5,939)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to Cenex Harvest States
Cooperatives ........................................... (818) 6,345 (5,525)
Equity Participation Units redeemed ..................... (5,472)
Defined Business Unit equity distributed to the
Company ................................................ (11,805) (15,016) (10,517)
--------- --------- ---------
Net cash used in financing activities ................ (18,095) (8,671) (16,042)
--------- --------- ---------
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-27
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS -- Cenex Harvest States Cooperatives'
(the Company) Oilseed Processing and Refining Defined Business Unit (the
Defined Business Unit) is a Defined Business Unit of 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 of America.
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 -- Inventories consisting of oilseed and processed oilseed
products are stated at net realized value, which approximates market.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into
exchange-traded commodity futures and options contracts to hedge its exposure
to price fluctuations from oilseed transactions to the extent considered
practicable for minimizing risk. Futures and options contracts used for hedging
are purchased and sold through regulated commodity exchanges. Fluctuations in
inventory valuations, 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. The Company also manages its risk by entering into
fixed price purchase contracts with preapproved producers and establishing
appropriate limits for individual suppliers. Fixed price sales contracts are
entered into with customers of acceptable creditworthiness, as internally
evaluated. The Company is exposed to loss in the event of nonperformance by
counterparties to the contracts. However, the Company does not anticipate
nonperformance by counterparties.
Changes in market value of futures and option contracts are recognized in
the statements of operations in the period such changes occur. The fair value
of these contracts are determined primarily from quotes listed on regulated
commodity exchanges.
Fixed price forward purchase and sales contracts are with various
counterparties, and the fair values of such contracts are determined from the
market price of the underlying product. Changes in market value are recognized
in the statements of operations in the period such changes occur. The
unrealized gains and losses on these contracts were not material as of August
31, 2001 and 2000.
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, a standard
related to the accounting for derivative transactions and hedging activities,
effective September 1, 2000. The effect of the adoption did not have a material
effect on the Company's earnings or financial position, since each of the
contracts described above were considered by the Company to be derivative
financial instruments and were carried at fair value under the Company's
previous accounting.
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. Expenditures which substantially increase value or
extend useful lives are capitalized. Expenditures for maintenance and repairs
are charged against income as incurred.
The Company periodically reviews 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. In a review, should the sum of
the related, expected future net cash flows be less than the carrying
F-28
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX 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)
value, 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 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's policy
provides for the payment of taxes as calculated on an individual business
entity basis for each of its Defined Business Units, accordingly, the Defined
Business Unit has recorded tax expense as though on a stand alone basis.
REVENUE RECOGNITION -- Sales of processed oilseeds are recognized upon
shipment and title transfer to customers. During 2001, the Oilseed Processing
and Refining Defined Business Unit adopted the provisions of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements." The effect was not material to the Defined Business
Unit.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
RECENT ACCOUNTING PRONOUNCEMENTS -- Emerging Issues Task Force (EITF)
00-10, "Accounting for Shipping and Handling Fees and Costs", is effective for
all fiscal years beginning after December 15, 1999. EITF 00-10 states that all
amounts billed to a customer in a sale transaction related to shipping and
handling represents revenues earned for the goods provided and should be
classified as revenue. Accordingly, the Oilseed Refining and Processing Defined
Business Unit has presented such amounts as a component of net sales for the
year ended August 31, 2001, and reclassified from cost of goods sold $15,338
and $12,568 for the years ended August 31, 2000 and 1999, respectively, to
conform to the current-year presentation. Costs incurred for shipping and
handling are reported as a component of cost of goods sold.
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets," which are effective for fiscal years beginning after
December 15, 2001, with early adoption permitted. These statements, in summary,
eliminate the use of the pooling method of accounting for business combinations
occurring in the future, and discontinue the amortization of acquired goodwill,
subject to periodic impairment testing. The Company expects to adopt the new
standard in the first fiscal quarter of 2002. The adoption is not expected to
have a material effect on the Defined Business Unit.
The Company is currently reviewing and analyzing the effects of SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
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, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
2. RECEIVABLES
Receivables at August 31, 2001 and 2000 are as follows:
2001 2000
---------- ----------
Trade .......................................... $28,331 $30,406
Less allowances for doubtful accounts .......... 395 395
------- -------
$27,936 $30,011
======= =======
3. INVENTORIES
Inventories at August 31, 2001 and 2000 are as follows:
2001 2000
---------- ----------
Processed oilseed products ..................... $13,087 $22,075
Oilseed ........................................ 1,843 3,374
------- -------
$14,930 $25,449
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment at August 31, 2001 and 2000
are as follows:
ESTIMATED
USEFUL LIFE
IN YEARS 2001 2000
------------ ---------- ---------
Land ........................................... $ 2,072 $ 2,072
Elevators, crushing plant and refinery ......... 15 to 20 24,224 23,970
Machinery and equipment ........................ 5 to 18 63,027 60,434
Furniture and fixtures ......................... 3 to 12 522 473
Other .......................................... 5 to 12 71 71
Construction in progress ....................... 10,946 2,719
-------- -------
100,862 89,739
Less accumulated depreciation .................. 52,321 49,469
-------- -------
$ 48,541 $40,270
======== =======
Interest expense amounting to $460 was capitalized during the current
year.
5. DUE TO CENEX HARVEST STATES COOPERATIVES
The Defined Business Unit satisfies its working capital needs through
borrowings, both long-term and short-term, from the Company to the extent the
Company's borrowing capacity permits. Amounts outstanding under this
arrangement at August 31, 2001 and 2000 totaled $15,073 and $15,891,
respectively.
The Company charges the Defined Business Unit interest on its daily
average of short-term borrowings at a rate that approximates 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 6.2%, 6.7%
and 5.8% for the years ended August 31, 2001, 2000 and 1999, respectively.
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, 2001 or 2000.
F-30
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
6. DEFINED BUSINESS UNIT EQUITY
On May 31, 1997, the Company completed an offering for the sale of Equity
Participation Units (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.
Effective September 1, 2000, the Company's Board of Directors approved a
resolution to compute patronage distributions based on earnings for financial
statement purposes rather than tax basis earnings. On December 1, 2000, the
resolution was ratified by the Company's members and beginning with fiscal year
2001 patronage distributions will be based on financial statement earnings.
During 2001, the Company's Board of Directors also adopted a resolution to
issue, at no charge, to each Defined Member of the Oilseed Processing and
Refining Defined Business Unit an additional 1/4 Equity Participation Unit
(EPU) for each EPU held due to increased crush volume.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Oilseed Processing and Refining Defined
Investment Program. The Company redeemed all the EPUs and the assets of the
Oilseed Processing and Refining Defined Business Unit were allocated to the
Company as provided in the plan. The plan included the buy back of the
outstanding Oilseed Processing and Refining Defined Member EPUs, at the
original price of $4.00 per unit, or a total of $5,227. The plan also provided
to the Oilseed Processing and Refining Defined Member EPU holders for the
redemption of all outstanding Preferred Capital Certificates issued totaling
$245, and a 100% cash distribution during 2002 for the patronage dividends
earned for the fiscal year ended August 31, 2001. Such 2001 patronage amounts
are included as a component of equity distributed to the Company.
7. RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all salaried and full-time hourly employees, including those
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 laws and
regulations. Plan assets consist principally of corporate obligations, U.S.
government bonds, money market funds and immediate participation guarantee
contracts. Pension costs charged to the Defined Business Unit for the years
ended August 31, 2001, 2000 and 1999 were $188, $281 and $538, 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, 2001 and 2000 for
the Company's plan is as follows:
2001 2000
----------- -----------
Projected benefit obligation for service rendered to date .......... $180,361 $190,709
Plan assets at fair value .......................................... 166,316 187,413
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.5% at August 31,
2001 (7.5% at August 31, 2000 and 7.0% at August 31, 1999) 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 years ended August 31, 2001,
2000 and 1999.
F-31
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
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, 2001 and 2000:
2001 2000
---------- ----------
Total postretirement benefit obligation ......................... $ 16,137 $ 15,700
Unrecognized transition obligation .............................. (8,691) (9,425)
Unrecognized net gains .......................................... 7,826 6,708
-------- --------
Accrued postretirement medical and other benefit costs .......... $ 15,272 $ 12,983
======== ========
The net periodic costs charged to the Defined Business Unit for the years
ended August 31, 2001, 2000 and 1999 were $266, $382 and $258, respectively.
The calculations assumed a discount rate of 7.5% at August 31, 2001 (7.5%
at August 31, 2000 and 7.0% at August 31, 1999) and a health care cost trend
rate of 7.5% for the year ending August 31, 2001, declining to 6.0% for 2003
and remaining at that level thereafter.
9. INCOME TAXES
A reconciliation of the statutory federal tax rate to the effective rate
for the years ended August 31, 2001, 2000 and 1999 is as follows:
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------
2001 2000 1999
-------- -------- --------
Statutory federal income tax rate ..................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income ...
tax benefit .......................................... 3.9 3.9 3.9
Patronage earnings .................................... (29.3) (32.3) (33.2)
Change in patronage determination ..................... (7.7)
------ ------ ------
Effective rate ........................................ 1.9% 6.6% 5.7%
====== ====== ======
Effective September 1, 2000, the Company computes patronage distributions
based on financial statement earnings. As a result, the tax rate applied to the
Oilseed Processing and Refining Defined Business Unit's temporary differences
between financial statement earnings and earnings used for tax reporting
purposes changed. In connection with the change in patronage determination, the
Defined Business Unit recorded a deferred tax benefit of $1,015. At August 31,
2001, the Defined Business Unit includes a current deferred income tax asset of
$699 and a long-term deferred income tax asset of $497.
10. COMMITMENTS AND CONTINGENCIES
Noncancellable operating leases for approximately 392 rail cars with
remaining lease terms of one to fifteen years are used by the Defined Business
Unit. The Defined Business Unit also leases certain property and equipment
under operating lease agreements.
Total rent expense for all operating leases, net of rail car mileage
credits received from the railroad, was $3,525, $3,848 and $3,326 for the years
ended August 31, 2001, 2000 and 1999, respectively.
F-32
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum future rental payments due under noncancellable operating leases
at August 31, 2001 are as follows:
2002 ........................................................ $ 3,422
2003 ........................................................ 3,205
2004 ........................................................ 2,731
2005 ........................................................ 2,387
2006 ........................................................ 2,241
2007 and thereafter ......................................... 7,647
-------
$21,633
=======
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 position, results of operations or cash flows of the
Defined Business Unit taken as a whole.
At August 31, 2001, the operations of the Defined Business Unit had
outstanding priced oilseed purchase contracts of 584,031 bushels at prices
ranging from $3.82 per bushel to $5.32 per bushel, and outstanding oil purchase
contracts of 97,283,400 pounds at prices ranging from $0.12 per pound to $0.21
per pound. In addition, the operations of the Defined Business Unit had
outstanding priced sales contracts totaling approximately $63,918.
In connection with the Defined Business Unit's proposed construction of a
crushing plant in Fairmont, Minnesota, the City of Fairmont paid $111 and $897
to the Defined Business Unit during fiscal 2001 and 1999, respectively. The
Defined Business Unit will have to repay these amounts, plus interest, to the
City of Fairmont in the event it does not meet specified construction target
dates. These amounts have been included in accounts payable and accrued
expenses on the balance sheet at August 31, 2001 and 2000.
11. RELATED PARTY TRANSACTIONS
Revenues for the years ended August 31, 2001, 2000 and 1999 include
$42,126, $59,833 and $94,072, respectively, to related parties, primarily an
entity related to the Company. Receivables due from this related party were
$5,246 and $4,082 as of August 31, 2001 and 2000, respectively.
The Defined Business Unit purchases a portion of its soybeans from the
Company. Included in cost of goods sold for the years ended August 31, 2001,
2000 and 1999 were $10,539, $14,849 and $18,180, 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 each of the
three years ended August 31, 2001 were $900.
F-33
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
12. SUPPLEMENTAL CASH FLOW INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities are as follows for the years ended August 31, 2001, 2000 and 1999:
2001 2000 1999
------ -------- -------
Net cash settlements to the Company during the period
related to:
Interest ........................................... $502 $ 18 $557
Income taxes ....................................... 245 1,330 800
F-34
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 the
Oilseed Processing and Refining Defined Business Unit (a Defined Business Unit
of Cenex Harvest States Cooperatives) as of August 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended August 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Oilseed Processing and Refining 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
statements in accordance with auditing standards generally accepted in the
United States of America, 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 provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 19, 2001
F-35
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
AUGUST 31,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Receivables ........................................ $ 35,031 $ 33,737
Inventories ........................................ 12,264 19,537
Unrealized gains on derivative instruments ......... 10,685
Other current assets ............................... 3,722 83
-------- --------
Total current assets ............................. 61,702 53,357
Property, plant and equipment ....................... 124,571 128,151
Other assets ........................................ 558 8,348
-------- --------
TOTAL ASSETS ..................................... $186,831 $189,856
======== ========
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ........... $ 81,352 $ 67,956
Current portion of long-term debt .................. 7,163 7,410
Accounts payable ................................... 4,492 5,201
Accrued expenses ................................... 4,012 3,462
-------- --------
Total current liabilities ........................ 97,019 84,029
Long-term debt, net of current portion .............. 33,344 40,100
Commitments and contingencies
Defined Business Unit equity ........................ 56,468 65,727
-------- --------
TOTAL LIABILITIES AND DEFINED BUSINESS
UNIT EQUITY ..................................... $186,831 $189,856
======== ========
The accompanying notes are an integral part of the financial statements.
F-36
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------
2001 2000 1999
------------- ----------- -------------
(DOLLARS IN THOUSANDS)
REVENUES:
Net sales ..................................... $ 257,084 $234,467 $ 186,148
--------- -------- ---------
COSTS AND EXPENSES:
Cost of goods sold ............................ 247,739 225,605 182,525
Marketing, general and administrative ......... 8,938 9,385 10,610
Loss on assets held for disposal .............. 7,548
Interest ...................................... 7,842 6,876 5,184
Other ......................................... 137 170 826
--------- -------- ---------
272,204 242,036 199,145
--------- -------- ---------
LOSS BEFORE INCOME TAXES ....................... (15,120) (7,569) (12,997)
INCOME TAX BENEFIT ............................. (3,940) (965) (1,125)
--------- -------- ---------
NET LOSS ..................................... $ (11,180) $ (6,604) $ (11,872)
========= ======== =========
The accompanying notes are an integral part of the financial statements.
F-37
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF DEFINED BUSINESS UNIT
EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)
BALANCE, SEPTEMBER 1, 1998 .......................................... $ 68,033
Net and comprehensive loss ......................................... (11,872)
Defined Business Unit equity loss allocated to the Company ......... 10,179
---------
BALANCE, AUGUST 31, 1999 ............................................ 66,340
Net and comprehensive loss ......................................... (6,604)
Defined Business Unit equity loss allocated to the Company ......... 5,991
---------
BALANCE, AUGUST 31, 2000 ............................................ 65,727
Equity Participation Units redeemed ................................ (9,066)
Net and comprehensive loss ......................................... (11,180)
Defined Business Unit equity loss allocated to the Company ......... 10,987
---------
BALANCE, AUGUST 31, 2001 ............................................ $ 56,468
=========
The accompanying notes are an integral part of the financial statements.
F-38
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------
2001 2000 1999
------------- ------------ -------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (11,180) $ (6,604) $ (11,872)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ......................... 7,941 7,309 5,928
Loss on assets held for disposal ...................... 7,548
Loss on disposal of property, plant and equipment ..... 325 171 757
Unrealized gains on derivative instruments ............ (10,685)
Deferred income tax benefit ........................... (1,118)
Changes in operating assets and liabilities:
Receivables ........................................... (1,294) (2,777) 4,268
Inventories ........................................... 7,273 (5,198) 4,556
Other current assets and other assets ................. (3,079) 127 219
Accounts payable and accrued expenses ................. (159) (3,015) (992)
--------- --------- ---------
Net cash (used in) provided by operating
activities .......................................... (4,428) (9,987) 2,864
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ............ (4,036) (24,118) (18,738)
Proceeds from the sale of property, plant and
equipment .............................................. 20 101
--------- --------- ---------
Net cash used in investing activities ................ (4,016) (24,017) (18,738)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to Cenex Harvest States
Cooperatives ........................................... 13,396 19,018 15,700
Long-term debt borrowings ............................... 566 19,000
Principal payments on long-term debt .................... (7,439) (10,005) (10,005)
Equity Participation Units redeemed ..................... (9,066)
Defined Business Unit equity allocated to the
Company ................................................ 10,987 5,991 10,179
--------- --------- ---------
Net cash provided by financing activities ............ 8,444 34,004 15,874
--------- --------- ---------
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-39
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX 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'
(the Company) Wheat Milling Defined Business Unit (the Defined Business Unit)
is a Defined Business Unit of 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; Fairmount, North Dakota;
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 of America.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported Defined Business Unit net income or
equity.
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 -- Inventories consisting of grain and processed grain
products, primarily flour, are stated at net realizable value, which
approximates market.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into exchange-traded
commodity futures and options contracts to hedge its exposure to price
fluctuations from grain and processed grain transactions to the extent
considered practicable for minimizing risk. Futures and options contracts used
for hedging are purchased and sold through regulated commodity exchanges.
Fluctuations in inventory valuations, 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. The Company also manages its risk
by entering into fixed price purchase contracts with preapproved producers and
establishing appropriate limits for individual suppliers. Fixed price sales
contracts are entered into with customers of acceptable creditworthiness, as
internally evaluated. The Company is exposed to loss in the event of
nonperformance by counterparties to the contracts. However, the Company does not
anticipate nonperformance by counterparties.
Changes in market value of futures and option contracts are recognized in
the statements of operations in the period such changes occur. The fair value of
these contracts are determined primarily from quotes listed on regulated
commodity exchanges.
Fixed price forward purchase and sales contracts are with various
counterparties, and the fair values of such contracts are determined from the
market price of the underlying product. Changes in market value are recognized
in the statements of operations in the period such changes occur.
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, a standard
related to the accounting for derivative transactions and hedging activities,
effective September 1, 2000. The effect of the adoption did not have a material
effect on the Company's earnings or financial position, since each of the
contracts described above are considered by the Company to be derivative
financial instruments and were carried at fair value under the Company's
previous accounting. The net unrealized gains and losses on these contracts
were $6,324 as of August 31, 2000. Prior to the adoption of SFAS No. 133,
unrealized gains on derivative instruments were recorded as a component of
inventory.
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
F-40
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)
removed from the related accounts and resulting gains or losses are reflected
in operations. Expenditures which substantially increase value or extend useful
lives are capitalized. Expenditures for maintenance and repairs are charged
against income as incurred.
The Company periodically reviews 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. In a review, should the sum of
the related, expected future net cash flows be less than the carrying value, an
impairment loss would be measured by the amount by which the carrying value of
the asset exceeds the fair value of the asset.
INTANGIBLE ASSETS -- Intangible assets, which consisted primarily of
goodwill and leasehold rights, were amortized using the straight-line method
over 15 to 18 years.
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's policy
provides for the payment of taxes as calculated on an individual company basis
for each of its defined business units and divisions, accordingly, the Defined
Business Unit has recorded tax (benefit) expense as though on a stand alone
basis.
REVENUE RECOGNITION -- Sales of processed grains are recognized upon
shipment and transfer of title to customers. During 2001, the Wheat Milling
Defined Business Unit adopted the provisions of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." The effect was not material to the Defined Business
Unit.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
RECENT ACCOUNTING PRONOUNCEMENTS -- Emerging Issues Task Force (EITF)
00-10, "Accounting for Shipping and Handling Fees and Costs", is effective for
all fiscal years beginning after December 15, 1999. EITF 00-10 states that all
amounts billed to a customer in a sale transaction related to shipping and
handling represents revenues earned for the goods provided and should be
classified as revenue. Accordingly, the Wheat Milling Defined Business Unit has
presented such amounts as a component of net sales for the year ended August
31, 2001, and reclassified from cost of goods sold $15,134 and $12,015 for the
years ended August 31, 2000 and 1999, respectively, to conform to the
current-year presentation. Costs incurred for shipping and handling are
reported as a component of cost of goods sold.
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets," which are effective for fiscal years beginning after
December 15, 2001, with early adoption permitted. These statements, in summary,
eliminate the use of the pooling method of accounting for business combinations
occurring in the future, and discontinue the amortization of acquired goodwill,
subject to periodic impairment testing. The Company expects to adopt the new
standard in the first fiscal quarter of 2002. The adoption is not expected to
have a material effect on the Defined Business Unit.
F-41
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)
The Company is currently reviewing and analyzing the effects of SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
2. RECEIVABLES
Receivables at August 31, 2001 and 2000 are as follows:
2001 2000
---------- ----------
Trade .................................................. $35,875 $34,576
Other .................................................. 880 810
------- -------
36,755 35,386
Less allowances for doubtful accounts .................. 1,724 1,649
------- -------
$35,031 $33,737
======= =======
3. INVENTORIES
Inventories at August 31, 2001 and 2000 are as follows:
2001 2000
--------- ---------
Grain ................................................... $ 9,291 $ 9,610
Processed grain products ................................ 2,012 9,288
Other ................................................... 961 639
------- -------
$12,264 $19,537
======= =======
4. LONG-LIVED ASSETS
PROPERTY, PLANT AND EQUIPMENT -- Major classes of property, plant and
equipment at August 31, 2001 and 2000 are as follows:
ESTIMATED
USEFUL LIFE
IN YEARS 2001 2000
------------ ----------- -----------
Land .................................. $ 1,808 $ 1,808
Grain processing plants ............... 15 to 45 67,224 66,941
Machinery and equipment ............... 5 to 20 85,382 78,841
Construction in progress .............. 3,840 7,162
-------- --------
158,254 154,752
Less accumulated depreciation ......... 33,683 26,601
-------- --------
$124,571 $128,151
======== ========
In April 2000, the Defined Business Unit completed the purchase of a mill
and related equipment in Fairmount, North Dakota for $19,900.
Intangible assets at August 31, 2000 included goodwill of $6,100 and
leasehold rights of $11,914, less accumulated amortization of $2,510 and
$7,156, respectively.
F-42
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. RESTRUCTURING CHARGES
In May 2001, management, in efforts to consolidate its manufacturing
facilities, approved and committed to a plan to cease operations and to dispose
of the assets at its Huron, Ohio mill. Discussions with potential buyers
indicate that the carrying amount of the related assets exceed the estimated
net realizable value and, as such, the financial statements reflect a loss on
assets held for disposal of $7,548, primarily related to identifiable
intangible assets and goodwill. Additionally, the Wheat Milling Defined
Business Unit recorded $429 of severance costs, related to the elimination of
employee positions at the Huron mill, during the fourth quarter of fiscal 2001,
in connection with the announcement to the employees.
6. BORROWINGS
DUE TO CENEX HARVEST STATES COOPERATIVES -- The Defined Business Unit
satisfies its working capital needs through borrowings, both long-term and
short-term, from the Company to the extent the Company's borrowing capacity
permits. Amounts outstanding under this short-term arrangement at August 31,
2001 and 2000 totaled $81,352 and $67,956, respectively.
The Company charges the Defined Business Unit interest on its daily
average of short-term borrowings at a rate that approximates 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 6.2%, 6.7%
and 5.8% for the years ended August 31, 2001, 2000 and 1999, respectively.
Amounts due from the Company receive interest in the same manner at the same
rate.
LONG-TERM DEBT -- Long-term debt consisted of the following at August 31,
2001 and 2000:
2001 2000
---------- ----------
Cenex Harvest States Cooperatives, with fixed and variable
interest rates from 4.63% to 8.00%, due in installments
through 2004 ............................................ $39,250 $46,410
Industrial Development and Public Grain Elevator Revenue
Bonds, payable through July 2004, with an interest rate
of 7.4% ................................................. 850 1,100
Other, payable through 2011 with interest rates from 5.7%
to 8.0% ................................................. 407
------- -------
40,507 47,510
Less current portion ..................................... 7,163 7,410
------- -------
Long-term portion ........................................ $33,344 $40,100
======= =======
During the year 2001, the Company, on behalf of the Wheat Milling Defined
Business Unit assumed an "interest free" Rural Economic Development Loan in
conjunction with the Fairmount, North Dakota mill acquisition totaling $450.
This non-interest bearing loan, payable in monthly installments over nine
years, has been discounted at 8% to reflect a present value principal balance
due of $320 and an interest discount of $130. The Company also incurred
long-term debt during the year 2001, on behalf of the Defined Business Unit in
the amount of $116, payable to the Minnesota Department of Transportation
quarterly over 120 months at 5.7% interest for the purpose of rail track
rehabilitation at the Rush City mill.
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)
6. BORROWINGS (CONTINUED)
The principal maturities of long-term debt outstanding at August 31, 2001
are as follows:
2002 ............................................................ $ 7,163
2003 ............................................................ 26,165
2004 ............................................................ 6,893
2005 ............................................................ 46
2006 ............................................................ 49
Thereafter ...................................................... 191
-------
$40,507
=======
7. DEFINED BUSINESS UNIT EQUITY
On May 31, 1997, the Company completed an offering for the sale of Equity
Participation Units (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.
Effective September 1, 2000, the Company's Board of Directors approved a
resolution to compute patronage distributions based on earnings for financial
statement purposes rather than tax basis earnings. On December 1, 2000, the
resolution was ratified by the Company's members and beginning with fiscal year
2001 patronage distributions will be based on financial statement earnings.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Wheat Milling Defined Investment Program. The
Company redeemed all of the EPUs and the assets of the Wheat Milling Defined
Business Unit were allocated to the Company as provided in the plan. The plan
included the buy back of the outstanding Defined Member EPUs at the original
price of $2.00 per unit, or a total of $9,066. Due to loss carry-forwards
incurred by the Wheat Milling Defined Business Unit the plan also provided for
the cancellation of all outstanding Preferred Capital Certificates issued to the
Equity Participation Unit holders of $193, which has been reflected as a
reduction of the equity loss allocated to the Company.
8. RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all salaried and full-time hourly employees, including those
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 laws and
regulations. Plan assets consist principally of corporate obligations, U.S.
government bonds, money market funds and immediate participation guarantee
contracts. Pension costs charged to the Defined Business Unit for the years
ended August 31, 2001, 2000 and 1999 were $111, $193 and $247, respectively.
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)
8. 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, 2001 and 2000 is as
follows:
2001 2000
----------- -----------
Projected benefit obligation for service rendered to date .......... $180,361 $190,709
Plan assets at fair value .......................................... 166,316 187,413
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.5% at August 31,
2001 (7.5% at August 31, 2000 and 7.0% at August 31, 1999) 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 years ended August 31, 2001,
2000 and 1999.
9. 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, 2001 and 2000:
2001 2000
---------- ----------
Total postretirement benefit obligation .............................. $ 16,137 $ 15,700
Unrecognized transition obligation ................................... (8,691) (9,425)
Unrecognized net gains and other ..................................... 7,826 6,708
-------- --------
Accrued postretirement medical and other benefit costs ............... $ 15,272 $ 12,983
======== ========
The net periodic costs charged to the Defined Business Unit for the years
ended August 31, 2001, 2000 and 1999 were $40, $51 and $78, respectively.
The calculations assumed a discount rate of 7.5% at August 31, 2001 (7.5%
at August 31, 2000 and 7.0% at August 31, 1999) and a health care cost trend
rate of 7.5% for the year ended August 31, 2001, declining to 6.0% for 2003 and
remaining at that level thereafter.
10. INCOME TAXES
A reconciliation of the statutory federal tax rate to the effective rate
for the years ended August 31, 2001, 2000 and 1999 is as follows:
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------
2001 2000 1999
---------- ----------- ----------
Statutory federal income tax rate ................. (35.0)% (35.0)% (35.0)%
State and local income taxes, net of federal income
tax benefit ...................................... (3.9) (3.9) (3.9)
Patronage losses .................................. 27.0 26.1 30.2
Non-deductible goodwill ........................... (11.5)
Change in patronage determination ................. (2.7)
------ ------ ------
Effective rate .................................... (26.1)% (12.8)% (8.7)%
====== ====== ======
Effective September 1, 2000, the Company computes patronage distributions
based on financial statement earnings. As a result, the tax rate applied to the
Wheat Milling Defined Business Unit's temporary differences between financial
statement earnings and earnings used for tax reporting
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)
10. INCOME TAXES (CONTINUED)
purposes changed. In connection with the change in patronage determination, the
Defined Business Unit recorded a deferred tax benefit of $406. At August 31,
2001, the Defined Business Unit maintains a current deferred income tax asset
of $560, a long-term deferred income tax asset of $558 and an income tax
receivable of $2,821.
11. COMMITMENTS AND CONTINGENCIES
Noncancellable operating leases for approximately 311 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 $5,152, $4,312 and $2,261 for the years
ended August 31, 2001, 2000 and 1999, respectively. Mileage credits were $37,
$58 and $226 for the years ended August 31, 2001, 2000 and 1999, respectively.
Minimum future rental payments due under these noncancellable operating
leases at August 31, 2001 are as follows:
2002 ............................................................. $2,262
2003 ............................................................. 784
2004 ............................................................. 226
2005 ............................................................. 124
2006 ............................................................. 92
2007 and thereafter .............................................. 664
------
$4,152
======
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 position, results of operations or cash flows of the
Defined Business Unit taken as a whole.
At August 31, 2001, the operations of the Defined Business Unit had
outstanding grain purchase contracts of 11,937,988 bushels at prices for durum
ranging from $3.90 per bushel to $5.50 per bushel and prices for spring wheat
ranging from $3.14 per bushel to $4.01 per bushel and prices for winter wheat
ranging from $3.03 per bushel to $4.09 per bushel. In addition, the operations
of the Defined Business Unit had sales contracts outstanding of both semolina
and commercial baking flour totaling approximately $83,633.
12. RELATED PARTY TRANSACTIONS
The Defined Business Unit purchases all of its durum and wheat from the
Company. Included in cost of goods sold for the years ended August 31, 2001,
2000 and 1999 were $189,676, $141,512, and $115,571, 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
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)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
the defined business units and divisions based on approximate usage. Costs
allocated to the Defined Business Unit for the years ended August 31, 2001,
2000 and 1999 were $1,692, $1,394 and $1,020, respectively.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities are as follows for the years ended August 31, 2001, 2000 and 1999:
2001 2000 1999
---------- ---------- ----------
Net cash settlements to (received from) the Company during
the period related to:
Interest ................................................ $ 7,548 $6,876 $ 5,184
Income taxes ............................................ (3,940) (965) (1,125)
14. SUBSEQUENT EVENT
In September 2001, the Company signed a non-binding letter of intent to
form a joint venture with Cargill, Incorporated to engage in wheat flour
milling in North America. The Company would hold a 24% interest in the joint
venture. The transaction is subject to definitive agreement and government
approvals.
F-47
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 (loss) and
cash flows present fairly, in all material respects, the financial position of
the Wheat Milling Defined Business Unit (a Defined Business Unit of Cenex
Harvest States Cooperatives) as of August 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended August 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Wheat Milling 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 statements in accordance with
auditing standards generally accepted in the United States of America, 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 provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 19, 2001
F-48
INDEPENDENT AUDITORS' REPORT
Members Committee of Ventura Foods, LLC:
We have audited the accompanying consolidated balance sheets of Ventura
Foods, LLC and subsidiary (the "Company") as of March 31, 2001 and December 31,
2000 and 1999, and the related consolidated statements of income, members'
capital, and cash flows for the three months ended March 31, 2001 and for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements present fairly, in
all material respects, the financial position of Ventura Foods, LLC and
subsidiary as of March 31, 2001 and December 31, 2000 and 1999, and the results
of their operations and their cash flows for the three months ended March 31,
2001 and for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 2 to the financial statements, the Company changed
its method of accounting for start-up activities in 1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
July 27, 2001
F-49
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000 AND 1999
2001 2000 1999
-------------- --------------- --------------
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash and cash equivalents (Note 2) ........................... $ 14,150,000 $ 4,285,000 $ 11,676,000
Trade receivables, net of allowance for doubtful accounts
of $854,000, $822,000, and $1,268,000 at 2001, 2000, and
1999, respectively (Notes 2 and 5) .......................... 56,368,000 57,348,000 56,989,000
Inventories (Note 2) ......................................... 66,680,000 71,769,000 67,886,000
Prepaid expenses and other current assets .................... 1,490,000 1,820,000 1,846,000
Due from Wilsey Foods, Inc. (Note 5) ......................... 47,000 48,000 341,000
Unrealized gains on derivative instruments (Note 2) .......... 12,193,000
------------ ------------ ------------
TOTAL CURRENT ASSETS ....................................... 150,928,000 135,270,000 138,738,000
------------ ------------ ------------
PROPERTY (Note 2):
Land, buildings, and improvements ............................ 96,082,000 94,836,000 89,772,000
Machinery and equipment ...................................... 120,932,000 119,565,000 109,750,000
Construction-in-progress ..................................... 7,581,000 5,761,000 9,334,000
Other property ............................................... 8,798,000 8,764,000 8,362,000
------------ ------------ ------------
Total ...................................................... 233,393,000 228,926,000 217,218,000
Less accumulated depreciation and amortization ............... 84,178,000 81,596,000 71,814,000
------------ ------------ ------------
Property, net .............................................. 149,215,000 147,330,000 145,404,000
------------ ------------ ------------
GOODWILL, Net of amortization of $15,180,000,
$14,144,000, and $10,144,000 at 2001, 2000, and 1999,
respectively (Notes 2 and 3) ................................. 46,063,000 47,099,000 46,823,000
TRADEMARKS, Net of amortization of $5,862,000,
$5,407,000, and $3,696,000 at 2001, 2000, and 1999,
respectively (Note 2) ........................................ 22,838,000 23,255,000 24,900,000
OTHER ASSETS, Net of amortization of $3,813,000,
$3,512,000, and $2,792,000 at 2001, 2000, and 1999,
respectively (Note 2) ........................................ 5,304,000 5,500,000 6,019,000
------------ ------------ ------------
TOTAL ........................................................ $374,348,000 $358,454,000 $361,884,000
============ ============ ============
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable (Note 5) .................................... $ 56,536,000 $ 59,479,000 $ 64,133,000
Accrued liabilities (Note 5) ................................. 21,334,000 18,082,000 15,874,000
Accrued compensation (Note 6) ................................ 11,217,000 10,926,000 9,723,000
Dividends payable ............................................ 18,625,000 10,312,000 4,843,000
Bank lines of credit (Note 4) ................................ 5,000,000 15,000,000
Current portion of long-term debt (Note 4) ................... 12,603,000 12,566,000 12,423,000
Current portion of long-term liability -- Wilsey Foods,
Inc. (Note 1) ............................................... 978,000 974,000 487,000
Unrealized losses on derivative instruments (Note 2) ......... 4,818,000
------------ ------------ ------------
Total current liabilities .................................. 131,111,000 112,339,000 122,483,000
------------ ------------ ------------
LONG-TERM DEBT (Note 4) ....................................... 109,936,000 110,527,000 123,087,000
------------ ------------ ------------
LONG-TERM LIABILITY -- WILSEY FOODS, INC.
(Note 1) ..................................................... 491,000 978,000
------------ ------------ ------------
ACCRUED COMPENSATION (Note 6) ................................. 1,557,000 9,407,000 3,144,000
------------ ------------ ------------
Total liabilities .......................................... 242,604,000 232,764,000 249,692,000
COMMITMENTS AND CONTINGENCIES (Note 7) ........................
MEMBERS' CAPITAL .............................................. 131,744,000 125,690,000 112,192,000
------------ ------------ ------------
TOTAL ........................................................ $374,348,000 $358,454,000 $361,884,000
============ ============ ============
See notes to consolidated financial statements.
F-50
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2001 AND THE YEARS ENDED
DECEMBER 31, 2000, 1999, AND 1998
2001 2000 1999 1998
--------------- --------------- --------------- --------------
NET SALES (Notes 2 and 5) ...................... $215,187,000 $890,042,000 $918,043,000 $844,843,000
COST OF GOODS SOLD
(Notes 2 and 5) ............................... 177,748,000 744,282,000 798,891,000 765,776,000
------------ ------------ ------------ ------------
GROSS PROFIT .................................. 37,439,000 145,760,000 119,152,000 79,067,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general, and administrative
(Notes 2 and 5) .............................. 20,121,000 78,145,000 69,127,000 54,210,000
Amortization of intangibles (Note 2) .......... 1,581,000 6,431,000 6,379,000 3,840,000
------------ ------------ ------------ ------------
Total operating expenses .................... 21,702,000 84,576,000 75,506,000 58,050,000
------------ ------------ ------------ ------------
OPERATING INCOME ............................... 15,737,000 61,184,000 43,646,000 21,017,000
INTEREST EXPENSE, Net .......................... 2,071,000 9,585,000 10,146,000 10,339,000
OTHER INCOME (Note 7) .......................... (702,000) (5,907,000) (2,413,000) (1,666,000)
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE .......................... 14,368,000 57,506,000 35,913,000 12,344,000
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 2) ............................... 563,000
------------ ------------ ------------ ------------
NET INCOME ..................................... $ 14,368,000 $ 57,506,000 $ 35,350,000 $ 12,344,000
============ ============ ============ ============
See notes to consolidated financial statements.
F-51
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
THREE MONTHS ENDED MARCH 31, 2001 AND THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
CENEX
HARVEST
WILSEY STATES
FOODS, INC. COOPERATIVES TOTAL
--------------- ---------------- ----------------
BALANCE, JANUARY 1, 1998 ............... $ 46,520,000 $ 31,013,000 $ 77,533,000
Net income ............................ 7,406,000 4,938,000 12,344,000
Dividends ............................. (5,555,000) (3,703,000) (9,258,000)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 ............. 48,371,000 32,248,000 80,619,000
Net income ............................ 21,210,000 14,140,000 35,350,000
Contributions (Note 3) ................ 12,000,000 8,000,000 20,000,000
Dividends ............................. (14,266,000) (9,511,000) (23,777,000)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 ............. 67,315,000 44,877,000 112,192,000
Net income ............................ 30,593,000 26,913,000 57,506,000
Transfer of interest (Note 1) ......... (11,775,000) 11,775,000
Dividends ............................. (23,288,000) (20,720,000) (44,008,000)
------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 ............. 62,845,000 62,845,000 125,690,000
Net income ............................ 7,184,000 7,184,000 14,368,000
Dividends ............................. (4,157,000) (4,157,000) (8,314,000)
------------- ------------- -------------
BALANCE, MARCH 31, 2001 ................ $ 65,872,000 $ 65,872,000 $ 131,744,000
============= ============= =============
See notes to consolidated financial statements.
F-52
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
2001 2000 1999 1998
-------------- ---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 14,368,000 $ 57,506,000 $ 35,350,000 $ 12,344,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ....................... 2,833,000 10,829,000 9,740,000 8,535,000
Amortization of intangibles ......................... 1,581,000 6,431,000 6,379,000 3,840,000
Loss (gain) on disposal/impairment of assets ........ 128,000 (139,000) 2,576,000 1,596,000
Unrealized gains on derivative instruments, net ..... (7,375,000)
Changes in operating assets and liabilities:
Trade receivables .................................. 980,000 (359,000) 6,198,000 (9,371,000)
Inventories ........................................ 5,089,000 (3,246,000) 4,600,000 (2,631,000)
Prepaid expenses and other current assets .......... 330,000 234,000 2,442,000 7,099,000
Accounts payable ................................... (2,943,000) (4,654,000) (1,023,000) 5,740,000
Accrued liabilities ................................ 3,252,000 1,780,000 900,000 313,000
Accrued compensation ............................... (7,559,000) 7,466,000 8,867,000 (129,000)
Due to/from affiliates ............................. 1,000 293,000 (266,000) 40,000
------------ ------------- ------------- -------------
Net cash provided by operating activities ........ 10,685,000 76,141,000 75,763,000 27,376,000
------------ ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property ............................... (4,869,000) (13,037,000) (17,841,000) (8,913,000)
Proceeds from sale of property ........................ 23,000 1,021,000 51,000 371,000
Acquisitions, net of cash acquired (Note 3) ........... (5,312,000) (50,028,000)
Acquisition of trademarks ............................. (47,000)
Other assets .......................................... 67,000 (201,000) (1,355,000) (574,000)
------------ ------------- ------------- -------------
Net cash used in investing activities ............ (4,779,000) (17,576,000) (69,173,000) (9,116,000)
------------ ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt .......................... 35,000,000 35,000,000
Repayment of long-term debt ........................... (554,000) (12,417,000) (9,490,000) (7,500,000)
Net borrowings (payments) on line of credit ........... 5,000,000 (15,000,000) (26,000,000) (29,500,000)
Payment to Wilsey Foods, Inc. (Note 1) ................ (487,000) (487,000) (974,000)
Payment of bank loan fees ............................. (105,000) (281,000)
Dividends paid ........................................ (38,539,000) (23,274,000) (9,084,000)
Contributions received ................................ 20,000,000
------------ ------------- ------------- -------------
Net cash provided by (used in)
financing activities ............................ 3,959,000 (65,956,000) (4,356,000) (12,339,000)
------------ ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................................. 9,865,000 (7,391,000) 2,234,000 5,921,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ................................... 4,285,000 11,676,000 9,442,000 3,521,000
------------ ------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ......................................... $ 14,150,000 $ 4,285,000 $ 11,676,000 $ 9,442,000
============ ============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION -- Cash paid during the
period for interest ................................... $ 653,054 $ 10,181,000 $ 10,296,000 $ 10,290,000
============ ============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS -- During 2001, the Company declared a dividend to its members of
$8,313,000, which was unpaid at March 31, 2001, and declared dividends in 2000, 1999, and 1998 to its members of
$10,312,000, $4,843,000, and $4,340,000, which were unpaid at December 31, 2000, 1999, and 1998, respectively.
See notes to consolidated financial statements.
F-53
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
1. GENERAL MATTERS
Ventura Foods, LLC and its subsidiary (the "Company") is a processor and
distributor of edible oils used in food preparation and a packager of food
products. The Company sells its products to national and regional restaurant
chains, food wholesalers, and retail chains.
The Company was formed pursuant to a Joint Venture Agreement (the
"Agreement") dated August 30, 1996 between Wilsey Foods, Inc. ("Wilsey") and
Cenex Harvest States Cooperatives ("Cenex") whereby substantially all the
assets and liabilities of Wilsey and Holsum Foods (a division of Cenex) were
transferred and assigned, with certain exclusions, to the Company. Wilsey is a
majority-owned subsidiary of Mitsui & Co., Ltd. From the period of inception
through March 31, 2000, Wilsey and Cenex owned 60 percent and 40 percent of the
Company, respectively. On March 31, 2000, Wilsey sold a 10 percent interest in
the Company to Cenex. Accordingly, Wilsey and Cenex each own 50 percent of the
Company.
At the formation date, a liability equal to the net deferred income tax
liability of Wilsey at August 30, 1996 was assumed by the Company and was
included in long-term liability -- Wilsey Foods, Inc. The amount is payable in
five equal annual installments of $487,000 plus a final installment of
$491,000.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION -- The consolidated
financial statements include the accounts of Ventura Foods, LLC and its 100
percent-owned subsidiary, Ventura Jets, Inc. All material intercompany
transactions have been eliminated.
FISCAL YEAR-END -- Since inception, the Company's fiscal year-end has been
December 31. During 2001, the Company changed its fiscal year-end to March 31.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- In connection with the adoption
of Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES,
on January 1, 1999, the Company charged $563,000 of previously deferred
start-up costs to expense.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
INVENTORIES -- Inventories consist of the following at March 31, 2001 and
December 31, 2000 and 1999:
2001 2000 1999
------------- ------------- -------------
Bulk oil .......................... $24,642,000 $28,673,000 $25,261,000
Finished goods .................... 24,692,000 24,411,000 24,564,000
Ingredients and supplies .......... 17,346,000 18,685,000 18,061,000
----------- ----------- -----------
Total ............................ $66,680,000 $71,769,000 $67,886,000
=========== =========== ===========
The Company accounts for bulk oil, including bulk oil in finished goods,
at market prices. This method approximates lower of cost or market, using the
first-in, first-out method, given the rapid inventory turns. All other
inventories are accounted for at the lower of cost or market, using the
first-in first-out method.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company's use of derivative
financial instruments is limited to forwards, futures, and certain other
delivery contracts as discussed below. The Company enters into these contracts
to limit its exposure to price volatility of various food oils that are
critical to its processing and distribution activities. It is the Company's
policy to remain substantially hedged with respect to edible oil product price
risk; derivative contracts and fixed price purchase and sales
F-54
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2. ACCOUNTING POLICIES (CONTINUED)
agreements are used to maintain this hedged position. Forward purchase and
sales contracts are entered into with established financial institutions in
amounts necessary to protect against price changes on raw materials needed for
the Company's food oil processing and distribution activities. The Company also
enters into purchase and sales commitments with major suppliers and customers
at a specified premium or discount from a future market price (the "Basis
Contracts"). Additionally, the Company's policies do not permit speculative
trading of such contracts. These contracts qualify as derivatives under
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and are stated at market value.
Changes in market value are recognized in the consolidated statements of
income, through cost of sales, in the periods such changes occur. As such, the
adoption of SFAS No. 133, on January 1, 2001, did not have a significant impact
on the Company's results of operations, as the Company historically recorded
its financial instruments at market value. Prior to the adoption of SFAS No.
133, unrealized gains and losses on futures contracts, basis contracts, and
forward purchase and sales contracts were recorded as a component of inventory.
Beginning with the adoption of SFAS No. 133, the unrealized gains and losses
are now recorded on the balance sheet as unrealized gains and losses on
derivative instruments. These contracts have maturities of less than one year.
The following summarizes the Company's various derivative contracts
outstanding at March 31, 2001 and December 31, 2000 and 1999:
CONTRACT NET UNREALIZED
FORWARD CONTRACTS AND COMMITMENTS POUNDS VALUE GAIN (LOSS)
- --------------------------------- ----------- ---------- --------------
(IN THOUSANDS)
MARCH 31, 2001
Forward purchases ................. 391,800 $72,600 $ 3,836
Forward sales ..................... 395,200 71,900 741
Basis purchase .................... 1,316,200 1,989
Basis sales ....................... 151,500 163
Futures contracts ................. 117,900 646
--------- --------
2,372,600 $ 7,375
========= ========
DECEMBER 31, 2000
Forward purchases ................. 468,300 $85,300 $ (1,841)
Forward sales ..................... 423,900 78,200 6,488
Basis purchase .................... 675,500 (263)
Basis sales ....................... 84,600 136
Futures contracts ................. 123,300 (429)
--------- --------
1,775,600 $ 4,091
========= ========
DECEMBER 31, 1999
Forward purchases ................. 439,600 $82,300 $ (366)
Forward sales ..................... 407,300 77,300 4,622
Basis purchase .................... 364,000 1,887
Basis sales ....................... 83,200 (857)
Future contracts .................. 97,200 (24)
--------- --------
1,391,300 $ 5,262
========= ========
The fair value of futures contracts are determined primarily from quotes
listed on the Chicago Board of Trade. Forward purchase and sales contracts are
with various counterparties, and the fair values
F-55
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2. ACCOUNTING POLICIES (CONTINUED)
of such contracts are determined from the market price of the underlying
product. The dollar amount of commitments under basis contracts is not known
until the contracts are converted to orders, at which time they are priced.
The Company is exposed to loss in the event of nonperformance by the other
parties to the contracts. However, the Company does not anticipate
nonperformance by counterparties.
PROPERTY AND DEPRECIATION -- Property is stated at cost, and depreciation
is provided for using the straight-line method over the estimated useful lives
of the assets, as follows:
Buildings ................................. 40 years
Leasehold improvements .................... 3 - 19 years
Machinery and equipment ................... 10 - 25 years
Other fixed assets ........................ 3 - 20 years
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company estimates the fair
value of financial instruments using the following methods and assumptions:
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE -- The carrying amounts
approximate fair value, due to the short maturities of these instruments.
LINES OF CREDIT -- The carrying amounts approximate fair value, as the
interest rates are based upon variable reference rates.
LONG-TERM DEBT -- Based on the borrowing rates currently available to
the Company for bank loans with similar terms and remaining maturities, the
carrying amounts approximate fair value.
FUTURES CONTRACTS -- The fair value of futures contracts (used for
hedging purposes) is determined from quotes listed on the Chicago Board of
Trade.
CONCENTRATION OF CREDIT RISK -- Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. During 2001,
2000, 1999, and 1998, net sales to one customer were 22 percent, 21 percent, 18
percent, and 18 percent of total net sales, respectively. This customer
represents approximately 17 percent, 16 percent, and 13 percent of trade
receivables at March 31, 2001 and December 31, 2000 and 1999, respectively. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses.
The Company maintains cash deposits with various financial institutions.
The Company periodically evaluates the credit standing of these financial
institutions and has not sustained any credit losses relating to such balances.
GOODWILL AND TRADEMARKS -- The Company's goodwill relates to various
acquisitions of businesses and is being amortized using the straight-line
method over periods ranging from 15 to 20 years. Trademarks are amortized using
the straight-line method over 10 to 15 years. Patents and other intangibles are
amortized using the straight-line method over 1 to 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS -- Long-lived assets, including
identifiable intangibles and goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In performing the review for recoverability,
future cash flows expected to result from the use of the asset and its eventual
disposition are estimated. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recorded under the discounted future cash flow
method. Impairment losses of $1,277,000 and $240,000 were recognized during
1999 and 1998, respectively.
F-56
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2. ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS -- The Company expenses advertising costs in the period
incurred. For the three months ended March 31, 2001 and the years ended
December 31, 2000, 1999, and 1998, the Company incurred advertising expenses of
approximately $1,300,000, $6,100,000, $4,500,000, and $4,800,000, respectively.
INCOME TAXES -- The Company is a limited liability company and has no
liability for federal and state income taxes. Income is taxed to the members
based on their allocated share of taxable income or loss. However, certain
states tax the income of limited liability companies. The Company's liability
for such state income taxes is not significant.
REVENUE RECOGNITION -- Revenue is recognized after the related product has
been shipped and title has transferred to the customer. Sales are presented net
of discounts and sales allowances.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
period's financial statements to conform to the 2001 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 2001, the Financial Accounting
Standards Board approved the issuance of SFAS No. 141, BUSINESS COMBINATIONS,
and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in business combinations occurring prior
to June 30, 2001, will cease upon adoption of this statement. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill, and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. Under SFAS Nos.
141 and 142, goodwill and other intangibles are initially assessed for
impairment upon adoption of the statements, with subsequent assessments
required annually and when there is reason to suspect that their values have
been diminished or impaired and with any corresponding write-downs recognized
as necessary.
The Company is required to adopt SFAS No. 141 on July 1, 2001, and has
determined that the impact of this statement will not be material to its
consolidated financial position or results of operations. The Company is
required to adopt SFAS No. 142 for its fiscal year beginning April 1, 2002. The
Company has not determined the impact that this statement will have on its
consolidated financial position or results of operations.
3. ACQUISITIONS
During 2000, the Company acquired substantially all the assets and
liabilities of Sona and Hollen for $5,740,000 ($428,000 of which was withheld
from the purchase price and will be paid at certain specific dates within the
next two years). Sona and Hollen is a portion packing company located in Los
Alamitos, California.
F-57
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
3. ACQUISITIONS (CONTINUED)
The acquisition has been accounted for as a purchase, and accordingly, the
purchase price has been allocated based on the estimated fair values of the
assets acquired. The excess of the purchase price over the fair value of the
assets acquired, approximately $4,276,000, was recorded as goodwill and is
being amortized over a 15-year period. The following is a summary of the assets
acquired at estimated fair market value:
Inventories ............................... $ 637,000
Prepaid expenses and other assets ......... 208,000
Property and equipment .................... 600,000
Trademark ................................. 19,000
Goodwill .................................. 4,276,000
----------
Net assets of business acquired ........... $5,740,000
==========
On January 11, 1999, the Company acquired substantially all the assets and
liabilities of Sunnyland Refining Company ("Sunnyland") from its parent,
Kane-Miller Corp, for $53.2 million in cash. Sunnyland is a manufacturer and
national distributor of margarine products located in Birmingham, Alabama.
The acquisition has been accounted for as a purchase, and accordingly, the
purchase price has been allocated based on the estimated fair values of the
assets acquired. The excess of the purchase price over the fair value of the
assets acquired, approximately $38.8 million, was recorded as goodwill and is
being amortized over a 15-year period. The purchase price was funded by
additional members' contributions of $20,000,000 and additional bank
borrowings.
The following is a summary of the assets acquired and liabilities assumed
at estimated fair market value:
Cash ...................................... $ 3,201,000
Accounts receivable ....................... 6,513,000
Inventories ............................... 2,577,000
Prepaid expenses and other assets ......... 486,000
Property and equipment .................... 12,445,000
Goodwill .................................. 38,837,000
-------------
Assets acquired ........................... 64,059,000
-------------
Accounts payable .......................... (7,653,000)
Accrued liabilities ....................... (3,177,000)
-------------
Liabilities assumed ....................... (10,830,000)
-------------
Net assets of business acquired ........... $ 53,229,000
=============
4. LINES OF CREDIT AND LONG-TERM DEBT
LINES OF CREDIT -- At March 31, 2001, the Company had a revolving
line-of-credit agreement with a banking group to provide for borrowings of up
to an aggregate of $72,000,000. Borrowings at March 31, 2001 and December 31,
2000 and 1999 under such lines were $5,000,000, $0, and $15,000,000,
respectively. The interest rates applicable to borrowings are based, at the
option of the Company, at a London Interbank Offered Rate ("LIBOR") or a term
federal funds rate ("TFFR") option. The weighted-average rate at March 31, 2001
and December 31, 1999 was 5.67 percent and 6.33 percent, respectively. The
credit agreement is subject to renewal annually with the banking group.
F-58
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
4. LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
LONG-TERM DEBT -- At March 31, 2001 and December 31, 2000 and 1999,
balances outstanding on long-term debt were $122,539,000, $123,093,000, and
$135,510,000, respectively. The interest rate applicable to term loans is
based, at the option of the Company, at a TFFR-based, LIBOR-based, or a fixed
rate option. The weighted-average interest rate on borrowings at March 31, 2001
and December 31, 2000 and 1999 was 6.83 percent, 6.93 percent, and 6.87
percent, respectively.
The term loans are collateralized by substantially all property,
equipment, and intellectual property rights, and the lines of credit are
collateralized by substantially all trade receivables and inventories of the
Company. The loan agreements contain various covenants, including compliance
with tangible net worth (as defined) and other financial ratios, restrictions
on the payment of dividends, and restrictions on the incurrence of additional
debt.
Annual maturities of long-term debt at March 31, 2001 are:
2002 ........................... $ 12,603,000
2003 ........................... 12,758,000
2004 ........................... 74,223,000
2005 ........................... 2,799,000
2006 ........................... 2,987,000
Thereafter ..................... 17,169,000
------------
Total .......................... 122,539,000
Less current portion ........... 12,603,000
------------
Long-term debt ................. $109,936,000
============
5. TRANSACTIONS WITH AFFILIATES
At March 31, 2001 and December 31, 2000 and 1999, the Company had
receivable balances of $47,000, $48,000, and $341,000, respectively, due from
Wilsey for reimbursement of expenses paid by the Company on behalf of Wilsey.
Included in accounts payable at March 31, 2001 and December 31, 2000 and
1999 were $3,347,000, $3,214,000, and $5,743,000, respectively, payable to
Cenex for purchases of oil. Purchases from Cenex for the three months ended
March 31, 2001 and the years ended December 31, 2000, 1999, and 1998 were
$8,575,000, $48,916,000, $84,872,000, and $105,874,000, respectively. Sales to
Cenex for the three months ended March 31, 2001 and the years ended December
31, 2000, 1999, and 1998 totaled $109,000, $950,000, $1,130,000, and $0,
respectively.
Included in accounts payable at March 31, 2001 and December 31, 2000 and
1999 were $448,000, $759,000, and $668,000, respectively, payable to Mitsui USA
for the Company's participation in Mitsui USA's insurance plans. During the
three months ended March 31, 2001 and the years ended December 31, 2000, 1999,
and 1998, the Company recorded expenses of $1,380,000, $5,049,000, $5,677,000,
and $5,171,000, respectively, in connection with its participation in such
plans.
Included in trade receivables at March 31, 2001 and December 31, 2000 and
1999 were $110,000, $103,000, and $239,500, respectively, of receivables from
Mitsui USA for product sales. Sales to Mitsui USA for the three months ended
March 31, 2001 and the years ended December 31, 2000, 1999, and 1998 totaled
$341,000, $1,569,000, $2,509,000, and $3,429,000, respectively.
Forward purchase contracts as of March 31, 2001, included commitments for
purchases of 339,096,000 pounds of oil from Cenex. The Company recognized gains
(losses) of $1,788,000, $(363,000),
F-59
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
5. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$(25,000), and $426,000, respectively, on such related party commitments for
the three months ended March 31, 2001 and the years ended December 31, 2000,
1999, and 1998.
6. EMPLOYEE BENEFIT PLANS
The Company has long-term incentive arrangements with certain key
executives under which they can earn additional compensation. Under these
arrangements, the amount of additional compensation is based on the attainment
of cumulative income-based targets over a multi-year period, ranging from three
to five years. At the end of such periods, amounts earned by individual
executives will be contributed to a rabbi trust, unless representatives of
Wilsey and Cenex elect to pay such amounts directly to the respective key
executives. For the three months ended March 31, 2001 and the years ended
December 31, 2000, 1999, and 1998, the Company recognized compensation expense
under these long-term incentive arrangements of $749,815, $5,883,929,
$1,780,445, and $281,300, respectively. At March 31, 2001 and December 31, 2000
and 1999, a liability for such awards of $8,773,779, $8,269,874, and
$2,385,945, respectively, is classified as accrued compensation in the
accompanying consolidated balance sheets.
The Company has a combined 401(k) and defined contribution profit-sharing
plan (the "Plan") covering substantially all employees not covered by
collective bargaining agreements. Under the Plan, employees can make annual
voluntary contributions not to exceed the lesser of an amount equal to 15
percent of their compensation or limits established by the Internal Revenue
Code. The Company is required by the Plan to make certain matching
contributions of up to 4 percent of each participant's salary and may make
discretionary profit-sharing contributions. The Company also established a
401(k) defined contribution plan covering employees under certain collective
bargaining agreements. Under this plan, employees can make annual voluntary
contributions of up to 15 percent of their compensation. Expense for the three
months ended March 31, 2001 and the years ended December 31, 2000, 1999, and
1998 was $1,343,000, $5,139,000, $5,212,000, and $2,989,000, respectively.
Certain of the Company's union employees are participants in multi-employer
plans. Payments to multi-employer pension plans are negotiated in various
collective bargaining agreements and aggregated $416,000, $1,641,000,
$1,465,000, and $1,431,000 for the three months ended March 31, 2001 and the
years ended December 31, 2000, 1999, and 1998, respectively. The actuarial
present value of accumulated plan benefits and net assets available for
benefits to union employees under these multi-employer pension plans are not
available, as the Company does not administer these plans.
Effective January 1, 1999, the Company established a Supplemental
Executive Retirement Plan for certain of its employees. The projected benefit
obligation as of March 31, 2001 and December 31, 2000 and 1999 was $1,484,000,
$1,392,000, and $1,072,000, respectively. A liability of $1,557,000,
$1,137,000, and $758,000 as of March 31, 2001 and December 31, 2000 and 1999,
respectively, is included in long-term accrued compensation in the accompanying
consolidated balance sheets. The plan is unfunded. During 2001, 2000, and 1999,
the Company recorded benefit expense related to the plan of $106,000, $379,000,
and $412,000, respectively. The assumptions used in the measurement of the
Company's benefit obligation are as follows:
DECEMBER 31,
MARCH 31, ---------------------
2001 2000 1999
---------- --------- ---------
Discount rate ......................... 7.0% 7.0% 7.5%
Rate of compensation increase ......... 3.0% 3.0% 4.0%
The Company accrues the actuarially determined amount necessary to fund
the participants' benefits in accordance with the requirements of the Employee
Retirement Income Security Act of 1974.
F-60
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
7. COMMITMENTS AND CONTINGENCIES
Future minimum annual payments under noncancelable operating leases with
lease terms in excess of one year at March 31, 2001 are as follows:
2002 ................ $ 4,429,000
2003 ................ 3,572,000
2004 ................ 2,724,000
2005 ................ 2,127,000
2006 ................ 1,428,000
Therefore ........... 742,000
-----------
Total ............... $15,022,000
===========
Under the lease agreements, the Company is obligated to pay certain
property taxes, insurance, and maintenance costs. Certain leases contain
renewal and purchase options. Rental expense for the three months ended March
31, 2001 and the years ended December 31, 2000, 1999, and 1998 under operating
leases totaled $1,476,000, $5,205,000, $5,121,000, and $4,231,000,
respectively.
During the year ended December 31, 2000, the Company received a payment of
approximately $2.4 million in connection with the settlement of a class action
lawsuit. This amount has been recorded as a component of other income in the
accompanying consolidated statements of income.
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition, or results of operations.
8. UNAUDITED INTERIM INFORMATION
As discussed in Note 2, the Company changed its fiscal year-end to March
31. The financial statements for the three months ended March 31, 2001 have
been included herein. Selected unaudited financial information for the three
months ended March 31, 2000 is as follows:
Sales ........................ $211,815,000
Cost of goods sold ........... 172,818,000
Net income ................... 17,123,000
Total assets ................. 362,382,000
Total liabilities ............ 231,789,000
Members' capital ............. 130,593,000
F-61