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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