Item 1. BUSINESS
GENERAL
Golden Growers Cooperative is a value-added agricultural cooperative association owned by 1,584 members primarily from Minnesota, North Dakota and South Dakota, all of whom deliver corn to the Cooperative for processing into a value-added product. Originally formed in 1994 as a North Dakota agricultural cooperative, Golden Growers Cooperative has provided its members with value and the opportunity to deliver corn for processing for almost two decades. Effective September 1, 2009, in order to further enhance the value it provides to its grower-owners, the Cooperative changed its domicile and form of entity from a North Dakota cooperative to a Minnesota cooperative association governed under Minnesota Statutes Chapter 308B.
Golden Growers Cooperative was incorporated in Minnesota on July 29, 2009, under Minnesota Statutes Chapter 308A as a wholly-owned cooperative subsidiary of the original North Dakota cooperative of the same name. Effective as of September 1, 2009, the original North Dakota cooperative was merged with and into the Minnesota 308A cooperative to change Golden Growers Cooperative’s domicile from North Dakota to Minnesota. In connection with the change of domicile, Golden Growers Cooperative also converted from a Minnesota 308A cooperative to a Minnesota 308B cooperative association. As a result of this change of domicile and statutory conversion, the North Dakota cooperative, historically taxed as an exempt cooperative under Section 521 of the Internal Revenue Code (Code), became a Minnesota cooperative association governed as a cooperative for state law purposes, but taxed as a partnership under Subchapter K of the Internal Revenue Code for tax purposes. The Cooperative, except for changes to the structure and operations as a result of the change in domicile and statutory conversion, continues to operate the business it has historically operated. For more details regarding the transactions see “Change in Domicile and Statutory Conversion.”
History
The Cooperative was originally formed in 1994 as a North Dakota cooperative with the goal of allowing its members to receive additional value from the corn that they grow through the processing of that corn into value-added products, such as corn sweeteners. The Cooperative accomplished this purpose by forming a joint venture with two partners - American Crystal Sugar Company, a Minnesota agricultural cooperative that processes sugarbeets and Minn-Dak Farmers Cooperative, a North Dakota cooperative that processes sugarbeets. The joint venture formed ProGold Limited Liability Company (ProGold), a Minnesota limited liability company that designed and constructed a corn wet-milling facility in Wahpeton, North Dakota to process corn into high fructose corn syrup and related co-products.
ProGold financed the cost of building this facility through proportionate capital contributions from its three members, including the Cooperative, and long-term debt financing. The Cooperative’s membership in ProGold included a right and obligation for the Cooperative to deliver corn to the ProGold facility for processing. The Cooperative’s members delivered corn to the ProGold facility on the Cooperative’s behalf to meet this delivery obligation.
At the same time ProGold began operating the corn wet-milling facility, the price for high fructose corn syrup dropped and it became apparent that operating the facility was not economically viable for ProGold so it sought other options for the facility that would preserve the ability to process its members’ corn while reducing financial risk. On November 1, 1997, ProGold entered into an operating lease with Cargill Incorporated for the entire ProGold facility. While ProGold no longer operates the wet-milling facility, the Cooperative, through its members, continues to have the obligation to deliver corn directly to Cargill at the wet-milling facility for processing. During the term of the original 10-year lease, Cargill paid ProGold annual rent of approximately $25,000,000 per year, substantially all of which was used to service ProGold’s debt, which was retired in 2008. The lease with Cargill was renegotiated effective January 1, 2008, with the lease term extended through December 31, 2017. Under this amended lease, Cargill is required to operate the facility and pay fixed lease payments subject to a very limited exception related to the availability of adequate ground water. Cargill bears all expenses with respect to operating and maintaining the wet-milling facility except for extraordinary capital projects that may arise. Cargill’s rent payable to ProGold for the remaining term of the lease is approximately $21,500,000 annually. ProGold has not undertaken any major capital improvements since its construction. We anticipate that ProGold will incur expenses in the future related to normal capital improvements to the facility necessary due to the passage of time.
Throughout the terms of the leases between Cargill and ProGold, the Cooperative’s members, on behalf of the Cooperative, have delivered corn directly to the facility for processing into high fructose corn syrup and related co-products. It is the Cooperative’s ownership interest in ProGold that creates this value-added relationship between its members and the facility. When members deliver corn to the Cooperative for processing at the facility, they are paid a market price for the corn that is delivered. In addition, members have a right to receive added value for the efforts in the form of patronage based on each member’s proportionate share of the Cooperative’s income from ProGold that is derived primarily from Cargill’s lease of the facility. For more details regarding the Cooperative’s ownership in ProGold see “Ownership in ProGold.”
Change of Domicile and Statutory Conversion
Prior to September 1, 2009, the Cooperative was a North Dakota cooperative taxed as a tax exempt cooperative under Section 521 of the Code. When formed in 1994, being taxed as a tax exempt cooperative under Section 521 and Subchapter T of the Code was the most appropriate option available to the Cooperative. While taxation as a cooperative has advantages to both the Cooperative and its members, the technical requirements of Section 521 impose a rigid structure on cooperatives. Since the Cooperative’s original formation, however, taxation as a partnership under Subchapter K of the Code has become an option for cooperatives. Subchapter K of the Code provides much more structural flexibility than taxation as a tax exempt cooperative.
The State of Minnesota enacted Chapter 308B - the Minnesota Cooperative Association Act - in 2003 which essentially combined the elements of a cooperative already embodied in Minnesota Chapter 308A with the flexibility to be taxed as a partnership under Subchapter K of the Code. Generally, agricultural cooperatives function much like a corporation except: (1) membership is generally limited to a specific group of patrons; (2) voting is done on a one member one vote basis (instead of proportionate equity ownership); (3) distributions are based on patronage of the cooperative (instead of distributions in
the form of dividends based on percentage ownership); and (4) dividends on investment securities are limited by statute, which discourages outside investors. Minnesota Chapter 308B removes some of these restrictions by providing for both patron and non-patron members, but requires that at least fifteen percent (15%) of the profits and losses be allocated on a patronage basis. Minnesota Chapter 308B also explicitly allows for an entity organized under it to elect to be taxed as a partnership under Subchapter K of the Code, which is currently more desirable than being taxed as a cooperative under either Section 521 and/or Subchapter T of the Code.
Prior to the conversion to a Minnesota 308B cooperative association, only corn growers in Minnesota, North Dakota and South Dakota could own equity in the Cooperative. After the conversion to a Minnesota 308B cooperative association, any person residing in the United States can own Cooperative Units as long as that person delivers or provides for the delivery of corn for processing at the facility.
In 2009 the Cooperative’s members voted to change our domicile from North Dakota to Minnesota as well as to convert to a Minnesota 308B cooperative association. Two steps were necessary to accomplish this transaction. First, a tax-free merger of the North Dakota cooperative into a Minnesota 308A cooperative was completed to change the domicile. Second, the Minnesota 308A cooperative “converted” into a Minnesota 308B cooperative association.
On July 29, 2009, we formed “Golden Growers Cooperative - Minnesota” under Minnesota Statutes Chapter 308A, solely for the purpose of changing our domicile to the State of Minnesota. On September 1, 2009, the North Dakota cooperative merged with and into Golden Growers Cooperative - Minnesota, changing our state of incorporation to Minnesota. Golden Growers Cooperative - Minnesota changed its name to “Golden Growers Cooperative” as part of the merger. As a North Dakota cooperative, our members each held one share of Class A Common Voting Membership Stock which entitled them to one vote in the affairs of the Cooperative and shares of Class B Non-Voting Equity Stock which allowed them to deliver bushels of corn to the facility for processing equal to the number of shares of stock held. As part of the merger to change our domicile, our members exchanged these shares for identical and equal shares of stock in the Minnesota 308A cooperative.
Immediately after the change in domicile, our members elected to convert to a Minnesota 308B cooperative association by filing Articles of Conversion that amended our Articles of Incorporation - our organizing document as a Minnesota 308A cooperative - into Articles of Organization - our organizing document as a Minnesota 308B cooperative association. As part of this conversion, each member’s single share of Class A Common Voting Membership Stock was redeemed for $150 and each member received the number of our membership interests (Units), equal to the number of shares of Class B Non-Voting Equity Stock each member held in the Minnesota 308A cooperative. For more details regarding our Units see “Description of Cooperative’s Securities.” As a result of our conversion from a Minnesota 308A cooperative to a Minnesota 308B cooperative association we are now taxed as a partnership under Subchapter K of the Code and our fiscal year end changed from August 31 to December 31.
Prior to the conversion to a Minnesota 308B cooperative association, the Cooperative’s securities were exempt from registration under Section 12(g)(1) of Securities Registration Act of 1934 due to our status as an agricultural cooperative. As a result of our statutory conversion into a Minnesota 308B cooperative association we no longer meet the requirements to be a cooperative exempt from registration under Section 12(g)(1) of the 1934 Act which necessitated the filing of a Form 10.
Business Operations
The Cooperative is in the business of providing value to our members by facilitating their delivery of corn to the corn wet-milling facility owned by ProGold. We accomplish our business on
behalf of our members not through the ownership of assets such as a plant and equipment but through our contract relationships with all of the parties involved in the ownership and operation of the facility. From an income production perspective our membership interest in ProGold is our primary asset that, in addition to giving the Cooperative the right to receive distributions from ProGold, also provides our members with additional value for the delivery of their corn for processing. Annually the Cooperative is required to deliver approximately 15,490,480 bushels of corn to Cargill for processing at the ProGold facility. We meet this delivery obligation by having our members deliver their corn to the ProGold facility.
Since November 1997, ProGold has leased its corn wet-milling facility to Cargill. Annually, Cargill pays ProGold rent equal to $21,500,000. Throughout the term of the lease between Cargill and ProGold, our members, on the Cooperative’s behalf, have delivered corn to the facility for processing into high fructose corn syrup and related co-products. It is our ownership interest in ProGold that creates a value-added relationship between our growers and the facility. Notwithstanding this cooperative arrangement, Cargill is an integral part of our financial success. Separate from the lease, Cargill also provides the Cooperative services that allow us to facilitate corn delivery at little or no expense. In addition, the lease payments Cargill makes to ProGold that are in turn distributed to the Cooperative provide us with the cash to make distributions to our members. If, however, at some time in the future ProGold stopped leasing its plant to Cargill it is anticipated that the plant would continue operations, managed either by ProGold or another party. It is expected that the plant would continue to provide a market for the corn produced by our members whether the plant is leased in the future by Cargill or another party or operated by ProGold.
Ownership of our Units requires our members to deliver corn to the Cooperative for processing in proportion to the number of Units each member holds. A member is required to deliver one bushel of corn for each Unit held by the member. Currently 15,490,480 Units are issued and outstanding. Income and losses are allocated to our members based on the volume of corn they deliver. Subject to certain limitations, as long as a member patronizes the Cooperative by delivering corn equal to the number of Units held by the member, the member will be allocated a corresponding portion of our income. In this way, we continue to operate on a cooperative basis.
To hold our Units a member is required to execute a Uniform Member Agreement that obligates the member to deliver corn to us and an Annual Delivery Agreement by which each member annually elects the member’s method to deliver corn - either Method A or Method B, or a combination of both. Under Method A, a member is required to physically deliver corn to us either at the facility or another location designated by the Cooperative. Under Method B, a member appoints us as its agent to arrange for the acquisition and delivery of corn on the member’s behalf. Separate from leasing the facility from ProGold, Cargill is in the grain services business. In order to most cost effectively provide delivery services to our members, the Cooperative has entered into an agreement with Cargill whereby we appoint Cargill as our agent to arrange for the delivery of the corn by our members who elect to deliver corn using Method A, and we appoint Cargill as our agent to acquire corn on our behalf for our members who elect to deliver corn using Method B. If a member elects to deliver corn using Method B, the price per bushel the Cooperative pays to the member is equal to the price per bushel paid by Cargill to acquire the corn as our agent. The Cooperative pays members who deliver corn under Method A the market price or contracted price for their corn at the time of delivery. Members who deliver corn under Method A receive from the Cooperative an incentive payment of $.05 per bushel on the corn that they deliver while members who elect Method B to deliver corn pay to the Cooperative a $.02 per bushel agency fee for the cost of having us deliver corn on their behalf. The incentive payment for Method A deliveries and the agency fee for Method B deliveries are subject to annual adjustment at the sole discretion of our Board of Directors. While the Cooperative is financially responsible for the various payments to the members for
corn, Cargill, serving as the Cooperative’s administrative agent, issues payments to members for corn on the Cooperative’s behalf.
Annually, we notify Cargill of the volume of Method A corn to be delivered by each Method A member. Once we provide notification to Cargill of the volume of corn, Cargill then confirms the amount of corn with each member and notifies that member with respect to quality specifications, allowances, deductions and premiums to be applicable to that corn. That Method A member then directly contracts with Cargill for the contract price agreed upon for the corn or, in the absence of an agreed upon price, the market price per bushel for corn delivered on the day on which the corn is delivered and accepted at the facility. With respect to all Method A corn that is delivered, Cargill pays to the Cooperative the aggregate purchase price for corn purchased from our members, and then, on our behalf, makes individual payments for corn directly to our members. In the event a Method A member delivers to Cargill more than its delivery commitment, any corn delivered in excess of that commitment is handled as a direct sale of corn to Cargill and is priced at the current closing delivery corn price established by Cargill at the facility on the day it is unloaded. In the event a Method A member delivers to Cargill less than its committed amount of corn, the quantity of the shortfall is then purchased and delivered by Cargill on our behalf, but this purchased corn is not credited to the Method A member’s account. If a Method A member fails to fully satisfy the corn delivery requirement, Cargill purchases replacement corn for which we reimburse Cargill the amount by which the underlying contracted corn price is less than the price of buying the replacement corn that was due on the delivery date. In addition, if a Method A member fails to deliver all of the corn it was obligated to deliver, that member’s allocation of our profit or losses and any cash distributions is proportionately reduced and we may terminate the member’s membership.
Based on the corn to be delivered by our members using Method A, Cargill then purchases the remainder of the corn to be delivered by us on behalf of our Method B delivering members at such time and such quantities and at such prices it deems appropriate and in the best interest of us and Cargill. Because Cargill purchases the corn on our behalf for our members who elect to deliver using Method B, the purchase price for the corn that would be paid to our members if they actually delivered the corn is offset against the payment to be made by us to Cargill for the cost to purchase the corn, thus no payment is made from Cargill to us for corn delivered using Method B.
Our members can change their delivery method annually, so the mix of members delivering by Method A or Method B changes each year.
In exchange for the services set forth above with respect to handling our member’s delivery of corn to the wet-milling facility, we pay Cargill an annual fee of $92,000, which is paid in quarterly installments. In addition, we also pay Cargill a per-bushel fee if a Method A member fails to deliver corn. This amount is in addition to any reimbursement required by us to Cargill for a Method A member’s failure to deliver.
Our income and/or losses are allocated and distributed to our members on a patronage basis based on each members’ volume of corn deliveries. Our Bylaws establish a Method A delivery pool and a Method B delivery pool. Generally, our income and/or losses are allocated annually based on the percentage of corn our members elect to deliver using either Method A or Method B. Regardless of the actual percentage allocation between our members who deliver using Method A or Method B, our Bylaws require us to annually allocate at least 25% of our income and/or losses to the Method A pool. The amount of our income and/or losses actually allocated to the Method A pool is a percentage equal to the greater of 25% or the actual percentage of corn delivered by our members under Method A.
If less than 25% of the corn is delivered by members using Method A, the members who do use Method A will be allocated 25% of our income and/or losses even though they deliver less than 25% of
the corn obligated to be delivered by us to Cargill. As a result of this requirement, a Method A member may receive a greater proportionate allocation of our income and/or losses than a Method B member who contracted to have the same amount of corn delivered.
For the 2011 fiscal year, 28.7% of members elected to deliver corn by Method A and 71.3% elected Method B. This resulted in 28.7% of the Cooperative’s income and/or losses and 28.7% of any cash distributions being allocated to the Method A pool in fiscal year 2011, which reflects the actual percentage of members who elected to deliver corn using Method A and does not result in reallocation to meet the 25% requirement set forth in the Cooperative’s governing documents.
For the 2012 fiscal year, 28.2% of members elected to deliver corn by Method A and 71.8% elected Method B. This resulted in 28.2% of the Cooperative’s income and/or losses and 28.2% of any cash distributions being allocated to the Method A pool in fiscal year 2012, which reflects the actual percentage of members who elected to deliver corn using Method A and does not result in reallocation to meet the 25% requirement set forth in our governing documents.
Ownership in ProGold
The Cooperative owns a 49% interest in ProGold and American Crystal owns a 51% interest in ProGold. Because American Crystal owns a controlling interest in ProGold, it must consolidate ProGold’s financial statements into its financial statements.
In connection with its membership interest in ProGold, the Cooperative has the right and obligation to deliver corn to be processed at the wet-milling facility. The Cooperative is also allocated 49% of the profits and losses of ProGold and is entitled to receive 49% of any cash that is distributed to ProGold’s members.
Currently, there are eleven members of ProGold’s board of governors and the Cooperative has the right to appoint five of these governors. Members of the Cooperative’s Board of Directors occupy these seats and provide active oversight of the management of ProGold. Based on percentage ownership in ProGold and representation on the ProGold board of governors the Cooperative does not control the operations of ProGold. Extraordinary transactions such as a sale of ProGold or its assets, dissolution, as well as amendments to its operating agreement, approval of its strategic plan, approval of new members and approval of loans to ProGold by its members can be approved by American Crystal over the Cooperative’s objections.
Even though the Cooperative does not control ProGold, American Crystal cannot sell or transfer its interest in ProGold to any other party without the Cooperative’s consent. The Cooperative also has a right of first refusal to purchase American Crystal’s interest in ProGold if it receives an offer for or desires to sell its interests in ProGold. Neither the Cooperative nor American Crystal can transfer its interests in ProGold without Cargill’s consent as long as the lease between Cargill and ProGold is in effect. American Crystal may buy the Cooperative’s interests in ProGold if any one person acquires more than 10% of the Cooperative’s Units or if the Cooperative changes its voting structure to anything other than one member one vote.
The wet-milling facility was built in 1995. As processing facilities age, more extensive maintenance becomes necessary to keep the facility in good working order. In the event the wet-milling facility owned by ProGold requires any maintenance or repairs that are capital in nature, ProGold would pay for such capital improvements from its revenue, reducing any income available for its members at the time of such expenses. The Cooperative and American Crystal would experience any such reduction in ProGold’s income proportionately based on their percentage ownership of ProGold.
Seasonality
Cargill operates the ProGold processing plant year-around but the facility only has enough corn storage on-site for approximately five days of operations. Corn deliveries to the facility are typically required four or five days each week of the year. Farmers harvest corn in October and November, although weather conditions have occasionally delayed harvest for some farmers into Winter or Spring. Corn can be stored for a long period of time after it is harvested in storage facilities.
The Cooperative does not control when members deliver corn to Cargill for processing at the facility. Some of members may elect to deliver higher volumes of corn immediately following harvest in October and November, while others prefer to deliver at times when local market prices are higher, typically in the Spring and late Summer months. Corn price contracts that members and Cargill enter into each year typically anticipate these delivery trends and incent members to store their corn on their farms until fewer farmers wish to deliver to the plant. As a result, while there is some seasonality to corn deliveries, members deliver corn every week of the year, and the Cooperative monitors and makes payments for those deliveries every week.
Intellectual Property Rights
The Cooperative does not hold any patents. To the extent it develops proprietary information or rights, the Cooperative will rely on a combination of trade secrets, trademarks, nondisclosure agreements and technical measures to establish and protect our proprietary rights.
Research and Development
As a commodity-based business, the Cooperative does not conduct any research and development activities associated with either the development of new products or the development of new technologies for use in producing those products.
Employees
As of December 31, 2012, the Cooperative had 1 full-time employee, Executive Vice President, Scott Stofferahn, who serves in the capacity of chief executive officer and chief financial officer and one part-time employee, neither of whom is covered by a collective bargaining agreement. Long-time Executive Vice President, Mark Dillon retired effective October 15, 2011. Management considers its employee relations to be good.
Legal Proceedings
The Cooperative is not currently involved in any legal proceedings. In addition, we are not aware of any potential claims that could result in the commencement of legal proceedings. The Cooperative carries insurance that provides protection against certain types of claims, up to policy limits.
Competition
As a grower-owned cooperative whose members are contractually obligated to deliver corn, the Cooperative generally does not face competition in the market place for corn. More importantly, its governing documents and contractual arrangements with Cargill contain contractual incentives for growers to deliver corn to the Cooperative and not to another processor. Even if members do not fully satisfy their delivery commitments, there are sufficient supplies of corn to be purchased in the open market to meet any contract obligations to Cargill, with any costs to be charged to the defaulting member.
The Cooperative was formed in 1994 by a group of corn growers with a goal of adding value to the corn they delivered for processing. Members invested in the Cooperative with the goal of creating a facility where they could not only find a certain market for their corn but where they could also benefit from a long term investment in a value added enterprise such as the ProGold facility. There is no competition in attracting members to the Cooperative and its services. Other grain shippers and corn processing facilities in the region provide competition for the purchase of corn from members, but most do not provide the opportunity for membership or partial ownership and any resulting additional profits from the operation or lease of their facilities.
Item 1A.
Item 1A. RISK FACTORS
The risks described below together with all of the other information included in this report should be considered carefully. The risks and uncertainties described below and elsewhere in this Form 10-K are not the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the distributions made to our members may decrease, the value of our Units could fall, and a member could lose all or part of his, her or its investment.
Risks Relating to the Units
There is no public market for our Units and no public market is expected to develop.
There is no established public trading market for our Units, and we do not expect one to develop in the foreseeable future. To maintain our partnership tax status, we do not intend to list the Units on any stock exchange or automatic quotation system. As a result, our Units may have to be held for an indefinite period of time because the Units are not readily re-sellable.
Our Units are subject to significant restrictions on transfer.
The ability to transfer our Units is restricted by our Bylaws. A member must obtain the prior consent of our Board of Directors before making any transfer of Units. Transferability of Units is restricted in part to ensure that we are not deemed a “publicly traded partnership” and thus taxed as a corporation. The delivery obligations that accompany our Units also partially restrict the transferability of our Units. As a result, a member may have to hold Units for an indefinite period of time because the Units may not be able to be readily resold.
Risks Related to Our Operations
We are required to allocate at least 25% of our income and/or losses to the Method A pool regardless of the percentage of corn actually delivered under Method A.
Our Bylaws require that our income and/or losses be allocated to the Method A pool in a percentage equal to the greater of 25% or the actual percentage of corn delivered under Method A. If less than 25% of the corn is delivered by the members using Method A, the members who do use Method A will be allocated 25% of the income and/or losses even though they deliver less than 25% of the corn we are obligated to deliver. As a result, the Method A member may receive a greater proportionate allocation of our income and/or losses than a Method B member who contracts to have the same amount of corn delivered.
A member electing to deliver corn under Method A who fails to deliver corn will not be allocated income and/or losses or receive cash distributions for that year in proportion to the shortfall.
If a member elects to deliver corn pursuant to Method A and then fails to deliver all of the corn he or she was obligated to deliver, his or her allocation of our income and/or losses and cash distributions will be proportionately reduced by the amount of corn the member failed to deliver pursuant to the terms of our Bylaws and Annual Delivery Agreement.
Risk Factors Related to Our Ownership of ProGold
We do not own a controlling interest in ProGold.
Our primary source of income is from our ownership interest in ProGold. ProGold’s primary asset is the facility that it leases to Cargill. We only own 49% of ProGold while American Crystal owns 51% of ProGold. We do not have a controlling interest in ProGold and as a result of that we have risks with respect to dealing with our minority interest in ProGold. Generally our business interests and American Crystal’s will be aligned with respect to decisions related to ProGold. In the future, however, an issue could arise whereby we do not have the same interest and we would not have the ability to control ProGold.
The lease with Cargill for the facility expires in December 2017.
The corn wet-milling facility has been leased to Cargill since 1997. The lease was renegotiated in 2008 and extended for an additional ten year term. The current lease term runs through December 31, 2017. Cargill bears all expenses with respect to operating and maintaining the facility except for extraordinary capital projects that may arise. Cargill is required to operate the facility and pay fixed lease payments subject to a very limited exception related to the availability of an adequate water supply. If Cargill does not continue to lease the facility at the termination of the lease, ProGold’s options are to lease the facility to a third party, to run the facility itself or to sell the facility to another party. There can be no assurances that a third party willing to operate or purchase the facility exists or that the value of the facility at the end of the lease will be such that it will be a profitable sale for ProGold, us or our members.
ProGold may need to pay for maintenance to the facility.
The facility has been operated by Cargill since 1997. While the facility has been maintained by Cargill pursuant to the terms of the lease, ProGold is responsible for the cost of any extraordinary capital expenditures. In the event ProGold has to pay for any such capital expenditure, the amount of income available for distribution to its members would be reduced, which would in turn reduce amounts paid to our members. No extraordinary capital expenditures are expected in the immediate future, but based on the age of the facility it can be expected that such expenditures may be forthcoming. The Board of Governors of ProGold would make the decision to incur such capital expenditure.
Tax Risks Related to Our Operation
The IRS could challenge our tax reporting positions which could materially adversely affect our members.
We have elected to be treated as a partnership for federal income tax purposes. This means that we will pay no federal or state income tax at an entity level, but our members will pay tax on their share of our net income. However, we could become taxable as a corporation if we are treated as a publicly traded partnership because of the manner in which our Units are transferred.
Our conversion to a cooperative association governed under Minnesota Statute 308B was a taxable event for both us (at the cooperative level) and our members. The IRS might challenge any aspect of this transaction. Any challenges brought by the IRS could adversely impact us or our members.
Our taxable income each year will depend in part on the depreciation, amortization and other cost recovery of the tax basis of the assets of ProGold. Our initial aggregate basis is based on the fair market value of assets deemed received by our members in the conversion transaction. However, the method of apportioning basis to our specific assets is uncertain, and the IRS could challenge the apportionment of basis to specific assets so as to increase the allocation to longer lived assets or assets that cannot be depreciated or amortized. This generally would defer the timing of some of our depreciation, amortization and other cost recovery deductions.
The tax liability a member may be responsible for as a result of an allocation of income may exceed any cash distributions the member receives.
As described above, we do not expect to pay any federal income tax, and all of our income and/or losses will “pass through” to our members. Members must pay tax on that allocated share of our taxable income every year. Although we are required to make cash distribution of at least 30% of the allocated income each year, a member may not receive cash distributions from us sufficient to satisfy all of the member’s tax liabilities. This may occur because of various factors, including accounting methodology, or if we decide to retain cash generated by the business to fund its activities or other obligations.
A member may not be able to fully deduct its share of our losses or its interest expense.
It is likely that most of our member’s interest in the Cooperative will be treated as a “passive activity.” In the case of members who are individuals or personal services corporations, this means that a member’s share of any loss incurred by us will be deductible only against the member’s income or gains from other passive activities (e.g., S corporations and partnerships that conduct a business in which the holder is not an active or material participant). Some closely held C corporations have more favorable passive loss limitations. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. Upon disposition of a taxpayer’s entire interest in a passive activity to an unrelated person in a taxable transaction, suspended losses with respect to that activity may then be deducted.
When the North Dakota cooperative was originally formed, members may have borrowed money to purchase their shares and may have been deducting the interest expense. As a result of the conversion transaction, part or all of some member’s interest expense may not be deductible in the same manner because it must be aggregated with other items of income and loss that the member has independently experienced from passive activities and subjected to the passive activity loss limitations.
Any audit of our tax returns resulting in adjustments could cause the IRS to audit our members’ tax returns, which could result in additional tax liability to our members.
The IRS may audit our tax returns and may disagree with the positions taken on those returns. The tax rules regarding organizations like us are complex. If challenged by the IRS, the courts may not sustain positions we took on our tax returns. An audit of our tax returns could lead to separate audits of our members’ tax returns, especially if adjustments are required. This could result in adjustments on our members’ tax returns and additional tax liabilities, penalties and interest to our members.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None
Item 2.
Item 2. PROPERTIES
We lease executive office space at 112 Roberts Street N, Suite 111, Fargo, ND 58102. The lease term runs until June 30, 2015. We believe this space is adequate for our immediate needs.
Item 3.
Item 3. LEGAL PROCEEDINGS
None
Item 4.
Item 4. MINE SAFETY DISCLOSURES
None
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
There is no established trading market for our Units. To maintain our partnership tax status, members may not trade their Units on an established securities market or readily trade Units on a secondary market (or the substantial equivalent thereof). All transfers are subject to approval by the Board of Directors and a determination that the transfer will not cause us to be deemed a publicly traded partnership. In accordance with the publicly traded partnership rules, the Cooperative has made arrangements with Alerus Financial to serve as a qualified matching service for our members.
Our Bylaws restrict the ability of our members to transfer their Units. To help ensure that a secondary market does not develop, our Bylaws prohibit transfers without the approval of our Board of Directors. The Board of Directors will not approve transfers unless they fall within “safe harbors” contained in the publicly traded partnership rules under the Code and the related rules and regulations, as amended. Any transfers of Units in violation of the publicly traded partnership rules or without the prior consent of the Board of Directors will be invalid.
There are no outstanding warrants or options to purchase, or securities convertible into, our Units. As of the date hereof, there are 15,490,480 Units that are eligible for sale pursuant to Rule 144. We have not agreed to register any Units under the Securities Act for sale by members.
Holders
As of the date hereof, there are 1,584 holders of the Cooperative’s Units determined by an examination of the Cooperative’s equity records that the Cooperative maintains. Our Units are uncertificated.
Distributions
The Cooperative, to the extent cash is available, generally plans to make distributions to its members. For the fiscal year ended December 31, 2010, the Cooperative made aggregate cash distributions to its members of $10,998,240.80. For the fiscal year ended December 31, 2011, the Cooperative made aggregate cash distributions to its members of $9,945,361.25. For the fiscal year
ended December 31, 2012, the Cooperative made aggregate cash distributions to its members of $9,450,000.
Securities Authorized for Issuance under Equity Compensation Plans
The Cooperative currently has no equity compensation plan.
Purchases of Equity Securities by Golden Growers Cooperative
None
RECENT SALES OF UNREGISTERED SECURITIES
None
DESCRIPTION OF COOPERATIVE’S SECURITIES
Overview
As detailed throughout this report, membership in our Cooperative as well as ownership of our Units involves some unique and complex characteristics, rights and obligations. The following description sets forth certain of the rights, obligations and characteristics. The Cooperative is governed by Minnesota Statutes Chapter 308B, its Amended and Restated Articles of Organization, its Amended and Restated Bylaws and Minnesota law generally.
Capitalization
The Cooperative’s Bylaws authorize 60,000,000 Units, of which 15,490,480 are currently issued and outstanding.
Membership Interests; Units
The Units denote membership interest in the Cooperative for the purposes of allocating income, gain, loss, deduction, credit and distribution and the right to deliver corn to the Cooperative. Our Bylaws authorize one class of membership interest or Units. The Cooperative has a first lien on all Units for all indebtedness owed to the Cooperative of any member related to the Units.
Qualifications for Membership
Membership in the Cooperative is limited to any natural person, partnership (whether general or limited), joint venture, association, cooperative, corporation, trust, estate, limited liability company, limited liability partnership, unincorporated association, governmental entity, or any other legal entity, including an individual acting as a sole proprietorship or as a business, who is a resident of the United States and (i) has entered into an Uniform Delivery Agreement with us, (ii) has acquired at least 4,000 Units, and (iii) has been accepted and approved by our Board of Directors.
Termination of Membership
A Unit holder’s membership in the Cooperative may be terminated by a majority vote of the Board of Directors if any of the following events occur: (a) a Unit holder has become ineligible for membership for any reason; (b) a Unit holder has failed to patronize the Cooperative for a period of one year or more; (c) a Unit holder fails to enter into, or ceases to have in effect, a member agreement with
the Cooperative; (d) a Unit holder that is an individual dies and the Unit holder’s estate does not fulfill the membership obligations pursuant to the Cooperative’s Bylaws, or a Unit holder that is a business entity ceases to exist and leaves no qualified successor to be a Unit holder as determined by the Board of Directors; or (e) the Board of Directors by resolution finds that a Unit holder has: (i) intentionally or repeatedly violated any provision of the Articles of Organization or the Bylaws of the Cooperative; (ii) breached the member agreement or any other contract with the Cooperative, including but not limited to, the obligation to make timely payments on the member’s account with the Cooperative; (iii) taken actions that will impede the Cooperative from accomplishing its purposes; (iv) taken or threatened to take actions that may adversely affect the interests of the Cooperative or its members; or (v) willfully obstructed any lawful purpose or activity of the Cooperative.
If a Unit holder’s membership in the Cooperative is terminated, the terminated member immediately loses all rights to vote but continues to have rights to distributions and allocations, subject to all of the restrictions that apply and to the extent applicable. The terminated member’s delivery obligation terminates as of the date membership is terminated. The Cooperative is required to refund the terminated member the value of the Units owned by the terminated member at the lesser of the book value or market value as of the date of termination less any amounts owed to the Cooperative by the member. The refund is due and payable seven (7) years following the date of termination. A terminated member may transfer his Units during the seven (7) year period to a person eligible for membership.
Voting Rights
Each member is entitled to one vote on all matters presented to the members for a vote, regardless of the number of Units owned by such member.
Capital Contributions and Initial Capital Accounts
The initial capital contribution of each of our members immediately after the conversion to a Minnesota 308B cooperative association was determined pursuant to the Plan of Conversion. The value of the capital contribution of each member is equal to the initial capital account for each member and was set at $2.85 per Unit.
Allocation of Income and Losses
General Allocation Rules
All items of income, gain, receipt, loss, deduction, and credit of the Cooperative for each fiscal year (Income and Losses) is allocated among our members, and our member’s capital accounts, on the basis of the ratio that the volume of the business done with or for each such member bears to the volume of the business done with or for all members who participate in the respective pools described below.
Limits on Allocation of Losses
In a fiscal year that results in a loss, the allocation of such loss to any member shall be limited to the positive balance in such member’s capital account, such that no member will have a deficit balance in their capital account. Any loss not allocated to the members on account of the preceding sentence (Excess Loss) will be reallocated among the remaining members participating in the respective allocation pools on the basis of the ratio that the volume of the business done with or for such member bares to the volume of business done with or for all members in the pool. To the extent we generate income in a subsequent year, such income shall first be allocated to the members to whom Excess Losses have previously been allocated in order to offset the allocation of Excess Losses to the members’ capital
accounts. To effectuate this allocation of income, the income allocated to the capital accounts of the members from whom the Excess Losses were originally reallocated shall be decreased to properly reflect the amount of the previously allocated Excess Losses reallocated from such members.
Allocation Pools
Our Bylaws allow our Board of Directors to establish pools, or allocation units, on a reasonable and equitable basis. These pools may be functional, divisional, departmental, geographic, or otherwise. The Board of Directors has established two allocation pools: an A Pool and a B Pool. Members are able to participate in one or both of the two pools by entering into an Annual Delivery Agreement specifying the volume of corn to be delivered under either Method A or Method B or both.
A Pool
Members delivering corn under Method A participate in the A Pool allocations of income and/or losses. Allocations of income and/or losses to the A Pool for any year must be equal to the greater of (i) the percentage that outstanding Units held by members delivering under Method A bear to all outstanding Units held by all members, or (ii) twenty-five percent (25%). The income and/or losses allocated to the A Pool are further allocated among the members participating in the A Pool on the basis of patronage, which equals the ratio that the volume of the business done with or for each such member bears to the volume of the business done with or for all members participating in the A Pool.
B Pool
Members delivering corn under Method B participate in the B Pool allocation of income and/or losses. The percentage of income and/or losses that are not allocated to the A Pool for a given year, are allocated to the B Pool. The income and/or losses so allocated to the B Pool are further allocated among the members participating in the B Pool on the basis of patronage which shall be the ratio that the volume of the business done with or for each such member bears to the volume of the business done with or for all members participating in the B Pool.
Distributions
The Cooperative may make cash distributions at such time and in such amounts as determined from time to time by our Board of Directors in its sole discretion; provided that the we must annually, on or before March 1 of each year, make a cash distribution to our then current members equal to at least thirty percent (30%) of the income allocated to members for the prior year. Any such cash distributions shall be made in a uniform and equitable basis among the members within a particular allocation pool on the basis of patronage. Such cash distributions will be reduced by any tax withholding payments that are made on the member’s behalf.
Restrictions on Transfer of Units
Any transfer and/or assignment of Units (or the financial and governance rights associated therewith) must be approved by our Board of Directors. The Bylaws prohibit the Board of Directors from approving any transfer and/or assignment if it would result in the transferee directly or indirectly owning more than ten percent (10%) of the issued and outstanding Units. Units can only be transferred or assigned to persons who qualify as members. See additional transfer restrictions described in the section below entitled “Publicly Traded Partnership Rule.”
Distribution of Assets upon Liquidation
On liquidation, all of our debts and liabilities must be paid according to their respective priorities. Any remaining value must be distributed among the holders of Units based on the value of each such Unit holder’s capital account.
Income Tax Considerations related to our Units and our Operations
The following summary is not intended to represent a detailed description of the income tax consequences applicable to a particular member in view of that member’s particular circumstances, nor is it intended to represent a detailed description of the income tax consequences applicable to investors subject to special treatment under the federal and state income tax laws. However, the summary is based on current provisions of the Code, current, proposed and temporary Treasury Regulations, court decisions, and other administrative rulings and interpretations. All of these sources of information are subject to change, and changes to any of these sources may be applied retroactively. Subsequent changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. This summary does not discuss all the tax considerations that may be relevant to a particular member in light of his or her personal circumstances (including their state of residence), or to certain types of members that may be subject to special tax rules. Therefore, members are always encouraged to consult their own tax advisors.
Taxation of as a Minnesota 308B Cooperative Association
As a result of the statutory conversion to a Minnesota 308B cooperative association, the Cooperative has elected to be taxed as a partnership for federal income tax purposes. This means that the Cooperative pays no federal income tax at the entity level, and our members pay tax on their allocable share of our net income.
If the Cooperative fails to qualify for partnership taxation for whatever reason, we would be treated as a C Corporation for federal income tax purposes. As a C Corporation, we would be taxed on our taxable income at corporate rates, distributions of our earnings and profits would generally be taxed to the members as corporate dividends, and our members would not be required to report the member’s share of our income, gains, losses or deductions on their tax returns. Because a tax would be imposed upon us as an entity, the cash available for distribution to members would be reduced by the amount of tax paid which could cause a reduction in the value of the membership interests held by our members.
Flow-through of Taxable Income; Use of Calendar Year
Because the Cooperative has elected to be taxed as a partnership, each member of the Cooperative is required to report on his income tax return for the taxable year with which, or within which, ends the Cooperative’s taxable year his distributive share of the Cooperative’s income, gains, losses and deductions without regard to whether corresponding cash distributions are received. The Cooperative will provide each member with an annual Schedule K-1 indicating the member’s share of our income, loss and their separately stated components.
Because we are taxed under Subchapter K as a partnership, Code Section 706(b) requires us to have our own taxable year separate from the taxable years of our members. A partnership generally must use the “majority interest taxable year” which is the taxable year that conforms to the taxable year of the holders of more than fifty percent (50%) of its interests. In our case, we believe that the majority interest taxable year is the calendar year ending on December 31.
Allocation of Income and Losses
Under Code Section 701, an entity, such as the Cooperative, subject to taxation as a partnership under Subchapter K of the Code, is not itself subject to Federal income taxation. Instead, each of our members will be required to report his or her allocable share of our income and/or losses, and each of our members will be liable for federal income tax on such income in each member’s individual or separate capacity. Code Section 702 provides that the character of any such item of income or deduction allocated to a member will be the same as its character to the Cooperative. Each member will be taxed on his or her distributive share of our income even though the equivalent amount of cash may not be distributed to such member.
Section 704(a) of the Code provides that a member’s distributive share of all income, gain, loss, deduction or credit shall be determined by a partnership agreement. In the case of the Cooperative, that agreement is our Bylaws.
Our Bylaws generally provide for the maintenance of capital accounts in accordance with the requirements of the 704(b) Regulations. Under the 704(b) Regulations, capital account maintenance rules, the Cooperative is required to maintain a capital account for each member, which generally is: (1) increased by the amount of money and the fair market value of the property contributed by the member; (2) increased by the allocations of partnership income or gain (or items thereof); and (3) decreased by the amount of money and the fair market value of property distributed to the member; and (4) decreased by the allocations of partnership deductions or losses (or items thereof). Liquidation proceeds are distributed in accordance with positive capital account balances, and the Bylaws limit the allocation of losses to such members’ positive capital account balances.
Tax Treatment of Distributions
Under Section 731 of the Code, cash distributions by the Cooperative to our members generally will not be taxable to the members for federal income tax purposes as long as distributions do not exceed the member’s basis in the member’s Units immediately before the distribution. However, cash distributions in excess of a member’s basis in the Cooperative’s Units - which are considered unlikely - will be treated as gain from the sale or exchange of the member’s Units under the rules described below for Unit dispositions.
Initial Tax Basis of Units and Periodic Basis Adjustments
Under Section 722 of the Code, a member’s initial basis in his or her Units in the Cooperative will be equal to the sum of the amount of money contributed to the Cooperative. This amount is increased by a member’s share of our debt. The Cooperative has no indebtedness. Since the property deemed to be contributed by each member is the property received in the constructive taxable liquidation occurring upon the Minnesota 308B conversion, each member’s initial basis in our Units was equal to the fair market value of those Units as reported by the member in determining the member’s gain or loss on the conversion transaction. We informed our members of each member’s initial basis in our Units when conversion date values and liabilities were determined.
A member’s initial basis in our Units will be increased to reflect the member’s distributive share of our taxable income. If a member makes additional capital contributions at any time, the adjusted Unit basis will be increased by the amount of any cash contributed.
Under Section 705 of the Code, a member’s Unit basis generally will be decreased, but not below zero, by (1) the amount of any cash distributed to the member; (2) the basis of any other property
distributed; (3) the member’s distributive share of losses and nondeductible expenditures of the Cooperative that are “not properly chargeable to capital account;” and (4) any reduction in that member’s share of our debt.
Unit basis calculations are complex. A member is only required to compute Unit basis if the computation is necessary to determine his or her tax liability, but members should maintain accurate records. Typically, basis computations are necessary at the following times:
· the end of a taxable year during which the Cooperative suffered a loss, for the purpose of determining the deductibility of the member’s share of the loss;
· upon the liquidation or disposition of a member’s interest; and
· upon the non-liquidating distribution of cash or property to a member, in order to ascertain the basis of distributed property or the taxability of cash distributed.
Except in the case of a taxable sale of a Unit by a member or the liquidation of the Cooperative, exact computations are generally not necessary. For example, a member who regularly receives cash distributions that are less than or equal to his or her share of our taxable income will have a positive Unit basis at all times. Consequently, no computations are necessary to demonstrate that cash distributions are not taxable to the member under Section 731(a)(1) of the Code. The purpose of the basis adjustments is to keep track of a member’s “tax investment” in the Cooperative, with a view toward preventing double taxation or exclusion from taxation of income items upon ultimate disposition of the Units.
Member’s Limitation on Deduction of the Cooperative’s Deductions or Losses
A member may not deduct his or her allocable share of the Cooperative’s losses to the extent such losses exceed the member’s basis in his or her Units. Excess losses are carried forward indefinitely, and such losses may be deducted to the extent that, at the end of any subsequent year, the member’s basis in his or her interest exceeds zero.
Section 465 of the Code limits, in certain circumstances, the amount of loss that a member may deduct in connection with such member’s share of our activities. Section 465 provides that certain taxpayers (including individuals) who sustain a loss may deduct such loss only to the extent of the amount the taxpayer is “at risk” at the end of a taxable year.
The member’s ability to deduct losses of the Cooperative may also be limited, in certain circumstances, under the passive loss rules of Section 469 of the Code. Under these rules, losses and credits from a business activity in which the taxpayer does not materially participate (a passive activity) generally may only offset income from the taxpayer’s other passive activities. Therefore, the excess of a taxpayer’s aggregate losses from passive activities for the taxable year over aggregate income from passive activities for the taxable year is not allowed as a deduction against the taxpayer’s other income, including salary, active business income and portfolio income (such as dividends, interest, annuities, royalties, and non-business capital gains, and including portfolio income passed through to the taxpayer from a passive activity). Losses and credits from passive activities that are not allowed can be carried forward indefinitely and, generally, will be allowed in subsequent years against income from passive activities. Disallowed losses or credits from a passive activity are allowed in full when the taxpayer recognizes gain or loss upon a disposition of his entire interest in the activity. The limitations on deductibility of passive losses also apply for alternative minimum tax purposes.
Section 1.469-5T of the Temporary Treasury Regulations provide detailed safe harbor rules for determining whether a taxpayer is active or passive with respect to an activity. It is anticipated that most members will generally not be treated as materially participating in the Cooperative’s trade or business.
Members who borrowed to purchase their equity interest in the North Dakota cooperative may have been deducting the interest expense. Since the conversion occurred, this interest expense will need to be aggregated with other items of income and loss from passive activities and subjected to the passive activity loss limitations. To illustrate, if a member’s only passive activity is the Cooperative, and if the Cooperative incurs a net loss, no interest expense on related borrowing would be deductible. If that member’s share of our taxable income is less than the related interest expense, the excess would be nondeductible. In both instances, the disallowed interest would be suspended and would be deductible against future passive activity income or upon disposition of the member’s entire interest in the Cooperative to an unrelated party in a fully taxable transaction.
Alternative Minimum Tax
The Cooperative is deemed to hold a proportionate share of the assets held by ProGold. ProGold owns depreciable property. To the extent ProGold adopts or has adopted an accelerated method of depreciation for income tax purposes, it is possible that an adjustment for depreciation expense for Alternative Minimum Tax purposes could flow through on the Schedule K-1’s issued to each of our members.
Publicly Traded Partnership Rules
The Cooperative has elected to be taxed as a partnership which provides for flow-through taxation. Because the Cooperative has many members, it could potentially be classified as a “publicly traded partnership” which could have adverse consequences on the Cooperative and our members. A partnership that constitutes a “publicly traded partnership,” as defined in Section 7704(b) of the Code, is generally treated as a C Corporation for federal tax purposes. The Cooperative has instituted various transfer restrictions and other policies to avoid being classified as a publicly traded partnership under Section 7704 of the Code by restricting transfers of Units in the manner described below.
By way of explanation, a partnership is classified as a publicly traded partnership if its interests are either:
· traded on an established securities market; or
· readily tradable on a secondary market or the substantial equivalent thereof.
The Units are currently not listed nor do we intend to list the Units on the New York Stock Exchange, the Nasdaq Stock Market, or on any other exchange or system which would be classified as an established securities market under the Code and Treasury Regulations.
Section 1.7704-1(j) of the Treasury Regulations provides for a safe harbor which shelters interests from being deemed readily tradable on a secondary market or its substantial equivalent under the general “facts and circumstances” test when there is a “lack of actual trading” of the interests. The Cooperative only allows those transfers of interests during any taxable year that permits the Cooperative to qualify under this “lack of actual trading” safe harbor. This safe harbor applies where the sum of the interests in capital or profits transferred during the tax year of the partnership does not exceed two percent (2%) of the total interests in capital or profits. For purposes of testing compliance with this safe harbor, the
following types of transfers, which are explained below, will be allowed by the Cooperative, subject to approval by the Board of Directors:
· “private” transfers;
· transfers pursuant to a “qualified redemption or repurchase agreement”; and
· transfers through a “qualified matching service.”
Private transfers include:
· gift transfers or transfers under Section 732 of the Code;
· transfers at death, including transfers from an estate or testamentary trust;
· transfers between members of a family, which is defined as brothers and sisters (whether by the whole or half blood), spouses, ancestors, and lineal descendants under Section 267(c)(4) of the Code;
· transfers involving the issuance of interests by the entity in exchange for cash, property or services;
· transfers involving distributions from retirement plans qualified under Section 401(a) of the Code or an individual retirement plan;
· “block” transfers, which are defined as transfers by a member and any related person as defined in Sections 267(b) and 707(b)(1) of the Code in one or more transactions during any thirty (30) calendar-day period, of interests which, in the aggregate, represent more than two percent (2%) of the total interests in the entity’s capital or profits;
· transfers pursuant to a plan of redemption or repurchase maintained by the entity by which the partners may tender their interests for purchase by the entity, another member, or a person related to a member, but only where either the right to purchase is exercisable only upon the member’s death, disability, mental incompetence, retirement, or termination from performance of active service;
· transfers pursuant to a “closed end” plan so that the entity does not issue any interests after the initial offering and no member or person related to a member provides contemporaneous opportunities to acquire interests in similar or related entities which represent substantially identical investments;
· transfers by one or more members of interests representing more than fifty percent (50%) of the total interests in the capital and profits in one transaction or series of related transactions; and
· transfers not recognized by the entity.
Transfers pursuant to a qualified redemption or repurchase agreement include transfers where:
· the agreement provides that a transfer cannot occur until at least sixty (60) days after the entity receives written notice of the member’s intent to exercise the redemption or repurchase right;
· the agreement provides that the purchase price not be established until at least sixty (60) days after receipt of notification or that the purchase price not be established more than four times during the entity’s tax year; and
· the sum of the percentage interests in capital or profits transferred during the entity’s taxable year, not including private transfers, does not exceed ten percent (10%) of the total percentage interests in capital or profits.
Transfers will be deemed to occur through a qualified matching service if:
· the matching service consists of a computerized or printed system that lists customers’ bids and/or ask prices in order to match prospective buyers and sellers of Units;
· matching occurs either by matching the list of interested buyers with the list of interested sellers or through a bid and ask process that allows interested buyers to bid on the Units;
· the selling member cannot enter into a binding agreement to sell the interest until the fifteenth (15th) calendar day after the selling member’s Units are made available to potential buyers, which date must be confirmable by maintenance of contemporaneous records;
· the closing of a sale effected through the matching service does not occur prior to the forty-fifth (45th) calendar day after the Units are made available to potential buyers;
· the matching service displays only quotes that do not commit any person to buy or sell a Unit at the quoted price, or quotes that express an interest in acquiring Units without an accompanying price, and does not display quotes at which any person is committed to buy or sell Units at the quoted price;
· the selling member’s information is removed within one hundred twenty (120) days of the listing and is not re-entered into the system for at least sixty (60) days after its deletion; and
· the sum of the interests in the capital or profits transferred during the entity’s tax year, not including private transfers, cannot exceed ten percent (10%) of the total interests in the capital or profits of the entity.
The Cooperative has made arrangements with Alerus Financial to serve as a qualified matching service that meets the requirements set forth above.
Tax Consequences of Disposition of Units
Recognition of Gain or Loss
A member will recognize gain or loss on a sale of our Units equal to the difference between the amount realized and the member’s basis in the Units sold. The amount realized includes cash, the fair market value of other property received, plus the member’s share of our debt. Because of the inclusion of debt in a member’s basis, it is possible that a member could have a tax liability on sale that exceeds the proceeds of sale. While this result is common in “tax shelters,” it is quite unlikely in the case of a typical business operation such as that of the Cooperative.
Gain or loss recognized by a member on the sale or exchange of a Unit held for more than one year generally will be taxed as long-term capital gain or loss. A portion of this gain or loss, however, will
be separately computed and taxed as ordinary income or loss under Section 751 of the Code to the extent attributable to depreciation recapture, other “unrealized receivables” or “substantially appreciated inventory” owned by the Cooperative. The Cooperative has adopted conventions to assist those members that sell Units in apportioning the gain among the various categories if applicable.
Allocations and Distributions Following Unit Transfers
Section 706(d) of the Code requires that income and loss allocations with respect to Units that are transferred during a fiscal year must take into account the varying interests of the transferor and transferee during the year. Further, Treasury Regulations Section 1.706-1(c) proscribes several methods, including the interim closing of the books and the daily proration method. The interim closing of the books method allocates profits and losses through the transfer date to the transferor and after the transfer date to the transferee. The proration method is essentially a rule of administrative convenience that allocates annual income between the transferor and transferee based on the portion of the year that has elapsed prior to the transfer.
We determine our profits and loss annually, and we will allocate the profit or loss for the year of transfer between transferors and transferees of Units using a proration method based on the proportion of corn that has been delivered as of the date of the transfer. Transfers of Units with respect to which Method A delivery is applicable will be permitted only after the member has delivered 100% of the corn requirement for that taxable year.
The Board of Directors will review Unit transfers quarterly. Unit transfers that are approved will be recognized as occurring at the beginning of the first day of the next quarter following the quarter in which the notice, documentation, information, and approval requirements of the transfer have been substantially complied with to the satisfaction of the Cooperative (Transfer Date). Allocations will be made to the transferor on a prorated basis based upon the volume of corn delivered between the beginning of the taxable year through the Transfer Date. The transferee will be allocated its share of the allocations based on the volume of corn delivered after the Transfer Date through the end of the taxable year of the transfer. The Board of Directors has the authority to adopt another reasonable method and/or convention with respect to the allocations and distributions.
Although a transferor member will receive an allocation of income that must be reported on the member’s tax return, any distribution of cash that is made by the Cooperative with respect to the allocated income will be paid to the transferee member. Such distribution will be reduced by any tax withholding payments that are made on the transferor’s behalf. Accordingly, the transferor and transferee should plan accordingly in addressing the income tax and cash flow implications of a transfer of units. Members should consult their tax advisor and legal counsel before entering into a sale or exchange of our units.
Effect of Tax Code Section 754 Election on Unit Transfers
Each members’ adjusted basis in the Units (Outside Basis) initially will equal the member’s proportionate share of the adjusted basis of the Cooperative in our assets (Inside Basis). Over time, however, it is probable that changes in Unit values and cost recovery deductions will cause the value of a Unit to differ materially from the member’s proportionate share of the Inside Basis. Section 754 of the Code permits us to make an election (a 754 Election) that allows a transferee who acquires our Units either by purchase, or upon the death of a member, to adjust the transferee member’s share of the Inside Basis to fair market value as reflected by the Unit price in the case of a purchase, or the estate tax value of the Unit in the case of an acquisition upon death of a member. Once the amount of the transferee member’s basis adjustment is determined, it is allocated among the transferee’s pro-rata portion of our various assets pursuant to Section 755 of the Code.
A 754 Election could be beneficial to the transferee member when such member’s Outside Basis is greater than such member’s proportionate share of the entity’s Inside Basis. In this case, if a 754 Election were in effect, a special calculation would be made solely for the benefit of the transferee member that would determine the member’s cost recovery deductions and the member’s gain or loss on disposition of Cooperative property by reference to the member’s higher Outside Basis. The 754 Election will be detrimental to the transferee member if the member’s Outside Basis is less than the member’s proportionate share of Inside Basis.
Our Bylaws provide that our Board of Directors does not have authority to authorize a 754 Election on the Cooperative’s behalf. A 754 Election is beneficial only where the tax benefits made available to affected Unit holders and their transferees by the 754 Election are likely to be sufficient to justify the increased cost and administrative burden of accounting for the resulting basis adjustments. Once made, a 754 Election is irrevocable unless the IRS consents to its revocation. In the event our Bylaws are amended to provide the Board of Directors authority to make a 754 Election, then, at such time when a 754 Election is made on behalf of the Cooperative, the Board of Directors will notify the members of the manner in which to comply with applicable rules.
Other Tax Matters
Tax Information to Members; Consistent Reporting
We are required to provide each member with a Schedule K-1 (or authorized substitute therefore) on an annual basis. Harsh penalties are provided for failure to do so unless reasonable cause for the failure is established. Each member’s Schedule K-1 will set out the holder’s distributive share of each item of income, gain, loss, deduction or credit that is required to be separately stated. Each member must report all items consistently with Schedule K-1 or, if an inconsistent position is reported, must notify the IRS of any inconsistency by filing Form 8062, “Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR),” with the original or amended return in which the inconsistent position is taken.
IRS Audit Procedures
Section 6221 of the Code requires the tax treatment of all “partnership items” to be determined at the entity level, rather than the member level. Partnership items are those items that are more appropriately determined at the partnership level than at the partner level as provided by the Code and the Treasury Regulations (the Unified Audit Rules). Since we are taxed as a partnership, these rules are applicable to the Cooperative and our members.
The Unified Audit Rules allow the IRS to challenge the reporting position of an entity that is taxed as a partnership for income tax purposes by conducting a single administrative proceeding to resolve the issue with respect to all of the entity’s members. However, the IRS must still assess any resulting deficiency against each of the taxpayers who were members of such entity in the year in which the understatement of tax liability arose. Any member of an entity taxed as a partnership can request an administrative adjustment or a refund for such member’s own separate tax liability. Any member also has the right to participate in such “partnership-level” administrative proceedings. A settlement agreement with respect to partnership items binds all parties to the settlement.
IRS rules establish the “Tax Matters Partner” as the primary representative of an entity in dealings with the IRS. The Tax Matters Partner must be a “member-manager” which is defined as a member who, alone or together with others, is vested with the continuing exclusive authority to make the management decisions necessary to conduct the business for which the organization was formed. In our
case, this would be a member of the Board of Directors who is also a member of the Cooperative. The Bylaws provide for the Board of Directors to designate the Tax Matters Partner.
Self-Employment Tax
The Code and Treasury Regulations provide that general partners are subject to self-employment tax on their distributive share of partnership income and that limited partners who do not render services to the partnership are not subject to self-employment tax. Neither the Code nor the Treasury Regulations directly address the treatment of our members for self-employment tax purposes. Proposed Treasury Regulations, however, were issued in 1997 that provide generally for imposition of the self-employment tax on limited liability company members only if such members: (i) have personal liability for limited liability company obligations; (ii) have authority to contract on behalf of the limited liability company; or (iii) participate in the limited liability company’s business for more than 500 hours each year. Few, if any, of our members would be subject to self-employment tax under this test unless such members are employees of the Cooperative. Members who are employees of the Cooperative will be subject to self-employment taxes not only on the member’s share of our taxable income, but also on the member’s salary and certain fringe benefits that are not deductible in calculating taxable earnings from self-employment.
The status of the Proposed Treasury Regulations is uncertain because they were subject to a Congressional moratorium that ended July 1, 1998, and the Treasury still has not taken steps to finalize them. Nevertheless, because of the similarity of our members to limited partners, it is believed to be highly likely that members of the Cooperative will be treated similar to limited partners, i.e., generally not subject to self-employment tax on a member’s share of our earnings.
State Income Taxes
The Cooperative’s members generally are subject to tax in each member’s state of residence as well as in those states in which the entity does business if a member’s share of income exceeds the minimum filing requirements. Since we do business in several states, this could create a substantial reporting burden for the members. Most states, however, allow “composite reporting” by partnerships and limited liability companies which means that the entity pays income taxes to the various states and the individual members are relieved of the reporting responsibility in states other than the member’s state of residence. The member’s state of residence generally will allow a tax credit for state income taxes paid by the entity for the benefit of the member. For example, a member who is a resident of Minnesota will report the member’s entire share of the Cooperative’s income, but the member will receive credit on the member’s Minnesota return for taxes paid to North Dakota and other states on the member’s behalf. The Minnesota resident member generally will not have to file individually in other states if the Cooperative elects to file composite tax returns. We do not anticipate electing to file composite tax returns. This result, however, may vary depending on the state of which a particular member is a resident. Members are encouraged to consult their own tax advisors on this matter.
The Cooperative will be required to file a tax return in North Dakota and under North Dakota law the Cooperative will be required to withhold and remit at the maximum rate from any allocations that are made to nonresidents of North Dakota. Nonresident withholding is required irrespective of any cash distributions that may be made. Therefore, any cash distributions that are made will be reduced by any tax withholding payments that have been made on member’s behalf.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table presents our selected historical financial data. We derived the selected income statement data from our audited financial statements as a North Dakota cooperative for the years ended August 31, 2008 and 2009, and from the Minnesota 308B cooperative association financial statements for the four-month period ended December 31, 2009, the fiscal years ended December 31, 2010, 2011 and 2012, which have been audited by Widmer Roel P.C., independent auditors. The historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our financial statements and related notes included elsewhere in this report and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
INCOME STATEMENT DATA:
(in thousands, except share and per unit data)
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Cooperative’s financial statements, the notes thereto and the other financial data included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Such statements are based on assumptions by the Cooperative’s management as of the date of this report and are subject to risks and uncertainties, including those under the heading entitled “Risk Factors,” that could cause actual results to differ materially from those anticipated. Readers should not place undue reliance on such forward-looking statements.
Overview
Golden Growers Cooperative is a value added agricultural cooperative association owned by 1,584 members who deliver their corn to the Cooperative for processing into a value-added product. Effective September 1, 2009, Golden Growers Cooperative changed its domicile and form of entity from a North Dakota cooperative to a Minnesota cooperative association governed under Minnesota Statutes Chapter 308B.
Golden Growers Cooperative was initially formed on July 29, 2009 under Minnesota Statutes Chapter 308A as a wholly-owned cooperative subsidiary of the original North Dakota cooperative of the same name. Effective as of September 1, 2009, the original North Dakota cooperative was merged with and into the Minnesota 308A cooperative to change Golden Growers Cooperative’s domicile from North Dakota to Minnesota. In connection with the change of domicile, Golden Growers Cooperative converted from a Minnesota 308A cooperative to a Minnesota 308B cooperative association and the North Dakota cooperative that was historically tax exempt under Section 521 of the Code, became a Minnesota cooperative association governed as a cooperative for state law purposes, but taxed as a partnership under Subchapter K of the Code for tax purposes. Golden Growers Cooperative, except for changes to the structure and operations as a result of the change in domicile and statutory conversion, continues to operate the business it has historically operated.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2012 and December 31, 2011
Revenues. The Cooperative derives revenue from two sources: operations related to the marketing of members’ corn and income derived from the Cooperative’s membership interest in ProGold. The corn marketing operations generate revenue for the Cooperative equal to the value of the corn that is delivered to Cargill. The Cooperative recognizes expense equal to this same amount which results in the corn marketing operations being revenue neutral to the Cooperative, except for revenue from the Method B agency fee and expenses related to the Method A incentive payments, required licensing and bonding expenses, and the service fee paid to Cargill.
For the fiscal year ended December 31, 2012, the Cooperative sold approximately 15.5 million bushels of corn compared to 15.5 million bushels of corn sold during the fiscal year ended December 31, 2011. For the fiscal periods ended December 31, 2012 and 2011, the Cooperative recognized corn revenue of $92,838,000 and $79,376,000 respectively, an increase of 17.0% due primarily to the increase of the price of corn sold. The Cooperative recognized corn expense of $92,935,000 and $79,478,000 in 2012 and 2011 respectively, an increase of 17.0% due primarily to increase in the price of corn purchased. For the fiscal year ended December 31, 2012, its members, on the Cooperative’s behalf, delivered to Cargill for processing at the facility 4,368,827 bushels of corn using Method A and 11,123,682 bushels of
corn using Method B resulting in incentive fee expense of $218,000 and agency fee income of $222,000 for this period while for the fiscal year ended December 31, 2011, its members, on the Cooperative’s behalf, delivered to Cargill for processing at the facility 4,440,448 bushels of corn using Method A and 11,050,032 bushels of corn using Method B resulting in incentive fee expense of $222,000 and agency fee income of $221,000 for this period. For the fiscal periods ended December 31, 2012 and 2011, the Cooperative recognized expense of $92,000 and $92,000, respectively, in connection with costs incurred to Cargill in connection with the Cooperative’s corn marketing operation.
The Cooperative derived income from ProGold for the fiscal year ended December 31, 2012, of $6,596,000, an increase of $439,000 or 7.1% as compared to $6,157,000 for the period ended December 31, 2011.
General and Administrative Expenses. The Cooperative’s general and administrative expenses include salaries and benefits, professional fees and fees paid to our board of directors. The general and administrative expenses for the fiscal year ended December 31, 2012, was $861,000 an increase of $128,000 or 17.5% as compared to the fiscal year ended December 31, 2011. The increase was due primarily to increased expenses associated with the replacement of the Cooperative’s Executive Vice President.
Interest Income. Interest income for the fiscal year ended December 31 2012, was $11,000 compared to $16,000 for the fiscal year ended December 31, 2011. The decrease was primarily the result of a reduction in cash reserves during 2012 compared to 2011.
Comparison of Fiscal Years Ended December 31, 2011 and December 31, 2010
Revenues. For the fiscal year ended December 31, 2011, the Cooperative sold approximately 15.5 million bushels of corn compared to 15.5 million bushels of corn sold during the fiscal year ended December 31, 2010. For the fiscal periods ended December 31, 2011 and 2010, the Cooperative recognized corn revenue of $79,376,000 and $58,015,000, respectively, an increase of 37% due primarily to the increase of the price of corn sold. The Cooperative recognized corn expense of $79,478,000 and $58,114,000 in 2011 and 2010 respectively, an increase of 37% due primarily to increase in the price of corn purchased. For the fiscal year ended December 31, 2011, its members, on the Cooperative’s behalf, delivered to Cargill for processing at the facility 4,440,448 bushels of corn using Method A and 11,050,032 bushels of corn using Method B resulting in incentive fee expense of $222,022 and agency fee income of $221,000 for this period while for the fiscal year ended December 31, 2010, its members, on the Cooperative’s behalf, delivered to Cargill for processing at the facility 4,422,904 bushels of corn using Method A and 11,059,525 bushels of corn using Method B resulting in incentive fee expense of $221,145 and agency fee income of $223,355 for this period. For the fiscal periods ended December 31, 2011 and 2010, the Cooperative recognized expense of $92,000 and $92,000, respectively, in connection with costs incurred to Cargill in connection with the Cooperative’s corn marketing operation.
The Cooperative derived income from ProGold for the fiscal year ended December 31, 2011, of $6,157,000, an increase of $257,000 or 4% as compared to $5,900,000 for the period ended December 31, 2010.
General and Administrative Expenses. The general and administrative expenses for the fiscal year ended December 31, 2011, was $733,000, a decrease of $86,000 or 11% as compared to the fiscal year ended December 31, 2010. The decrease was due primarily to reduced expenses associated with the conversion.
Interest Income. Interest income for the fiscal year ended December 31 2011, was $16,000 compared to $27,000 for the fiscal year ended December 31, 2010. The decrease was primarily the result of a reduction in cash reserves during 2011 compared to 2010.
Comparison of Fiscal Year Ended December 31, 2010 and Four-Month Period Ended December 31, 2009
Due to its change in domicile and conversion from a Minnesota 308A cooperative to a Minnesota 308B cooperative association, the Cooperative’s fiscal year end changed from August 31 to December 31 resulting in a four-month fiscal year period ended December 31, 2009, which is compared against the twelve-month fiscal year ended December 31, 2010, and the historic financial annual financial information from prior fiscal years ended August 31.
Revenues. For the fiscal year ended December 31, 2010, the Cooperative sold approximately 15.5 million bushels of corn compared to 5.2 million bushels of corn sold during the four months ended December 31, 2009. For the fiscal period ended December 31, 2010 and 2009, the Cooperative recognized corn revenue of $58,015,000 and $18,293,000, respectively, an increase of 217% due primarily to an increase in the number of bushels of corn sold in 2010 compared to 2009 due to the shortened fiscal period for 2009. The Cooperative recognized corn expense of $58,114,000 and $18,300,000 in 2010 and 2009 respectively, an increase of 218% due primarily to an increase in the number of bushels purchased in 2010 compared to 2009 due to the shortened fiscal period for 2009. For the fiscal year ended December 31, 2010, its members, on the Cooperative’s behalf, delivered to Cargill for processing at the facility 4,422,904 bushels of corn using Method A and 11,059,525 bushels of corn using Method B resulting in incentive fee expense of $221,145 and agency fee income of $223,355 for this period. The Cooperative did not pay an incentive fee for Method A delivery prior to its reorganization into a 308B cooperative association effective September 1, 2009 and all deliveries between September 1, 2009 and December 31, 2009 were deemed to be delivered via Method B with the agency fee waived. For the fiscal periods ended December 31, 2010 and 2009, the Cooperative recognized expense of $92,000 and $7,000, respectively, in connection with costs incurred to Cargill in connection with the Cooperative’s corn marketing operation.
The Cooperative derived income from ProGold for the fiscal year ended December 31, 2010, of $5,900,000 compared to $2,200,000 for the four month fiscal period ended December 31, 2009, a decrease related to the shortened fiscal year for 2009.
General and Administrative Expenses. The general and administrative expenses for the fiscal year ended December 31, 2010, was $819,000 compared to $187,000 for the four month fiscal period ended December 31, 2009, which was primarily the result of the shortened fiscal period for 2009.
Interest Income. Interest income for the fiscal year ended December 31 2010, was $27,000 compared to $17,000 for the four month fiscal period ended December 31, 2009.
Liquidity and Capital Resources
The Cooperative’s working capital at December 31, 2012, was $2,845,000. The Cooperative’s working capital at December 31, 2011, was $2,394,000. The Cooperative’s working capital at December 31, 2010, was $2,252,000.
The Cooperative established a $1,000,000 line of credit with a variable interest rate based on the prime rate that terminates on July 16, 2013. The line of credit is secured by all of the business assets of the Cooperative. There is no outstanding balance as of December 31, 2012.
The Cooperative had no long-term debt as of December 31, 2012, December 31, 2011, December 31, 2010.
The Cooperative used operating cash flows of $900,000 for the fiscal year ended December 31, 2012, $1,047,000 for the fiscal year ended December 31, 2011 and $773,000 for the fiscal year ended December 31, 2010.
The Cooperative received cash distributions from ProGold totaling $10,852,000 for the fiscal year ended December 31, 2012, $10,902,000 for the fiscal year ended December 31, 2011 and $10,674,000 for the fiscal year ended December 31, 2010.
The Cooperative paid cash distributions to its members totaling $9,450,000 for the fiscal year ended December 31, 2012, $9,945,000 for the fiscal year ended December 31, 2011 and $10,998,000 for the fiscal year ended December 31, 2010.
The following table provides information regarding the Cooperative’s contractual obligations as of December 31, 2012:
(1) Includes payments due under Cargill Grain Services Agreement that terminates December 31, 2017.
(2) Lease terminates on June 30, 2015.
Management believes that non-cash working capital levels are appropriate in the current business environment and does not expect a significant increase or reduction of non-cash working capital in the next 12 months.
Critical Accounting Estimates
Management’s estimate of the carrying value of the investment in ProGold is based on historical cost plus its pro-rata share of ProGold’s net income and additional paid-in capital less distributions received from ProGold.
The Cooperative does not pay out Method A incentive payments or collect Method B agency fees until the end of its fiscal year. These amounts are accrued quarterly and then confirmed at the end of the fiscal year. The total annual Method B agency fee was determinable once the members completed their delivery method determination prior to January 1, 2013. The quarterly Method B bushel delivery and agency fee revenue was calculated by allocating the portion of the total annual agency fee for a particular quarter or cumulating it for the particular period. The annual Method B bushel delivery and agency fee revenue is confirmed at the conclusion of the fiscal year. The Cooperative tracks Method A corn deliveries throughout the year so it can report the bushels of corn delivered by its members as well as the corresponding Method A incentive fees earned. The final amounts owed by or due to Cargill and/or the Cooperative’s members who elect to deliver using Method A is not calculated until after December 31 in
order to account for any failures to deliver or over-deliveries of corn.
The Cooperative has determined corn revenue and corn expense for Method B deliveries based on the average annual cost per bushel paid by Cargill to the Cooperative’s members for Method A quarterly deliveries.
Recent Accounting Pronouncements
There are no recently issued accounting pronouncements that are expected to have a significant effect on the Cooperative’s financial statements.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in the interest rates, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to all market-risk sensitive financial instruments, including long term debt.
The Cooperative does not believe that it is subject to any material market risk exposure with respect to interest rates, exchange rates, commodity prices, equity prices and other market changes that would require disclosure under this item.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Cooperative’s financial statements for the fiscal years ended December 31, 2010, 2011 and 2012 have been audited to the extent indicated in their report by Widmer Roel PC an independent registered public accounting firm. The financial statements have been prepared in accordance with generally accepted accounting principles and are included in Appendix A of this report.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Cooperative’s chief executive officer and chief financial officer has reviewed and evaluated the effectiveness of the Cooperative’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of December 31, 2012. Based on that review and evaluation, the chief executive officer and chief financial officer has concluded that the Cooperative’s current disclosure controls and procedures, as designed and implemented, are effective in ensuring that information relating to the Cooperative required to be disclosed in the reports the Cooperative files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Cooperative’s management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, because of changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the effectiveness of the Cooperative’s internal control over financial reporting as of December 31, 2012, using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework and concluded that the Company maintained effective internal control over financial reporting as of December 31, 2012 based on these criteria.
This annual report does not include an attestation report of the Cooperative’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Cooperative’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Cooperative to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in the Cooperative’s internal control over financial reporting that occurred during the Cooperative’s most recent fiscal quarter that may have materially affected, or are reasonably likely to materially affect, the Cooperative’s internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
None
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Cooperative’s Board of Directors consists of three directors from each of five districts. Directors are elected to serve three-year terms. A director cannot serve more than four consecutive three-year terms. One director is elected each year from each district at district meetings held in March each year. Directors must hold Units of the Cooperative or must be representatives of such members belonging to the district they represent and are elected by the members of that district. In the case of a holder of Units who is other than a natural person, a duly appointed or elected representative of such member may serve as a director.
The board of directors of the North Dakota cooperative immediately before the change of domicile and conversion continued to serve as the Cooperative’s Board of Directors after the transaction and as of the date hereof such directors continue to serve on the Board of Directors except for those Directors who served on both the North Dakota cooperative’s board and our Board of Directors whose terms have expired in March of 2010 and March of 2011. Directors are eligible to continue to serve as a
director of the Cooperative subject to the restrictions set forth above which shall take into account board service prior to the conversion.
In accordance with our Bylaws, all directors of the Cooperative are required to be members of the Cooperative, residence of the United States of America, and elected by a majority of the members from their district present at a members’ meeting for that purpose. Each person’s experience, qualifications, attributes or skills to serve as a director are determined by the members voting in the district meetings at which the election occurs and not reviewed or otherwise considered by the Cooperative before any election. The Cooperative does not have a nominating committee. A qualified member indicates his or her interest to serve in advance of the meeting or candidates are nominated from the floor at the meetings. If a member from a particular district does not come forward indicating a desire to run for election to serve as a director then that seat on the Board of Directors for that district becomes or remains unfilled.
The Cooperative’s board officers consist of a Chairman, First Vice Chairman, Second Vice Chairman, Treasurer and Secretary of the Board. These board offices are populated by members of the Board of Directors who are elected by and at the discretion of the Board of Directors. Each of these individual’s experience, qualifications, attributes and skills to serve in their capacity as a board officer are determined by the members of the Board of Directors who are voting to place these individuals in these offices.
The name, age, position, district and term details of each of the Directors and the Named Executive Officer are as of March 15, 2013 are as follows:
Below is the biographical information on each Director and our Executive Officer.
Jason Medhaug. Mr. Medhaug has been a director since 2003, served as 1st Vice-Chairman from 2008 until 2010, and was elected Chairman in 2010. Mr. Medhaug has farmed near Veblen, South Dakota since 1986. Mr. Medhaug serves as Treasurer of the Lake Region Electric Coop in Webster, South Dakota and as President of Medhaug Farms, Inc., in Veblen, South Dakota.
Paul B. Borgen. Mr. Borgen has been a director since 2006 and has served as 1st Vice-Chairman since 2010. Mr. Borgen has farmed near Dilworth, Minnesota, since 1965. Mr. Borgen serves as president of Paul Borgen Farms, Inc. Mr. Borgen served on the board of American Crystal Sugar Company for 12 years and currently serves as a director of State Bank and Trust of Fargo.
Thomas J. Jennen. Mr. Jennen has been a director since 1999 and has served as 2nd Vice-Chairman since 2008. Mr. Jennen has been farming in the Fergus Falls, Minnesota area since 1978, and has served as a Director and President of the Farmers Co-op Elevator of Fergus Falls.
Randall A. Mauch. Mr. Mauch has been a director since 1999 and has served as Secretary since 2008. Mr. Mauch farms near Mooreton, North Dakota and is owner of KARM Company. He is an owner and director of Direct Grain, Inc., a public warehouse located in Wyndmere, North Dakota.
Shaun Beauclair. Mr. Beauclair has been a director since 2008. Mr. Beauclair farms in the Stephen, Minnesota, area, and is a Farm Operation instructor at Northland Community College in East Grand Forks, Minnesota He has served on the Stephen, Minnesota School Board and his church board. Mr. Beauclair was a director of the Gold Energy ethanol project start-up board.
David Benedict. Mr. Benedict has been a director since 2010. Mr. Benedict has farmed in the Sabin, Minnesota, area since 1987. Mr. Benedict attended Moorhead State University.
Bernard J. DeCock. Mr. DeCock has been a director since 2008. Mr. DeCock has farmed near Ghent, Minnesota, since 1978. Mr. DeCock has served on the boards of MGT Co-op Oil Company of Minnesota.; Farmers Cooperative Association of Canby, Minnesota.; Viking Investment Club of Ghent, Minnesota and St. Edward’s Church Endowment Board of Minnesota, Minnesota.
Mark L. Harless. Mr. Harless was elected as a director in March of 2011. Mr. Harless has farmed near Moorhead, Minnesota, since 1985. Mr. Harless serves as vice president of the Lee Bean and Seed, Inc., an edible bean elevator located in Borup, Minnesota, where he has been employed since 1985.
Gary L. Jirak. Mr. Jirak has been a director since 2008. Mr. Jirak has farmed in the Breckenridge, Minnesota area for 31 years. Mr. Jirak currently serves as a Trustee of United Methodist Church in Breckenridge, Minnesota.
Chris A. Johnson. Mr. Johnson has been a director since 2008. Mr. Johnson has farming operations located near Great Bend, North Dakota, and has been farming since 1974. Mr. Johnson is the owner/operator of C&S Farms, Inc. Mr. Johnson has an degree in Agricultural Economics from North Dakota State University.
Glenn H. Johnson. Mr. Johnson has been a director since 2008. Mr. Johnson has farmed in the Mayville, North Dakota area for 33 years.
Byron Koehl. Mr. Koehl has been a director since 2010. Mr. Koehl is a partner in his family’s farming operation near Hancock, Minnesota, since 1984. Mr. Koehl serves as President of Outback Five, Inc., of Hancock, Minnesota. Mr. Koehl serves as the President of the Sterns County Pork Producers.
Leslie O. Nesvig. Mr. Nesvig has been a director since 2008 and Treasurer since 2011. Mr. Nesvig has farming interests in LaMoure, Danson and Polk Counties in North Dakota. He has worked in the banking industry and served as Chairman of the Gold Energy ethanol plant start-up project. He is currently retired. Mr. Nesvig currently serves as director for Nored, Inc. and director for Bancinsure.
Nicolas A. Pyle. Mr. Pyle has been a director since 2010. Mr. Pyle holds a BSB degree in finance from the University of Minnesota Carlson School of Management. He has been farming since 2002 near Casselton, North Dakota. Mr. Pyle serves as a director of McIntyre-Pyle, Inc. Mr. Pyle is president and a director of Unity Seed Company, a member of Global Soy Genetics LLC and Director of McIntyre Farms Partnership. He is treasurer of Westminster Presbyterian Church and Planning and Zoning administrator for Casselton and Everest Townships in Cass County, North Dakota.
Bruce K. Speich. Mr. Speich has been a director since 2008. Mr. Speich has farming/ranching operations located in Milnor, North Dakota, and has been farming since 1975. Mr. Speich currently serves as director for North Dakota Beef Cattle Improvement Association and director for Wild Rice Soil Conservation.
Scott Stofferahn. Mr. Stofferahn was elected Executive Vice President, Chief Executive Officer and Chief Financial Officer of the Cooperative effective October 15, 2012. Starting in March 2001 Mr. Stofferahn worked as State Director for North Dakota Senator Kent Conrad. Prior to that Mr. Stofferahn was the State Executive Director for the North Dakota Farm Service Agency from 1993 to 2001. Mr. Stofferahn has extensive public service experience including serving in the North Dakota State House of Representatives from 1982 to 1992. Mr. Stofferahn received his Bachelor of Science Degree from North Dakota State University.
Audit Committee and Audit Committee Financial Expert
The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the Cooperative’s financial reporting and controls, the annual independent audit of the Cooperative’s financial statements and the legal compliance and ethics programs as established by management and the Board of Directors. The Audit Committee selects the independent public accountants and approves the fees, scope and procedural plans of the audits of the Cooperative’s financial statements. The Audit Committee administers the Cooperative’s employee complaint program and handles, on behalf of the full Board of Directors, any issues that arise under the Cooperative’s Code of Ethics. The Audit Committee has a charter that is available from the Cooperative upon request.
As of December 31, 2012, the Board of Directors of the Cooperative has determined that there is no audit committee financial expert serving on the Audit Committee. The Cooperative is a cooperative association formed in accordance with the Minnesota cooperative law of the State of Minnesota. In accordance with the Minnesota cooperative association law, and the Cooperative’s Amended and Restated Bylaws, the Board of Directors must be composed of members of the Cooperative. Based on the state law requirements for both membership and board service, the Cooperative is unable to recruit outside of its membership to elect to its Board of Directors and its audit committee an individual that possesses the attributes of an “audit committee financial expert” as defined by the SEC. To date, the Cooperative has been unable to recruit from its membership an individual to serve on the Board of Directors that possesses the attributes of an “audit committee financial expert.”
The Audit Committee has reviewed and discussed with management and Widmer Roel our audited financials statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The Audit Committee also discussed with Widmer Roel the matters required to be discussed pursuant to SAS No. 61 (Codification of Statements of Auditing Standards, AU Section 380), which includes, among other items, matters related to the conduct of the audit of the Cooperative’s financial statements.
The Audit Committee has received and reviewed the written disclosures and the letter from Widmer Roel required by the applicable requirements of the Public Company Accounting Oversight Board regarding Widmer Roel’s communications with the Audit Committee concerning its independence from the Cooperative and has discussed with Widmer Roel its independence from the Cooperative
Based on the review and discussions referred to above, the Audit Committee recommended to the Board that the audited financial statements be included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2012 for filing with the Commission.
On December 31, 2012, the members of the Audit Committee were Paul Borgen, Shaun Beauclair, Leslie Nesvig, Glenn Johnson, Nicholas Pyle and Jason Medhaug.
Code of Ethics
The Cooperative has adopted a code of ethics that applies to its principal executive officer and principal financial officer as well as all employees and Directors of the Cooperative. The Cooperative’s code of ethics is posted on the Cooperative’s website.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The Board of Directors has a Personnel and Compensation Committee comprised of Messrs. Thomas Jennen, Bernard DeCock, Randall Mauch and Jason Medhaug. The Committee and Board of Directors have reviewed and discussed the compensation discussion and analysis set forth in this report and, based on this review and discussion, the Board of Directors has approved the inclusion of the compensation discussion analysis in this report.
The Cooperative only has a single employee who serves in the capacity of its chief executive officer and chief financial officer (our Named Executive Officer). The primary objective of the Cooperative’s executive compensation program is to maintain a compensation program that will fairly compensate the Named Executive Officer. In determining the compensation of the Named Executive Officer, the Personnel and Compensation Committee considers the financial condition and operational performance of the Cooperative during the prior year.
The Personnel and Compensation Committee may review the compensation practices of other companies, based in part on market survey data and other statistical data relating to executive compensation obtained through industry publications and other sources. The Personnel and Compensation Committee does not intend to benchmark executive compensation directly with other publicly traded companies or other companies with which we may compete for potential executives since some of these competitors are privately held companies for which executive compensation information may not be available. However, the Personnel and Compensation Committee may compare executive compensation as a whole with the compensation packages of other companies for which survey data is available, and may also compare the pay of individual executives if the jobs are sufficiently similar to make the comparison meaningful.
Perquisites and Other Benefits
The Cooperative provided a pension plan, 401(k) plan, term life and disability insurance, medical insurance and a vehicle allowance to Mr. Dillon in accordance with his employment agreement. Mr. Dillon retired on September 30, 2012. The Cooperative entered into a Services Agreement with Mr. Dillon which concludes on March 31, 2013. On October 15, 2012, Scott Stofferahn became our Named Executive Officer. Mr. Stofferahn does not have an employment agreement.
Pension Plan
The Cooperative provides a defined-benefit pension plan to all of its eligible employees. The plan provides for monthly payments after retirement based on each employee’s earnings while in the company’s employment. The plan provides for vesting after 5 years of service with benefits for early retirement, normal retirement and disability or death. Benefit accruals under the plan are frozen as of January 1, 2013.
401(k) Plan
The Cooperative makes available a 401(k) plan for its Named Executive Officer. The Cooperative pays four percent (4%) of employee’s annual salary into the plan, and the employee may make additional contributions up to the lawful limits.
Employment Agreements
Mr. Dillon was employed by the Cooperative from June 10, 1996 through September 30, 2012. He has been a member of the Cooperative since 2010. His employment was governed by an employment agreement executed in January 2011 that was renewable annually at the discretion of the Board of Directors. The material terms of Mr. Dillon’s employment agreement include:
· An annual guaranteed partner payment of $186,051
· The agreement specifies paid time off and as well as vacation leave.
· Performance and loyalty obligations of Mr. Dillon were set forth in the agreement.
On July 10, 2012, the Cooperative entered into a service agreement with Mr. Dillon in anticipation of Mr. Dillon’s retirement effective September 30, 2012. Pursuant to the service agreement, Mr. Dillon agreed to provide transitional consulting services to the Cooperative until March 31, 2013. In exchange for such services, Mr. Dillon was paid $37,250 per month. If the Cooperative terminated the service agreement prior to March 31, 2013 for any reason other than for cause, the Cooperative would have been required to pay the full amount due under the service agreement.
Mr. Stofferahn is not party to an employment agreement with the Cooperative.
Deferred Compensation Agreement
Until February 2010, the Cooperative had a deferred compensation agreement with its Named Executive Officer that provided Mr. Dillon with certain contract rights tied to the value of the Cooperative’s equity. This deferred compensation agreement was an historic arrangement between Mr. Dillon and the Cooperative that was put in place to incentivize Mr. Dillon based on the economic performance of the Cooperative. Prior to the conversion to a Minnesota 308B cooperative association Mr. Dillon could not hold an equity interest in the Cooperative because he was not a corn grower. Once the conversion to a Minnesota 308B cooperative association was finalized, the Board of Directors elected to terminate the deferred compensation agreement in consideration for the issuance of Units deemed to be of a value equivalent to the value to the contract rights issued to Mr. Dillon under the original deferred compensation agreement. Mr. Dillon received 31,493 Units in the Cooperative that were valued at $2.85 per Unit, based on the valuation that was used for the conversion.
The Cooperative has not adopted any other bonus, profit sharing, or deferred compensation plan for the future.
Compensation Policies and Practices and Risk Management
Mr. Stofferahn’s compensation is set by the Board. In the event it is modified, such a modification is based on a performance evaluation conducted by our Personnel and Compensation Committee that consists solely of members of the Board. As discussed throughout this report, the revenue and expenses of the Cooperative directly relate to the price of corn as well as the rental income received by ProGold for the facility. Mr. Stofferahn has no control over these two factors. Based on this reality, no risks arise from the Cooperative’s compensation policies and practices that are reasonably likely to have a material adverse effect on its business operations.
Summary Executive Compensation Table
The following table sets forth, for the last three calendar years, the dollar value of all compensation awarded to, earned by or paid to Mr. Dillon through September 30, 2012 and to Mr. Stofferahn after October 15, 2012.
*Mr. Dillon retired effective September 30, 2012. Mr. Stofferahn commenced his employment on October 15, 2012. Mr. Dillon received contract payments totaling $111,750 as of December 31, 2012.
Pension Benefits
The table below reflects information for the Named Executive Officer pertaining to the Cooperative’s Pension Plan.
Non-Qualified Deferred Compensation
The table below reflects information for the Named Executive Officer pertaining to non-qualified deferred compensation.
Director Compensation
The Cooperative reimburses our Directors for expenses incurred in connection with board service. The Cooperative’s Directors are paid $150 per month and the Chairman is paid $375 per month. In addition, Directors and the Chairman receive a per diem of:
· $300 per meeting they attend when the meeting plus their travel time exceeds 4 hours;
· $150 per meeting they attend when the meeting plus their travel time is more than 2 but less than 4 hours;
· $75 per meeting they attend when the meeting plus their travel time is more than 1 but less than 2 hours.
The following table sets forth for the year ending December 31, 2012 the dollar value of all cash and non-cash compensation paid to individuals serving as Directors of the Cooperative during fiscal year 2012.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 15, 2013, the number of Units beneficially owned and the percent so owned by (1) each of our directors as of such date, (2) Mark Dillon, our former Executive Vice President and Scott Stofferahn, our current Executive Vice President (our Named Executive Officer) and (4) all of our Directors, Mr. Dillon and the Named Executive Officer as a group. The number of Units owned by each person are those beneficially owned, as determined under the rules of the SEC, and such information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any Units as to which a person has sole or shared voting power or investment power and any Units which the person has the right to acquire within 60 days through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic
termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. The applicable percentage ownership is based on 15,490,480 Units outstanding held by 1,584 members.
Due to our cooperative nature, each member of the Cooperative is allowed to cast one vote at any meeting of the members, regardless of the number of Units actually held by that member. Some of our directors hold their Units through more than one entity which allows those directors to cast a vote for each one of those members. The address of each director and our Named Executive Officer is 112 Roberts Street, Suite 111, Fargo, ND 58102-4984.
(1) Membership interests are measured Units which equal the holders proportionate financial right but not a governance right.
(2) Voting rights are based on one member one vote. Each person or entity that holds units is a member for voting purposes. Some officers and directors own their Units through multiple entities resulting in multiple membership votes.
(3) Includes 11,000 Units that Mr. Medhaug owns jointly with his spouse.
(4) Includes 12,000 Units owned directly by Mr. Borgen’s spouse.
(5) Mr. Pyle owns no Units directly. Includes 40,000 Units held by McIntyre Farms of which Mr. Pyle is a 25% owner, 10,000 Units held by HarMar LLC of which Mr. Pyle is a 33% owner, and 5,000 Units held jointly with his spouse.
(6) Includes 20,000 Units owned directly by Mr. Beauclair’s spouse and 88,000 Units Mr. Beauclair owns in joint tenancy with his spouse.
(7) Includes 30,000 Units owned by Jirak Brothers Farming of which Mr. Jirak is a partner and 10,000 Units owned by Triple J. Ranch of which Mr. Jirak is a partner.
(8) Includes 4,000 Units owned by C and S Farms of which Mr. Johnson is the President.
(9) Includes 28,000 Units owned jointly with his spouse.
(10) Includes 48,000 Units owned by KARM Company of which Mr. Mauch is the President.
(11) Includes 300 Units as Mr Koehl’s share of C R Koehl & Sons, Inc.
(12) Includes 31,493 Units Mr. Dillon owns jointly with his spouse.
(13) Includes 12,000 Units owned by Mr. Stofferahn’s spouse and 12,500 Units owned by the Warren E and E Louise Stofferahn Family Trust.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In accordance with the Cooperative’s Bylaws, only people who are members of the Cooperative or representatives of members can serve on our Board of Directors. As members of the Cooperative (or representatives of members), all of our Directors have a contractual patronage relationship with the Cooperative that obligates them to deliver or contract to deliver corn to the Cooperative for processing. As a result of this patronage relationship, the Cooperative’s Directors, like all other member of the Cooperative, receive allocations of profit/loss and cash distributions.
The Cooperative has developed its own definition of “Independent Director” that takes into account the patronage relationship that exists between the Cooperative and each Director. Under the Cooperative’s definition, the patronage relationship is not considered for purposes of determining “independence.” However, other relevant relationships between the Cooperative and the Directors, and certain family members, are considered in assessing “independence.” Except with respect to the patronage relationship that exists, the Cooperative’s definition is consistent with the definition of an independent director found in Section 303A.02 of the New York Stock Exchange Listed Company Manual. Below please find the Cooperative’s definition of an independent director:
A director of the Cooperative shall be considered an “Independent Director” unless:
· The director has a material financial relationship with the Cooperative (either directly or as a partner, shareholder or officer of an organization that has a relationship with a company) other than the patronage relationship that exists between the Cooperative and each of its members.
· The director is, or has been within the last 3 years, an employee of the Cooperative; or immediate family member is, or has been within the last 3 years, an employee, of the Cooperative.
· The director has received, or an immediate family member has received, during any 12-month period within the last 3 years, more than $120,000 in direct compensation from the Cooperative, other than director or committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).
· (i) the director is a current partner or employee of a firm that is the Cooperative’s internal or external auditor; (ii) the director has an immediate family member who is a current partner of such firm; (iii) the director has an immediate family member who is a current employee of such a firm and personally works on the Cooperative’s audits; or (iv) the director or an immediate family member was, within the last 3 years, a partner or employee of such a firm and personally worked on the Cooperative’s audit within that timeframe.
· The director or an immediate family member is, or has been within the last 3 years, employed as an executive officer of another company, or any of the Cooperative’s present executive officers, at the same time serves or served on that company’s compensation committee.
· The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Cooperative for property or services in an amount which, in any of the last 3 fiscal years, exceeds the greater of $1,000,000 or 2% of such company’s consolidated gross revenues, other than as a result of such person’s patronage relationship with the Cooperative.
Based on the above definition, all of our Directors are independent of management and of the Cooperative.
Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit services rendered by Widmer Roel for the audits of the Cooperative’s annual financial statements for the years ended December 31, 2012 and 2011 and fees, if any, for other services rendered by Widmer Roel during those periods.
Audit Fees. The Audit Fees set forth above include the aggregate fees billed by Widmer Roel to the Cooperative for audit services related to the audit of the Cooperative’s annual financial statements and review of the statements included in the Cooperative’s quarterly reports on Form 10-Q for fiscal 2012.
Audit-Related Fees. No additional Audit-Related Fees were billed by Widmer Roel to the Cooperative for assurance and related services provided by Widmer Roel related to the performance of the audit or review of the Cooperative’s financial statements for fiscal 2012.
Tax Fees. No Tax Fees were billed by Widmer Roel to the Cooperative for professional services rendered by Widmer Roel for tax compliance, tax advice and tax planning for fiscal 2012.
All Other Fees. No Other Fees were billed by Widmer Roel to the Cooperative for professional services provided by Widmer Roel to the Cooperative for fiscal 2012.
The Cooperative’s Audit Committee would pre-approve all professional services provided by Widmer Roel to the Cooperative. The Audit Committee approved all of the services and the fees billed for such services to the Cooperative. The Audit Committee makes its decisions on the approval of services with due consideration given to maintaining the independence of the principal accountant. None of the hours expended on the audit of the 2012 financial statements were attributed to work performed by persons who were not employed full time on a permanent basis by Widmer Roel.
PART III
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2012 and 2011
Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010.
Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010
Statements of Changes in Members’ Equity for the Years Ended December 31, 2012, 2011 and 2010
Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010
Notes to the Financial Statements
2. Financial Statement Schedules
None
3. The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index on pages E-1 to E-2 of this report.
(b) Exhibits. The response to this portion of Item 15 is included as a separate section of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 1, 2013.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Jason Medhaug
Director
March 29, 2013
/s/ Paul Borgen
Director
March 29, 2013
/s/ Nicolas A. Pyle
Director
March 29, 2013
/s/ Shaun Beauclair
Director
March 29, 2013
/s/ Bernie DeCock
Director
March 29, 2013
/s/ Mark Harless
Director
March 29, 2013
/s/ Gary L. Jirak
Director
March 29, 2013
/s/ Chris A. Johnson
Director
March 29, 2013
/s/ Glenn Johnson
Director
March 29, 2013
/s/ Leslie Nesvig
Director
March 29, 2013
/s/ Bruce Speich
Director
March 29, 2013
/s/ David Benedict
Director
March 29, 2013
/s/ Byron Koehl
Director
March 29, 2013
APPENDIX A
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
GOLDEN GROWERS COOPERATIVE FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
A-2
Balance Sheets as of December 31, 2012 and 2011
A-3
Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010
A-4
Statement of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010
A-5
Statements of Changes in Members’ Equity for the Years Ended December 31, 2012, 2011, and 2010
A-6
Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010
A-7
Notes to the Financial Statements
A-8
A-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Golden Growers Cooperative
Fargo, North Dakota
We have audited the accompanying balance sheets of Golden Growers Cooperative as of December 31, 2012 and 2011, and the related statements of operations, changes in members’ equity and comprehensive income and cash flows for the years then ended December 31, 2012, 2011, and 2010. Golden Growers Cooperative’ management is responsible for these statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Golden Growers Cooperative, as of December 31, 2012, 2011, and 2010, and the results of its operations and its cash flows for the years ended December 31, 2012, 2011, and 2010, in conformity with accounting principles generally accepted in the United States of America.
Widmer Roel, PC
Fargo, ND
March 1, 2013
A-2
GOLDEN GROWERS COOPERATIVE
BALANCE SHEETS
DECEMBER 31, 2012 AND 2011
(In Thousands)
See Notes to Financial Statements
A-3
GOLDEN GROWERS COOPERATIVE
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012 , 2011 AND 2010
(In Thousands)
See Notes to Financial Statements
A-4
GOLDEN GROWERS COOPERATIVE
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010
(In Thousands)
See Notes to Financial Statements
A-5
GOLDEN GROWERS COOPERATIVE
STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010,
(In Thousands)
See Notes to Financial Statements
A-6
GOLDEN GROWERS COOPERATIVE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010,
(In Thousands)
See Notes to Financial Statements
A-7
GOLDEN GROWERS COOPERATIVE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010
NOTE 1 - NATURE OF OPERATIONS
Organization - Golden Growers Cooperative was initially organized as a North Dakota member-owned cooperative incorporated on January 19, 1994 (“GG-ND”). GG-ND and two other partners, one of whom was American Crystal Sugar Company (“ACSC”) entered into a joint venture that formed ProGold Limited Liability Company, a Minnesota limited liability company (“ProGold”) which designed and constructed a corn wet-milling facility in Wahpeton, North Dakota (the “Facility”). Under the joint venture, GG-ND (and indirectly its members) had the right and obligation to deliver corn to be processed at the Facility. After it was constructed and operated briefly by its members, the Facility was leased to Cargill Incorporated (“Cargill”) who continues to operate the Facility under a lease that runs through December 31, 2017. Golden Growers Cooperative and ACSC are the current members of ProGold, with Golden Growers Cooperative holding a 49% interest and ACSC holding the remaining 51% interest.
On July 29, 2009 GG-ND formed a wholly owned cooperative subsidiary in the state of Minnesota (GG-MN), organized under Minnesota Statutes chapter 308A, solely for the purpose of reincorporating into the state of Minnesota. On September 1, 2009, GG-ND merged into GG-MN and reincorporated into the state of Minnesota. Immediately after the merger, GG-MN statutorily converted into a cooperative association governed under Minnesota Statutes 308B. As a result of its reincorporation and reorganization Golden Growers - North Dakota, a North Dakota cooperative association historically taxed as a tax-exempt cooperative under Subchapter T of the Internal Revenue Code, became Golden Growers Cooperative, a Minnesota cooperative association governed by Minnesota Statutes chapter 308B as a cooperative for state law purposes but taxed as a partnership under Subchapter K of the Internal Review Code for tax purposes. Golden Growers Cooperative succeeded to the business of Golden Growers - North Dakota and except for changes to the structure and operations as a result of the reincorporation and statutory conversion, continues to operate the business of Golden Growers - North Dakota.
As part of the Conversion, GG-ND’s members exchanged their shares of Class A Common Voting Membership Stock and Class B Non-Voting Equity Stock for identical and equal shares of such stock in GG-MN. Each member’s single share of Class A Common Voting Membership Stock was redeemed for $150 and each member received membership units in GG-MN equal to the number of shares of Class B Non-Voting Equity Stock each member held in GG-ND prior to the Merger.
Prior to September 1, 2009, ownership of membership stock, which signified membership in the Cooperative, was restricted to producers of agricultural products. The ownership of equity stock was restricted to members of the Cooperative. Preferred stock could be held by persons who were not members of the Cooperative. At August 31, 2009 and 2008, the Cooperative had 10,000 shares of non-voting, $1,000 par-value preferred stock authorized, of which none were issued or outstanding. Equity requirements, as determined by the board of directors, could be retained from amounts due to patrons and credited to members’ equity in the form of unit retains or allocated patronage.
The Cooperative reserved the right to acquire any of its stock offered for sale and the right to recall the stock of any member. In the event this right was exercised, the consideration paid for such stock was 25% of its book value.
Beginning September 1, 2009, ownership of membership units is available to any person or entity residing in the Unites States of America. Net proceeds or losses will be allocated to members on the basis of their patronage of the Cooperative.
A-8
In connection with the Conversion, the Cooperative changed its fiscal year end to December 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments - The Cooperative’s investment securities are held to maturity and recorded at amortized cost. The Cooperative’s investment in ProGold is recorded at historical cost plus its pro-rata share of ProGold’s net income and additional paid-in capital less distributions received from ProGold. Unrealized gains or losses are recorded in accumulated other comprehensive income within members’ equity. Gains and losses are determined using the specific identification method.
Cash and Cash Equivalents - The Cooperative considers all demand accounts to be cash equivalents and overnight sweep accounts. Cash equivalents do not include money market accounts maintained by the Cooperative’s investment managers. Cash equivalents do not include any investment with a stated maturity date, regardless of the term to maturity.
Income Taxes - Beginning September 1, 2009, Golden Growers Cooperative is taxed as a limited liability company under Subchapter K of the Internal Revenue Code. As such, the Cooperative will generally not be subject to income taxes. Instead, net income will be reported by its members who will be responsible for any income taxes which may be due. Prior to September 1, 2009, Golden Growers Cooperative was an exempt cooperative for federal income tax purposes. As such, the cooperative was generally not subject to income taxes. Instead, net proceeds were allocated to the Cooperative’s patrons who were responsible for any income taxes which may have been due.
Property and Equipment - Property and equipment are stated at cost. Depreciation on assets placed in service is provided using the straight-line method over estimated useful lives ranging from 5 to 10 years.
Accounting Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition -The Cooperative’s members are contractually obligated to annually deliver corn to the Cooperative by either Method A or Method B or a combination of both. Under Method A, a member is required to physically deliver corn to the cooperative and under Method B a member appoints the cooperative as its agent to arrange for the acquisition and delivery of corn on the member’s behalf. For an annual fee of $92,000 paid quarterly, the Cooperative contractually appoints Cargill as its agent to arrange for the delivery of the corn by its members who elect to deliver corn using Method A and to acquire corn on its behalf for its members who elect to deliver corn using Method B. The price per bushel paid to the member who elects to deliver corn using Method B is equal to the price per bushel paid by Cargill to acquire the corn as the Cooperative’s agent. Members who deliver corn under Method A are paid the market price or contracted price for their corn at the time of delivery. The Cooperative pays members who deliver corn under Method A an incentive payment of $.05 per bushel while members who elect Method B to deliver corn pay the Cooperative a $.02 per bushel agency fee for the cost of having the Cooperative deliver corn on their behalf. The board has the discretion to change the incentive fee and the agency fee based on the Cooperative’s corn delivery needs. The incentive fee and agency fee are a component of Corn Expense.
With respect to all Method A corn that is delivered, Cargill pays the aggregate purchase price for corn purchased from the Cooperative’s members to the Cooperative and then, on the Cooperative’s behalf, makes individual payments for corn directly to its members. If a Method A member fails to fully satisfy the corn delivery requirement, Cargill purchases replacement corn for which the Cooperative reimburses Cargill the amount by which the underlying contracted corn price is less than the price of buying the replacement corn that was due on the delivery date. The Method A member who fails to deliver corn is then invoiced by the Cooperative for the price of the corn.
A-9
Based on what is to be delivered by its members using Method A, Cargill then purchases the remainder of the corn to be delivered by the Cooperative on behalf of its Method B delivering members. Because Cargill purchases the corn on the Cooperative’s behalf of Method B delivering members, the purchase price for the corn that would be paid to the Cooperative’s members if they actually delivered the corn offsets against the payment to be made by the Cooperative to Cargill for the cost to purchase the corn, thus no payment is made from Cargill to the Cooperative for corn delivered using Method B. The Cooperative has determined Corn Expense for Method B deliveries based on the average quarterly cost per bushel paid by Cargill to the Cooperative’s members for Method A quarterly deliveries.
Concentrations - Several times during the year, the Cooperative maintained a cash balance in excess of the Federal Deposit Insurance Corporation (“FDIC”) limits. At December 31, 2012, the Cooperative’s cash balance exceeded the FDIC insurance limits by approximately $2.6 million.
Fair Value Measurements - The Cooperative has determined the fair value of certain assets and liabilities in accordance with the provisions of Accounting Standards Codification (“ASC”) 820-10, which provides a framework for measuring fair value under generally accepted accounting principles.
ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820-10 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.
Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability.
NOTE 3 - PROGOLD LIMITED LIABILITY COMPANY
The Cooperative has a 49% ownership interest in ProGold Limited Liability Company. Following is summary financial information for ProGold Limited Liability Company:
A-10
NOTE 4 - INVESTMENTS
The Cooperative has determined fair value of its investments held to maturity based on Level 1 inputs.
The Cooperative’s investments held to maturity are as follows as of December 31, 2012 and 2011 (in thousands):
NOTE 5 - INCOME TAXES
The Cooperative follows the provisions of ASC 740-10 related to accounting for uncertainty in income taxes.
The Cooperative had no unrecognized tax benefits on December 31, 2012 and 2011. No interest or penalties are recognized in the statements of operations or in the balance sheets. The Cooperative is no longer subject to U.S. Federal and State income tax examinations by tax authorities for fiscal years 2008 and earlier.
The Cooperative recognized no income tax expense for the years ended December 31, 2012, 2011 and 2010.
A-11
NOTE 6 - EMPLOYEE BENEFIT PLANS
Pension Plan - In December 2012, the Cooperative approved a change to freeze the Cooperative’s defined benefit pension plan. As a result, no additional benefits will accrue to participants in the plan and no new employees are eligible for the plan. During the year ended December 31, 2012, 2011 and 2010,, the pension expenses were $75,500, $42,000, and $31,000 respectively.
As of December 31, 2012, the pension plans were funded as required by the funding standards set forth by the Employee Retirement Income Security Act (ERISA).
The Cooperative’s Compensation Committee has the responsibility of managing the operations and administration of the Cooperative’s retirement plans. The Cooperative has an investment policy that establishes target asset allocations to reduce the risk of large losses. Asset classes are diversified to reduce risk, and equity exposure is limited to 75% of the total portfolio value. The stated goal is for each component of the plan to earn a rate of return greater than its corresponding benchmark. The return objective of the plan is to achieve a minimum average total rate of return of four percentage points (4.0%) above the rate of inflation as measured by the Consumer Price Index. The real rate of return goal assumes a real rate of return for equities of 10.0% and a real rate of return for fixed income of 4.0%.
The assumptions used in the measurement of the Cooperative’s benefit obligations are shown below:
The following schedule reflects the expected pension benefit payments during each of the next five years and the aggregate for the following five years (in thousands):
The Cooperative expects to make contributions of approximately $141,000 to the defined benefit pension plan during the next fiscal year.
A-12
The following schedules provide the components of the Net Periodic Pension Costs for the periods ended December 31, 2012, 2011 and 2010 (in thousands):
The following schedules set forth a reconciliation of the changes in the plan’s benefit obligation and fair value of assets for the periods ending December 31, 2012 and 2011 and a statement of the funded status and amounts recognized in the Balance Sheets and Accumulated Other Comprehensive Income as of December 31, 2012 and 2011 and (in thousands):
A-13
The estimated amount that will be amortized from Accumulated Other Comprehensive Income at December 31, 2012 into net periodic benefit cost in fiscal 2013 is as follows (in thousands):
The accumulated pension benefit obligation was $179,000 and $148,000 as of December 31, 2012 and 2011, respectively.
401(k) Plan - The Cooperative has a 401(k) plan that covers employees that meet eligibility requirements. The Cooperative’s contributions to the plan totaled $8,000, $7,442 and $6,959 for the years ended December 31, 2012, 2011 and 2010, respectively.
Deferred Compensation Plan - Prior to 2010, the Cooperative had a non-qualified deferred compensation plan for a key employee. Under the plan, benefits accrued to the employee based upon the performance of the Cooperative. During 2010, the Cooperative terminated the plan and issued 31,493 membership units to the key employee. The Cooperative recognized expenses totaling $36,000 for the year ended December 31, 2010.
NOTE 7 - LINE OF CREDIT
The Cooperative has established a $1,000,000 line of credit with a variable interest rate based on the prime rate, maturing July 16, 2013. The line of credit is secured by business assets. At December 31, 2012, the Cooperative had no outstanding balance on the line of credit.
A-14
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Cooperative contracted with Cargill, Incorporated in connection with the procurement of corn which includes payments of $92,000 annually and terminates December 31, 2017.
On July 10, 2012, the Cooperative entered into a Services Agreement with Mark C. Dillon (the “Agreement”), the Cooperative’s former Executive Vice President and Chief Executive Officer. The Agreement was entered into in anticipation of Mr. Dillon’s retirement effective September 30, 2012. Pursuant to the Agreement, Mr. Dillon agrees to provide enumerated transitional consulting services to the Cooperative until March 31, 2013. In exchange for such services, Mr. Dillon shall be paid $37,250 per month. If the Cooperative terminates the Agreement prior to March 31, 2013 for any reason other than for cause, the Cooperative will still be required to pay the full amount due under the Agreement. Mr. Dillon retired effective September 30, 2012. During the year ended December 31, 2012 , the Cooperative incurred $111,750 expense in connection with the Services Agreement. At December 31, 2012, the Cooperative had an account payable to Mr. Dillon totaling $37,250 in connection with the agreement.
NOTE 9 - SUBSEQUENT EVENTS
In February of 2013, the Cooperative declared a distribution of $3,098,053, or $.20 per outstanding membership unit.
Management has reviewed subsequent events through March 1, 2013 the date to which the financial statements were available to be issued.
A-15
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2012
Exhibit No.
Exhibit Description
2.1
Articles of Merger of Golden Growers Cooperative and Golden Growers Cooperative is incorporated by reference to Exhibit 2.1 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
2.2
Certificate of Conversion of Golden Growers Cooperative is incorporated by reference to Exhibit 2.2 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
3.1
Amended and Restated Articles of Organization of Golden Growers Cooperative is incorporated by reference to Exhibit 3.1 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
3.2
Amended and Restated Bylaws of Golden Growers Cooperative dated September 1, 2009 is incorporated by reference to Exhibit 3.2 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
10.1
Form of Uniform Member Agreement is incorporated by reference to Exhibit 10.2 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
10.2
Form of Annual Delivery Agreement is incorporated by reference to Exhibit 10.3 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
10.3
Amended and Restated Member Control Agreement between Golden Growers Cooperative, Golden Growers Cooperative and ProGold Limited Liability Company dated September 1, 2009 is incorporated by reference to Exhibit 10.4 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
10.4
Operating Agreement between Golden Growers Cooperative, Golden Growers Cooperative and ProGold Limited Liability Company is incorporated by reference to Exhibit 10.5 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
10.5
Amended and Restated Grain Services Agreement between Golden Growers Cooperative and Cargill, Incorporated is incorporated by reference to Exhibit 10.6 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
10.6
Amended and Restated Corn Supply Agreement between Golden Growers Cooperative and Cargill, Incorporated is incorporated by reference to Exhibit 10.7 from the Cooperative’s Registration Statement on Form 10 (File No. 10783579) filed April 30, 2010.
E-1
Exhibit No.
Exhibit Description
10.7*
Employment Agreement between Mark Dillon and Golden Growers Cooperative dated January 1, 2011 is incorporated by reference to Exhibit 10.8 from the Cooperative’s Annual Report on Form 10-K (File No. 11726115) filed March 31, 2011.
10.8*
Services Agreement between Mark Dillon and Golden Growers Cooperative dated July 10, 2012 is incorporated by reference to Exhibit 10.8 from the Cooperative’s Quarterly Report on Form 10-Q (File No. 121030939) filed on August 14, 2012.
Filed herewith electronically
31.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1
Audited Financial Statements of ProGold Limited Liability Company for the years ended August 31, 2012 and August 31, 2011.
The following materials from Golden Growers Cooperative’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on April 1, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) Balance Sheets at December 31, 2012 and December 31, 2012; (ii) Statements of Operations for the years ended December 31, 2012 and 2011, for the period ended December 31, 2010; (iii) Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010; (iv) Statement of Changes in Members’ Equity and Comprehensive Income for the years ended December 31, 2012, 2011 and 2010; (v) Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010; and (vi) Notes to Financial Statements.* *
*A management contract or compensatory plan required to be filed with this report.
* * Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of the Exchange Act, except as shall be expressly set forth by specific reference to such filings.
E-2