Abstract

This report provides information on consolidating critical balance sheet compo

nents during cooperative mergers. It discusses the implications of combining

assets and liabilities and provides information and examples on various methods of consolidating member equities. Several case studies of cooperatives that

have merged are included. They provide actual examples on how equities were

combined during mergers, consolidations, and acquisitions.

Key Words: Merger, plan, equity, assets, liabilities

Consolidation of Balance Sheet Components

During Cooperative Mergers

James J. Wadsworth

David S. Chesnick

Agricultural Economists

U.S. Department of Agriculture

Rural Business and Cooperative Development Service

RBCDS Research Report 139

March 1995
Cooperatives or cooperative leaders studying merging or in the midst of merging are likely to confront some difficult issues when planning to consolidate

major balance sheet components-assets, liabilities, and equity. This report

describes the implications and presents information and examples on methods

for consolidating these important financial elements.

This information was obtained from: (1) literature by noted authors on cooperative mergers; (2) intra-agency development of examples and relevant information; and (3) case studies of several fanner cooperatives recently involved in

mergers.

This report is intended to aid cooperative leaders and others interested in (a)

better understanding financial aspects involved in mergers, and (b) developing

a plan to combine major balance sheet components for the merger, consolidation, or acquisition being considered.

The authors thank the six cooperatives that participated as case-study subjects.

Their contributions were essential for this report.

For brevity, the term “merger” is used throughout the report rather than specifying merger, consolidation, and acquisition in every instance.

The portions of this report that refer to the tax implications of mergers do not

represent official policy of the U.S. Department of Agriculture, the Internal

Revenue Service, the U.S. Department of the Treasury, or any other govemment agency. Hence, this report is not providing tax recommendations.

Cooperatives studying or interested in tax issues of mergers should seek pro

fessional/legal tax advice.
Contents

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

iv

Consolidating Balance Sheet Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Assets and Liabilities ....................................................................................... 2

Assets ....................................................................................................... 2

Liabilities ................................................................................................... 4

Member Equities ............................................................................................... 4

Allocated Equity ......................................................................................... 5

Unallocated Equity..................................................................................... 5

Equity Redemption Plans ......................................................................... 6

Alternatives for Consolidating Equity ................................................................. 6

Examples-Hatfield, et al. Report ............................................................ 6

Immediate Payoff .............................................................................. 6

Delayed Payoff .................................................................................. 6

Prorate Old Equity ............................................................................ 7

Reassignment to Unallocated Reserves .......................................... 8

Equity Reevaluation .......................................................................... 8

Base Capital Plan ........................................................................... 10

Handling Inactive Patrons ............................................................... 10

Other Alternatives ................................................................................... 11

Transfer Stock ................................................................................. 11

Exchange Stock ............................................................................. 11

Group Old Equity ............................................................................. 11

Equal but Weighted Grouping ......................................................... 13

Percentage-of-All-Combined Equities ............................................ 14

Acquisitions ............................................................................................ 15

Summary ................................................................................................ 16

ii
Contents

Cooperative Examples of Combining Equity .................................................. 16

Merger-Different Size and Strength ..................................................... 16

Consolidation-Different Size and Strength ........................................... 17

Acquisition 1 -Different Size and Strength ............................................ 17

Acquisition 2Cimilar Size and Strength ............................................... 17

Recent Case Study Examples ................................................................ 18

Case Study I-Cooperatives 0 and P ............................................ 18

Case Study II-Cooperatives Q and R ........................................... 20

Case Study III-Cooperatives S and T .......................................... 20

Case Study IV-Cooperatives U and V .......................................... 22

Case Study V-Cooperatives W and X .......................................... 22

Case Study VI-Cooperatives Y and Z .......................................... 23

Summary ............................................................................................... 23

Other Financial Issues ................................................................................... 24

Evaluating Equity ................................................................................... 24

Tax Considerations ................................................................................ 24

Summary and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

References . . ..*.............*.................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Appendix Adlossary of Terms/Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Appendix B-Case Study Survey Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Highlights

Cooperative leaders pursuing merger will benefit by developing and following an

organized plan to carry them through the process. Part of this plan entails the

careful study of the characteristics and structure of the participating cooperatives’ assets, liabilities, and equity. Major questions need to be answered pertaining to those structures:

l What are the assets, what will be needed, and what are they worth?

l How should assets be evaluated (book or appraised value)?

l How do debt-to-asset ratios compare?

l Must assets be sold to retire debt?

l Are liabilities at similar levels and structured the same?

l What types of equities do the cooperatives have?

l What are the redemption plans?

l Are the cooperatives current in redeeming equity?

l What alternatives are available for consolidating member equities?

l What redemption plan will best suit the unified cooperative?

These and other questions should be addressed in the merger plan. Doing so

will require a thorough examination of each cooperative’s balance sheet and

financial characteristics. Every merger is different depending on the attributes of

each cooperative, what precipitated the merger, and what each cooperative has

to offer a unified organization.

Handling member equity is, perhaps, the most difficult financial issue in a merger. Member investment needs to be respected and protected. Alternatives for

combining equity must take that into consideration.

Not all alternatives for combining equity provide complete member equality.

Develop alternatives and assess attributes of each to narrow the field to the

most suitable alternative given the conditions and the overall situation of the participating cooperatives.

This report contains 21 alternatives or examples for combining equity. Eleven

are described in general. Ten are examples from cooperatives that participated

iv
in a merger. Cooperatives considering merger may use them to help develop a

field of alternatives.

Cooperatives usually don’t face the same problems in acquisitions as they do in

mergers. While member financial interests and their patronage still must be

respected, the acquiring cooperative usually dictates most actions taken to combine assets, liabilities, and member equity, especially if the cooperative being

acquired is financially weak. In any event, acquisitions are gaining in popularity

given the relative ease by which the applicable transactions can be completed.

Cooperatives considering merger must work to let members know that their

interests are being represented and protected and that their financial stake in the

unified cooperative is important.

The new or unified cooperative should emerge with an equity capitalization and

redemption program that closely adheres to the “user-owned cooperative principle-the equity structure should reflect current patterns of usership. Cooperative

leaders should adhere to that precept in developing the merger plan.

V
Consolidation of Balance Sheet Components

During Cooperative Mergers

James J. Wadsworth

David S. Chesnick

Agricultural Economists

B

alance sheet characteristics of cooperatives

involved in a merger are rarely identical.

Problems often arise when organizations with different depreciable assets, liabilities, types of equity, and

equity redemption programs attempt to combine

their assets and equities into a single organization.

Asset evaluation, liability realignment, and

equity transfer during cooperative mergers are delicate issues and must be handled in an equitable or

mutually agreeable manner.

In a merger, one or more business organizations absorb another firm. The survivor maintains

its identity. Many of its organizational features are

operated on an expanded basis, given its increased

size and capacities. Consolidation combines two or

more business organizations into a new organization. In an acquisition, the assets of one cooperative

are purchased by another.

This report examines and clarifies the alternative methods for evaluating and consolidating critical balance sheet components during mergers, consolidations, and acquisitions. The report provides

references for cooperatives involved in planning

and negotiating a merger, and/or for those interested in the types of financial structural changes that

result from the consolidation of cooperative balance

sheets during mergers.

Mergers result in expanded assets, realigned

liabilities, and transferred and consolidated member

equities. Cooperative members involved in mergers

have a personal stake in the methods used to evaluate and consolidate these critical financial elements.

This report has seven sections. The first is a

general plan for consolidating major balance sheet

components during a cooperative merger. The second describes the appraisal of cooperative assets

and handling liabilities, while the third analyzes

and describes alternatives for consolidating member equities-some summarized from another literature source and some developed.

The fourth section provides some general

alternatives for consolidating equity, examples borrowed from other literature and other developed

examples. The fifth section includes case studies of

cooperatives that have merged, some originating

from a past study and some from recent case studies. Section six discusses some financial issues pertaining to merger. Section seven summarizes the

report and discusses implications of the findings.

CONSOLIDATING BALANCE SHEET

COMPONENTS

Cooperative leaders contemplating or actively

pursuing merger will benefit by developing and

following an organized plan that will carry the participants through the merger process. A welldeveloped plan for merger indicates steps to follow

and the components or elements in each step.1

Part of the plan should include strategies for

consolidating the balance sheet components of the

participating cooperatives. A joint merger or study

committee evaluates all implications of consolidating the participants’ balance sheets and provides

recommendations to the boards of directors about

the most suitable strategies for completing the task.

Initial phases of those studies often involve

outside consultants. Later phases of merger proposals usually involve a range of complex issues that

require the outside assistance from legal counsel,

accountants, and occasionally professional mediators.

This part entails careful study of the characteristics and structure of participants’ assets, liabilities, and equity (figure 1). The figure portrays the

1 See Swanson (ACS Research Report 43-Merging

Cooperatives: Planning, Negotiation, and Implementation)

for general information, guidelines, and step-by-step procedures for merging cooperatives.
consolidation of assets, liabilities, and equities of

two cooperatives into a single organization.

The variations and implications of consolidating these major financial elements can be complicated. To limit disruption to the merger process,

financial consolidations should be handled carefully. In proceeding with merging these components, a

number of questions, such as those included in figure 1, need to be answered in their regard.

Successfully answering these and other more

detailed questions requires a thorough understanding of the characteristics of each merger participant’s financial statements. Thus, financial statements must be carefully examined by the merger

committee.

The final plan or strategies for consolidating

the financial elements may vary according to the

status of the cooperatives contemplating merger.

For example, cooperatives with a similar financial

structure and similar financial strength and performance will find it relatively easy to consolidate

financial elements.

On the other hand, consolidating the financial

elements of cooperatives with significantly different structures and financial strengths may be more

difficult. If one cooperative is financially strong and

the other in danger of bankruptcy, the stronger

cooperative may feel that the equity position of the

weaker one should be adjusted in relation to current financial predicament in terms of debt and the

probability of future losses without the merger.

Other circumstances may require special plans

for financial consolidation-(a) the cooperatives

have similar levels of financial success, but one is

relatively larger than the other, (b) the cooperatives

have similar financial performance, but one has

superior operating assets in superior locations, (c)

the cooperatives have a similar financial structure,

but one owns property with windfall potential, (d)

the cooperatives have different types of equity

instruments or revolvement periods vary, etc. Such

differences must be considered when planning the

consolidation of financial (balance sheet) components of merging cooperatives.

A merger plan must examine possible tax

implications associated with the various aspects of

financial consolidation. Different methods for con2

solidating financial elements may have different tax

implications. This may be especially true when

cooperatives are merging across State lines, or

when asset disposal returns windfall profits.

The mission of a merger is to create synergies,

and at the very least, a financially and operationally sound cooperative that enhances the economic

well-being of owner-members. A merger should

produce greater economies of scale, less business

duplication, a greater resource base from which to

operate, and an expanded member base from which

to derive and achieve broader market penetration,

greater leadership abilities, and expanded capitalization.

The merged cooperative also has an opportunity for a new beginning by following important

cooperative financial principles and practices,

regardless of whether or not the participants completely followed them before the merger.

In other words, the merged organization has a

renewed opportunity to improve or continue

adherence to the “user-owned” cooperative principle regarding member capitalization, financial policies, and equity redemption. The members must

have a substantial financial stake in their cooperative and the equity structure should reflect current

patterns of usership.

ASSETS AND LIABILITIES

Assets

As cooperative leaders examine the value and

quality of assets involved in a merger, questions

invariably arise (figure 1):

(1)

(2)

(3)

(4)

(5)

(6)

What assets (capacity) will be needed?

What are the fixed assets worth?

What depreciation, writeoff, or salvage valuation methods are used? Is there windfall potential?

Should assets be considered at book value or

revalued?

Is any compensation necessary (if assets are

sold)?

What is the status of accounts receivable (and

bad debts)?
The leaders need to determine what assets will

be needed to adequately serve the members of the

unified cooperative. In some cases, all assets will be

retained, as when the merger involves complimentary cooperatives and there is little duplication or

trade overlap. It may be more complex in other

cases (duplication and overlap) and assets of both

cooperatives are of equal quality and capacity and

have similar locations.

will be needed by the unified cooperative, the

merging parties must agree on the value of assets.

It is generally advantageous to simply accept

the balance sheet asset (book) values of the merging

cooperatives. This is the simplest and most commonly used method in mergers. However, when

using book values, make sure that asset values (e.g.,

inventory, investments, and fixed assets) are reported accurately.

Once the decision is made about which assets On the other hand, when joining organizations

F~~II~S I-- Consolidating Balance Sheet Components

Cooperative A

+ Cooperative B

Assets

Assets

(1)

(2)

(3)

Unified Cooperative Assets

(4)

(6)

(6)

Cooperative A Liabilities

+ Cooperative B Liabilities

Unified Cooperative Liabilities

(1)

(2)

(3)

(4)

What assets (capacity) will be needed?

What are the fixed assets worth?

What depreciation, writeoff, or salvage valuation methods are

used? Is there any windfall potential?

Should assets be considered at book value or revalued?

Is any compensation necessary (ii assets are sokl)?

What is the status of accounts receivable (and bad debts)?

How do the total debt to total assets ratios compare (are debt

levels equivalent)?

Are accounts payable levels similar?

Are asset sales to retire debt necessary?

Are liabilities similarly structured (i.e., current, long-term)?

Cooperative A Equity

+ Cooperative B Equity

Unified Cooperative Equity

(1) How are equities identified?

(2) What are the differences in equity types?

(3) What are the respective redemption plans?

(4) What are the redemption schedules (if applicable)?

(5) Are the cooperatives current in redeeming equity?

(6) What alternatives are available/applicable for consolidating

member equities?

(7) What redemption plan will best suit the unified cooperative?

Assets = Liabilities + Equity

If tax implications are relevant to the situation, what are they?

3
use considerably different methods for depreciation, debt writeoff, salvage valuation, or have properties of possible windfall potential, procedures

other than the general acceptance of book values

may be necessary. Other procedures include evaluating assets on a liquidation basis, collateral basis,

or appraisal basis.

The evaluation of assets of the cooperatives

contemplating merger must reflect member-equity

values. If book values are used, member-equity values also can be accepted. However, if assets are valued by appraisal or some other method, then member-equity values may have to be adjusted.

Reevaluation of assets and member equity

may negatively impact some member good-will.

Therefore, reevaluation must be done fairly and its

impact well communicated to members.

When compensation for assets of one of the

merging cooperatives is necessary (e.g., assets are

sold or their value is appreciably high) the form of

compensation must be negotiated. Compensation

can be in cash, stock, notes, debentures, or book

credit. Cash payments may be made in a lump sum

or over a period of years.

Liabilities

Merger questions related to the examination of

liabilities include (figure 1):

(1) How do the total debt to total assets ratios compare (are debt levels equivalent)?

(2) Are accounts payable levels current and similarly structured?

(3) Must assets be sold to retire debt?

(4) Are liabilities similarly structured (i.e., current,

long term)?

Real differences in liabilities and long-term

debt obligations can pose problems for merging

cooperatives. However, differences must be analyzed in relative terms. The merger committee or

analysts should start by examining the ratios of

total debt (total liabilities) to total assets.

Ratio differences may indicate a possible

source of friction between members of the participating cooperatives. If friction occurs, one method

of alleviating the problem is to dispose of some of

the assets from the cooperative(s) with greater debt

to reduce the debt burden.

However, the outcome of such action (the sale

of assets) must be carefully examined. First, to

whom are the assets being sold. Will competitors be

bidding on assets.7 If so, how will such a sale affect

the unified cooperative’s operations? Second, critical assets must not be sold simply to alleviate a difference in debt-the capacity of the assets that

remain after sale must be sufficient to meet the unified organization’s needs.

Therefore, in some cases, debt levels may have

to be transferred as they are (or paid off in some

other manner) so that the unified organization

keeps the physical assets it needs to operate.

There is usually little concern when debt loads

and structures are relatively similar. In most cases,

such debt can be consolidated and/or restructured

in a mutually agreeable manner.

Current liabilities should also be examined. If

there are major relative differences in current liability categories-deposits received, advance payments, trade acceptances, notes payable, short-term

loans, and current portions of long-term debt-the

reasons for such differences must be clarified and a

course of action set for resolving or accepting differences.

MEMBER EQUITIES

Member equity must be carefully examined

during cooperative mergers. Member equity provides the definition and direct measure of members’ investment and, thus, ownership in their

cooperative. Data from 1991 (ACS Research Report

124-Equity Redemption and Member Equity

Allocation Practices of Agricultural Cooperatives)

indicate that equity made up 49 percent of assets

for those cooperatives with active equity redemption programs (table 1). For those with inactive

equity redemption programs (where equity is subject to but not redeemed) and those whose equity is

not subject to redemption, equity made up 44 percent of assets. This ownership in their cooperative

makes members particularly interested in how their

equity is handled (i.e., transferred/exchanged) in a

merger.

4
gable I- Equity redemption practices of agricultural

cooperatives, 19911

Percent

Active redemption programs

Total equity to total assets

Unallocated equity to total equity

Inactive redemption programs

Total equity to total assets

Unallocated equity to total equity

49

21

44

15

Systematic programs only 16

Special programs only 34

Systematic and special programs 26

Subtotal 76

No equity redemption program 10

Not subject to equity redemption 14

Total 100

t Rathhone and Wissman (ACS Research Report 124).

Figure 1 lists seven questions pertaining. to

consolidating members’ equity:

(1)

(2)

(3)

(4)

(5)

(6)

(7)

How are equities identified?

What are the differences in equity types?

What are the respective redemption plans?

What are the redemption schedules

(if applicable)?

Are the cooperatives current in redeeming

equity?

What alternatives are available/applicable for

consolidating member equities?

What redemption plan will best suit the unified

cooperative?

Cooperative leaders negotiating a merger

must determine how to handle differences in equity

types and what equity instruments should be used

by the unified cooperative. They will also need to

examine alternatives for consolidating equity and

redeeming equity, and work out various related

issues.

Allocated Equity

Equity capital in a cooperative is either allocated or unallocated. Allocated equity is capital

assigned proportionally to each member on the

basis of the patronage or business the member conducts with the cooperative.

Allocated equity is acquired in several different ways: (1) by direct investment from members

(common stock, preferred stock), (2) through a

retained patronage allocation (i.e., preferred stock,

allocated equity), or (3) through per-unit retains.

Conversely, unallocated equity is capital retained

by the cooperative that is not assigned or designated to specific member accounts.

Cooperatives involved in mergers may have

different allocated equity profiles. In some, equities

may be accrued and labeled differently.

Redemption plans and schedules may be at different stages. Others may carry old allocated equity of

inactive, retired, or deceased members. Differences

in the equity profiles of merging cooperatives may

or may not cause problems. Small differences can

usually be overcome easily. On the other hand,

variations in redemption schedules and/or the

presence of old allocated equity may create conflict

between the members of merging cooperatives.

Unallocated Equity

While not assigned to a member’s account,

unallocated equity makes up varying amounts of

total equity in cooperatives. In 1991, unallocated

equity made up 21 percent of total equity for cooperatives with active redemption programs. For

those cooperatives with inactive redemption programs, unallocated equity made up 15 percent of

total equity (table 1).

Even though not individually assigned, members have a vested interest in how unallocated equity is handled. This is especially true when one

cooperative has a much larger unallocated account

in relation to its allocated equities than the other

cooperative(s). It may be prudent to transfer some

unallocated equities from the cooperative with the

relatively larger amount into associated member

allocated accounts. However, such a procedure

requires careful study and administration.

5
Equity Redemption Plans

There are three types of systematic equity

redemption programs in agricultural cooperatives:

revolving fund plan, base capital plan, and percentof-all-equities plan. There are also special programs

activated by events that occur to individual members, such as when they die, retire from farming, or

reach a prescribed age.

In 1991,76 percent of all cooperatives had

some type of active equity redemption program, 10

percent had no program, and 14 percent were not

subject to equity redemption (table 1). These data

suggest that cooperatives discussing merger are

likely to have either different or no equity redemption programs. Such differences can lead to problems if each cooperative feels its program or policy

is superior.

Members of a cooperative current in redeeming its equity may be reluctant to merge their equity on an equal basis with a cooperative that is not

current. In other words, members of a cooperative

in a more current equity position may be reluctant

to dilute their equity by assuming the redemption

burden of a cooperative in a less current position.

While the concern of members in such a situation is

understandable, it is important to carefully examine

these differences and reach an agreeable solution.

If one (or more) of the merging cooperatives is

significantly behind in redeeming its equity, a plan

should be devised to either reallocate the old equity

into a current equity rotation schedule or pay it off.

On the other hand, if merger participants are current in redeeming member equity and have similar

redemption programs, then the major issues to

address are how to unite the equities and phase-in

the equity redemption program chosen for the unified cooperative.

To alleviate potential problems, leaders of each

cooperative should openly analyze positive and

negative aspects of each plan. The program ultimately chosen should be a current-user based plan

supported by the members. Of course, the level of

support members exhibit will likely be tied to how

well they perceive that their leaders analyzed each

plan and handled respective differences in redemption schedules and/or outstanding equity

Merger participants should develop and implement an equity structure for the emerging cooperative that reflects current patterns of usership and

then adhere to it. Farmers benefitting from the cooperative today should be those who finance it.

If old allocated equity of inactive, retired, or

deceased members is still on the books of the cooperatives studying merger, then a strategy should be

developed to retire or pay it off.

ALTERNATIVES FOR CONSOLIDATING

EQUITY

There are numerous ways to consolidate equities during cooperative mergers. This section provides information and examples, in a general sense,

pertaining to several methods of consolidating the

member equity of cooperatives being merged. Other

information pertaining to mergers, consolidations,

and acquisitions is also included in this section.

Examples-Hatfield, et al. Report

A report by Hatfield, et al. (Consolidation of

Allocated Equity for Merging Cooperatives Previously

Operating on a Revolving Fund, 1986), describes six

options for consolidating the equity of cooperatives

in different stages of redemption: immediate payoff, delayed payoff, prorate old equity, reassignment to unallocated reserves, equity reevaluation,

and base capital plan. The options are described

here and examples provided where applicable.

hmediate PayoH In this option, the surviving

cooperative pays all allocated equity older than a

predefined date. That date, prescribed by the

merging cooperatives, corresponds to the age-in

years-that the oldest allocated equities are to be in

the unified cooperative. For example, if the

cooperatives agree to 7 years, all allocated equity

older than that would be considered old equity and

immediately paid. All allocated equity is brought

into the merger as is. No concern is given to the

amount or actual status (age) of the equity.

Delayed Payoff This option is similar to the

immediate payoff. Existing equity levels are

brought into the merged cooperative. The

difference is that the old allocated equity (as set by

the predefined date) is paid off at some specified

6
rate (e.g., 2 or 3 years at a time), on a delayed basis

(e.g., per fiscal year), and not all at once. The

delayed payments are continued until all the old

allocated equity has been redeemed (up to the

predefined date).

Hatfield, et al. noted the disadvantage of these

two options is that they may be inequitable, especially if a significant difference exists in revolvement periods and amounts of old allocated equity.

Also, the pressure put on cash reserves may weaken the capital structure of the unified cooperative

(although more so in the immediate payoff plan

than in the delayed plan). These options should

only be considered when leaders are assured that

the unified cooperative will not be left with insufficient net worth and financial strength once the

merger is completed.

The advantage is that they are likely to be well

perceived in a public relations light-especially to

those members whose cooperatives are on equal

footing in equity redemption, and to those members whose cooperative is behind in equity redemption in relation to its merger partner(s). However,

members of a cooperative further along in equity

redemption may not agree with the good-will gesture.

Prorate Old Equity The old equity of the merging

cooperatives is prorated over a revolvement

schedule. If there is a significant difference between

the age of each cooperative’s equity, this option will

not be equitable to the parties involved. The

cooperative more current and with less old equity

will be paying part of the old equity of the other

partners.

Table 2 (example I) shows prorating old equity.

Table 2- Example 1, prorating old allocated equity, Cooperative A and Cooperative B merging

Ahcated equity Revised equity total

Age in Combined 7-year totals Prorated

years’ Coop AZ Coop 93 equity4 equiW Coop A’ Co-opB@ Combined0

_______ _ _________ Tjwusa& &l/am ___ ______________ Percent _____________________ l=hol/eanrj r&&n --------------------

7 50 55 105 7 17 67 55 122

6 125 200 325 21 52 177 200 377

5 100 125 225 14 35 135 125 260

4 75 150 225 14 35 110 150 260

3 55 250 305 19 48 103 250 353

2 110 95 205 13 33 143 95 238

1 80 100 180 12 30 110 100 210

Totals 595 975 1,570 100 250 845 975 1,820

Equity over

7 years old 250 0 250 0 0 0 0

SOURCE: Hatfii, et al., p6. (modified example)

1 Cooperatfve B is on a 7-year revolving fund plan and current, and Cooperative A does not have a member redemption plan or has never

redeemed allocated equity.

2 Allocated equity of Cooperative A-last 7 years and total allocated equity over 7-years old.

1 Allocated equity of Cooperative B-last 7 years.

4 Allocated equity from Cooperative A and Cooperative B added together for each year, overall, and old equity.

5 Combined equity in each year of the 7-year period divided by the total of the 7 years.

a The $250 old outstanding equity of Cooperative A multiplied by the corresponding percent data in the preceding column.

7 Revised equity of Cooperative A-original allocated equity (2nd column) plus prorated old equity.

8 Cooperative B revised equity the same as previously because there was no old equity.

e Combined revised equity total of Cooperative A and Cooperative 9.

7
In this example, Cooperative A has allocated equity

more than 7 years old, while Cooperative B is

redeeming equity on a 7-year revolvement cycle.

The older allocated equity of Cooperative A

($250,000) is prorated over the latest 7 years to coincide with the redemption schedule of Cooperative

B. The equity is prorated by multiplying total allocated equity older than year 7 by the percentage in

column 5 of table 2 (combined equity for each year

as a percent of 7-year combined total) for each year

of the 7-year period.

The resulting amount is then added to the

equity of Cooperative A for redemption in the corresponding year. While example I shows the total

amount of old equity of Cooperative A being prorated, actually, the old equity of each member of

Cooperative A is being prorated.

This plan brings the older equity of one cooperative into the shorter revolving cycle of the other

cooperative. Spreading the old equity redemption

obligation over a number of years softens the financial burden of trying to redeem significant equity

amounts all at once.

Example A-I shown in appendix table 1 is similar to example I except that both Cooperative A

and Cooperative B have old equity prorated. This

case assumes that a 9-year revolving fund is chosen

(both cooperatives were revolving on a longer

schedule at the time of merger) for the unified

cooperative. Thus, the old equity of each cooperative is prorated over the 9-year schedule.

This option shortens the period of equity rotation of one or both cooperatives in example I and

example A-I. However, when cooperatives have

significantly different equity profiles prior to the

merger, such as in example I, the plan is not equitable to all members.

Reassignment to Unallocated Reserves This

option also alleviates the equity redemption

differences of Cooperative A and Cooperative B.

The less current cooperative-Cooperative Aabsorbs an amount of equity (recent equity) equal

to its old equity (amount older than the agreedupon 7 years) and crediting it to unallocated

reserves of the unified cooperative. Cooperative A

(as used in the previous example) would deduct

$250,000 from its recent 7-year allocated equity total

($595,000; the deduction could be prorated over the

7-year rotation schedule) and the unified

cooperative would be credited with $250,000 in

unallocated reserves (table 3-example II).

To account for the loss of recent equity, each

patron of Cooperative A could be issued a capital

loss statement equal to the amount deducted from

his/her recent equity portion. However, this exercise still results in the need to account for the

$250,000 old equity (greater than 7 years). One solution is to bring it into the 7-year-redemption schedule. Prorating this amount over the most recent 7

years in the same manner as presented in example I

(table 2) leaves the unified cooperative with combined equity of $1,820,000 as shown in the last column of table 3, including the $250,000 of unallocated reserve.

Hatfield, et al. point out that this option treats

all members fairly and equitably because it places

the responsibility for older unredeemed equity on

the cooperative with the older equity.

Equify Reevaluation An interesting formula is

provided in this option. The book values of the

merging cooperatives’ allocated equity are adjusted

according to appraised values of that equity. These

conversion ratio formulas are used to adjust book

values in this option:

Conversion ratio formula for Cooperative A:

A, = Aa/Ab

Ba/Bb

Conversion ratio formula for Cooperative B:

B, =

Ba/Bb

Aa/Ab

A and B represent Cooperatives A and B while

a = appraised value,

b = book value, and

r I reevaluation multiplier.

8
Table 4 (example III) uses this approach for

reevaluating allocated equity. The example assumes

that Cooperative A’s allocated equity (book value

of $845,000) is appraised at $950,000 and

Cooperative B’s allocated equity (book value of

$975,000) is appraised at $1.3 million. The reevaluation multipliers are derived by using the conversion ratio formulasA, = [950,000 + 845,000] + [1,300,000 + 975,000]

= 0.843 and

B, = [1,300,000 + 975,000] + [950,000 + 845,000]

=1.186).

Thus, Cooperative A’s reevaluation formula is 0.865

and Cooperative B’s is 1.186.

Using these multipliers, the allocated equity of

Cooperative A adjusts to $712,000 ($845,000 x 0.843)

.

and that of Cooperative B adlusts to $1.156 million

($975,000 x 1.186). The combined total for the unified cooperative would be $1.868 million. This

example indicates total equity figures-in practice,

adjustments are made to each member’s individual

equity.

Hatfield, et al. report that because each cooperative’s allocated equity is discounted to reflect its

relative value (based on an appraisal), members are

treated equitably. Further, this approach allows the

unified cooperative to develop any form of

redemption program. The adjusted total equity

gable S- Example II, transferring old outstanding equity to unallocated reserve,

Cooperative A and Cooperative B merging

Age in

Years

Allocated equity of Cooperative A Intermediate Revissd Equity of Co-op A

OIigilIal Percent of Deduction1 Adjusted Cooperative B combined old equity combined

equity 7-year total balance2 equity3 prorated4 equity6

7 50 8 20 30 55 85 17 102

6 125 21 53 72 200 272 52 324

5 100 17 43 57 125 182 35 217

4 75 13 32 43 150 193 35 228

3 55 9 23 32 250 282 48 330

2 110 19 47 63 95 158 33 191

1 80 13 32 48 100 148 30 178

Totals 595 100 250 345 975 1,320 250 1,570

Old equity 250 0 250

Unallocated

reserve 250 250

Total equity 845

SOURCE: Hatfii. et al.. D. 9 lmociifii example).

975 1,820 1.820

Recent equity ckkction’of skated equity-hhived by multiplying percent (of Cooperative A 7-year total)

by equity greater than 7 years-to be credited to unalloceted msetve of new cooperative.

Adjusted balance is the original equity of Cooperative A less the deduction.

Adjusted balance of equity of Cooperative A plus corresponding-year equity of Cooperative B.

Old equity of Cooperative A prorated over most current seven years based on percentage of equity

ownership (of both cooperatives combined) in most recent 7-year period (see 6th column of table 2).

Intermediate combined equity plus prorated equity.

9
TEW c Example iii, adjusting allocated equity based

on conversion ratio formula, Cooperative A

and Cooperative B merging

Coopwaive A Coopmative B Combined totals

Thousand &Uars

Book value 845 975 1,820

Appraised value1 950 1,300 2,250

Conversion ratio* 0.843 1.188

Adjusted equity3 712 1,158 1,858

Source: Ha&Id, et al., p.11 (modified example).

l Appraised velues assumed for example purposes.

* Conversion ratio derived by conversion ratio formula (see text).

3 Ac@sted equity is cbrived by multiplyiig equity at book value by

conversion ratio.

could be divided equally to fit into an equity

redemption schedule, or it could be converted to a

base-capital plan, or a percentage-of-all-equities

plan.

The basis of this alternative is the appraisal

process. It must consider each cooperative’s potential for deriving positive returns as well as the condition of the fixed assets. A cooperative may show

a capital loss in the reevaluation process due to a

decline in property values or earning power (as

Cooperative A did in example III).

Base Capita/ P/an Under this plan, a total equity

requirement is determined for the unified,

cooperative. Each member would be obligated to

hold equity in the unified cooperative based on

his/her business volume during the year.

Each member’s annual business volume

would be divided by the total business volume of

the unified cooperative (a 3- or S-year average for

instance) to find a basis. The resulting basis-percent (i.e., relative proportion of cooperative use and

thus, equity requirement)-for each member would

be multiplied by the unified cooperative’s total

equity requirement to derive each member’s

required equity investment.

Then, a comparison between each member’s

required equity investment and current equity

holding in his/her pre-merger cooperative would

be made to determine if the member is over- or

under-invested. Equity of over-invested members

would be retired while under-invested members

would make up the equity deficiency (some combination of direct cash payment, retained earnings,

capital retains, and/or the purchase of equity from

an over-invested member). The investment would

be adjusted annually according to the individual’s

patronage and the cooperative’s capital needs.

This method for consolidating equity may be

the easiest to administer in situations where there

are significant differences in the amounts of member equity between the pre-merger cooperatives.

However, Hatfield, et al. point out that pre-merger

inequities will continue to exist unless there is a

stock reevaluation. If stock is revalued, inequities

can be corrected.

Handling inactive Patrons Hatfield, et al. also

presented a buyout option for paying off the equity

of inactive patrons. In contrast to leaving inactive

patron equity in the unified cooperative for

redemption in the chosen schedule, inactive

patrons may receive a lump-sum payment for their

allocated equities. After reaching agreement of a

discount rate, the present value of future equity

payments from the revolving fund plan would be

calculated and the total paid in lump sum.

This procedure gives the inactive member the

option of immediately receiving cash for his/her

equity at a discounted rate rather than having it

placed in the equity revolvement rotation of the

unified cooperative for later redemption.

Table 5 (example IV) illustrates this situation.

One member of Cooperative A has old equity of

$400 that is prorated over the 7-year redemption

period. To discount the equity, the prorated amount

for each year is multiplied by the present value

multiplier for the established discount rate (e.g., 8

percent) and for the appropriate time period.

(because the equity from year 7 would be redeemed

in year 1, the corresponding multiplier would be

found by using 8 percent and 1 year.) Following

this pattern for all 7 years results in a discounted

total value of $297 for the member. Thus, this member would have the option of receiving a lump sum

10
we s- Example IV, present value of old equity of

one inactive member of Cooperative A

Age in

Years

Old equity of PIwent VahJe

member’ multipliiF

Dollars Number

Present

VdlW

Dollars

stock of each cooperative into the unified organization in its current and original form. Under this

scheme, the original policies from each cooperative

prior to merger would continue until the stock

could be retired or voluntarily exchanged for

another type of member equity.

2 7 0.926 2 5 6 3 0.857 7 1

5 7 0.794 4 6

5 7 0.735 4 2

7 0 0.681 5 3

5 2 0.630 3 3

4 6 0.583 2 7

400 297

Exchange merging cooperatives Stock When

have different forms of stock, or stock of differing

dividend rates, problems may be avoided by

changing the stock and/or dividend rates of one to

match that of the other. This option leaves the

members of the unified cooperative with the same

types of stock.

For example, issue unified cooperative preTotals

Old outstanding

equity 400 (portion of $250,000 total old equity)

’ Old equity of one member prorated over 7-year redemption period

Prorated the same as total old equity of Cooperative A in table 2.

* Present value multipliers from appendii table 2 (&count rate of 6

percent).

3 Discounted old equity (prorated equity times multiplier).

payment of $297 in cash or waiting to receive the

face value of $400 according to the 7-year equity

redemption schedule.

Hatfield, et al. point out that the equity of

inactive members could either be bought by the

unified cooperative or sold to an active underinvested member at the discounted value.

Other Alternatives

The options and information provided from

the study by Hatfield, et al. yield some excellent

choices for cooperative leaders to consider for consolidating equity while examining and negotiating

mergers. Some alternatives and information in

addition to those are provided in this section.

Transfer Stock Most agricultural cooperatives are

organized as stock cooperatives. (See definitions of

stock and nonstock cooperatives in the Appendix

glossary.)

If differences in stock types, amounts, or dividend rates are not too great between merging cooperatives, it may be feasible to bring the outstanding

ferred stock (similar to that of one cooperative) to

members of a cooperative who have only common

stock. Or, exchange stock from one cooperative that

has a lower dividend rate with that from the unified cooperative with a higher dividend rate.

Exchanging stock or equities may involve

incorporating a simplified capital structure for the

unified cooperative. One method combines all

types of stock and equities of the participating

cooperatives into one account. Then, distribute one

share of common stock to each eligible member and

convert the remaining equities to some form of

nonvoting stock (e.g., preferred.stock) or allocated

capital reserve (e.g., capital certificates) that retains

the original order of redemption.

Group Old Equity Some mergers involve

cooperatives that have allocated equity extending

beyond the new (agreed upon) equity redemption

rotation period. An alternative for handling that

old equity is to break it down into groups and

allocate it t0 selected age-years of the new

redemption period.

This alternative uses a prorated approach, but

unlike the equity examples used by Hatfield, et al.,

the equity is not prorated systematically. Equity is

grouped and allocated into select years of the rotat’ion schedule via a pragmatic examination of the

equity data. No precise formula is used. The old

equity is grouped into the schedule years to create

equity redemption similarities among the merging

cooperatives.

11
The equities of Cooperative A and

Cooperative B-used in the previous examples

from Hatfield, et al. (table 2, example I)-could be

grouped. Table 6 (example V) shows that the

$250,000 of old equity of Cooperative A is arbitrarily broken into three groups ($65,000, $165,000, and

$20,000). These groups are allocated into three ageyears (4,3, and 1, respectively) of the 7-year rotation schedule. The net result is that the old equity

of Cooperative A is grouped and distributed into

the chosen 7-year equity rotation schedule relative

to the distribution of Cooperative B equity in the

schedule.

This option allows old equity of Cooperative

A to be reallocated into the new 7-year equity

redemption rotation period. However, the equity is

grouped and placed into age-years that will result

in the old equity being redeemed in future years.

While this goes somewhat against the principle that

current users be current financers, it is more equitable to the members of Cooperative B. The older

equity of Cooperative A is placed in later revolving

years.

This equity grouping and allocation could also

be done in other ways. In essence, the precise type

of distribution followed is irrelevant as long as both

cooperative memberships are satisfied with the

results. However, two rules should be followed

when using this option to ensure that the equity

grouping and subsequent allocations are logically

made:

(1) Avoid allocating any equity groupings into

the oldest equities (front years of the schedule)

that will be redeemed during the unified cooperative’s first few years of operation-this

avoids placing an additional financial burden

on the unified cooperative. (In table 6, example V, no groups are allocated to schedule

years 7,6, and 5.)

(2) Develop equity group sizes relative to

equity amount differences between the mergwe IZ- Example V, grouping and reallocating old allocated equity, Cooperative A

and Cooperative B merging’

Allocated equity Revised equity totals

Age in Grouped equity

years Coop A C-WB Coop AZ Co+p A Coop B

Thousand dollars

Combined

7 5 0 5 5 5 0

6 125 200 125

5 100 125 100

4 75 150 6 5 140

3 55 250 165 220

2 110 9 5 110

1 60 100 2 0 100

Totals 595 975 250 645

Equity over 7

years old 250 0 0 0

Grouping of old equity:

Group 1 6 5

Group 2 165

Group 3 2 0

1 Equity data from same cooperatives in table 2.

* Pragmatic grouping of old equity of Cooperative A and reallocation among years 4,3, and 1.

5 5 105

200 325

125 225

150 290

250 470

9 5 205

100 200

975 1,820

0 0

12
ing cooperatives in the various years chosen

for allocation. (In example V the third .$20,000

group allocated to age-year-l makes the equity

amounts between the members of the two

cooperatives even.)

This option would be more complicated if

both (or more) cooperatives have old allocated

equity that extends beyond the agreed-upon rotation period for the unified cooperative. However,

grouping and reallocating the old equity could still

be a valid and equitable option as long as the

resulting aged equities of each cooperative are similar and not so large that a substantial financial burden is placed on the unified cooperative.

E9ua/ but Weighted Grouping Another option

for reallocating old equity is to prorate it among the

years of the new schedule on an equal, yet

weighted basis. Old equity would be allocated

among the age-years by multiplying it by a scaled

percentage derived for each year of the rotation.

Table 7, example VI, shows this option. Part of

the over 7-year equity of $250,000 of Cooperative A

is allocated among each rotation year by multiplying it by a scaled prorate percent. To determine

appropriate scaled percents, divide 100 percent by 7

years. The resulting percent figure is used for the

middle year of the rotation. Then, each preceding

and additional year is decreased and increased,

respectively, by 1 percent for each consecutive year.

In example VI, 100 percent divided by 7 years

equals 14.3 percent. This percentaged is given to the

middle year (year 4). Then scale each consecutive

year higher than year 4 by 1 percent lower than the

preceding year, and each consecutive year lower

than year 4 is scaled by 1 percent higher than the

preceding year. (Note that the scaled prorate percent for age-year 7 is slightly different. An adjustment was made to that year to make the percentages sum to 100.)

Follow a similar procedure for any number of

odd years in a schedule. For schedules with an even

number of years, use the resulting percent figure

(100 percent divided by the number of years) for

the middle two years and then follow a similar scaling procedure (example VI) for the rest of the

schedule.

gable 7- Example Vl,.scalad prorating of old allocated equity, Cooperative A and Cooperative B merging’

Allocated equity Scaled Revised equity total

Age in Combined prorate Prorated

Years Co-op A Coop B equity Pe-nP equiW Coop A Coop B Combined

_________ ______ Thousand &,/jam _______________ Penxnt __ ______________ ____ Thoum,j &//a,-~ ______ __ __._________

7 50 55 105 11.2 28 78 55 133

6 125 200 325 12.3 3 1 156 200 356

5 100 125 225 13.3 33 133 125 258

4 75 150 225 14.3 36 111 150 261

3 55 250 305 15.3 38 93 250 343

2 110 95 205 16.3 41 151 95 246

1 80 100 180 17.3 43 123 100 223

Totals 595 975 1,570 100 250 845 975 1,820

Equity over

7 years old 250 0 250 0 0 0 0

1 Equity data from Cooperative A and Cooperative B-same as table 2, example A.

z Scaled prorate percents derived by dividing 100 percent by 7 years, using that result for the middle year, and then scaling that fiire higher

toward earlier years (and lower toward later years of schedule). In this example, 14.3 percent is the result used for the middle year (4th year).

Then each consecutive year higher than year 4 is scaled 1 percent lower than the preceding year, and each consecutive year tower than year 4

is scaled 1 percent higher than the preceding year.

3 Prorated equity derived by multiplying $250,000 (old equity) by the scaled prorate percent figures of the preceding column.

13
While this option may not be equitable to all

members (those of Cooperative B), it may be palatable because of the way it distributes a higher pmportion of the old equity (such as Cooperative A)

toward the later years of the redemption rotation

schedule.

Percentage-of-All-Combined Equities This

option is analogous to the Percentage-of-AllEquities redemption plan used by many

cooperatives.

The cooperative would redeem a percentage of

all outstanding allocated equities. All members

would receive the same percentage of their equities

regardless of when they were originally allocated.

The percent figure used for redemption would be

determined by the board of directors, given the unified cooperative’s financial performance and capital

needs. Members would receive an equity redemption derived from a percentage of their total equity

accounts included in the combined equities of the

unified cooperative. Equity would be redeemed

annually or as determined by the board.

All combined equity would be redeemed by

the percentage-of-all-combined equities plan before

any new allocated equity, accumulated from the

operations of the unified cooperative, would be

redeemed. Once all past equity is redeemed, the

ia~e e- Example VII, percentage of all combined

equities plan

Cooperative A Cooperative B Combined

Thousand Dollars

EquityAook

value 845 975 1,820

Equity-adjusted’ 950 1,300 2,250

Equity redeemabld 135 (6%)

1 Equity adjusted following valuation of assets.

2 Equity redeemable after first year of operation--percent of all

combined equity plan, subject to financial performance and equity

requirements. (Each member would receive 6 percant of equities

he/she has alkcated in combined equity.)

new equity could be similarly redeemed or a

revolving fund established.

Table 8, example VII, shows this option using

the same‘two cooperatives in the previous examples. After appraisal, Cooperative A’s $845,000 of

allocated equity is adjusted to $950,000 and

Cooperative B’s $975,000 is adjusted to $1.3 million

for a combined equity total of $2.255 million (each

member of Cooperative A would have his/her

equity adjusted by a multiplier of 1.12

($950,000/$845,000). Those in Cooperative B would

have their equity adjusted by a multiplier of 1.33

($1.3 million/$975,000).

In the first year of operation, the board makes

$135,000 available for redemption. This amount,

applied against the combined adjusted equity total,

is 6 percent. Thus, each member would have 6 percent of equity redeemed (equity in the adjusted

combined equity total). This procedure would be

followed each year until all the combined equity is

redeemed.

In this example, assets shown were revalued.

This illustrates that this option fits well with mergers that involve asset reevaluation. Equity is adjusted to reflect asset values provided by the reevaluation and then combined. This option also applies to

situations where no assets or equity are revalued.

The major factor to consider in using this

option is its fairness or unfairness to members,

given that all their equities will be combined into

one grouping without regard to original dates of

issuance.

The Percentage-of-All-Combined Equity plan

is easy to administer and understand. It can also be

financially beneficial. Annual redemption of the

combined equities would not be predetermined

based on historically allocated sums but rather

determined on the unified cooperative’s most

recent financial performance and capital requirements.

The disadvantage is that if equity is revalued

at higher levels for both cooperatives, such as in

example VII, then the unified cooperative will be

responsible for redeeming higher levels of equity

than originally prescribed.

14
Acquisitions

Acquisition characteristics distinguish them

from merger and consolidation transactions. In an

acquisition, one cooperative purchases the assets of

another. The cooperative being acquired is dissolved and ceases to exist. The acquiring cooperative assumes the assets, and sometimes the liabilities.

The board of directors of the acquiring cooperative must vote whether or not to proceed with the

transaction. A full vote of the members is not

required. However, members of the cooperative

being acquired generally must vote on liquidation/voluntary dissolution. While a full membership vote is not necessary for the acquiring cooperative, lack of membership support may inhibit

future operations of the unified cooperative. Thus,

it is in everyone’s interest that directors of the

acquiring cooperative proceed with the transaction

only with sound member support. A strong director-to-member communication program will be

required.

When cooperatives aspire to combine assets

through an acquisition, consolidation of critical balance sheet components requires careful negotiation

and analysis, just as in a merger or consolidation.

Members of both cooperatives have a vested interest in how the transaction is completed. Often, the

assets of the cooperative being acquired will be

reevaluated (e.g., market value).

To speed the process, the acquiring cooperative may find it practical to assume the liabilities of

the other. However, the acquiring cooperative is not

required to assume the liabilities of the dissolving

cooperative. But, the dissolving cooperative cannot

be folded until it pays its liabilities, so the acquiring

cooperative often assumes them. The liabilities can

be assumed as is or be restructured. Restructuring

may be advisable when the cooperative being purchased is in poor financial health.

Equity instruments will be issued to the members of the cooperative being acquired. This is usually done in relation to the value of assets and may

also be contingent on outstanding liabilities that

must be assumed and the future earning potential

of the cooperative being acquired.

The acquiring cooperative may issue equity

certificates, stock (preferred, common), bonds,

notes, equity credits, nearly any kind of financial

instrument, to the members of the acquired cooperative as part of the transaction. The type issued will

usually depend on what acquiring cooperative currently uses and the circumstances pertaining to the

member equity of the cooperative being acquired

(i.e., equity age and type).

Equity is often transferred during an acquisition by issuing new equity credits (e.g., stock, certificates) to the new members in exchange for the

equity they hold in their cooperative. The exchange

rate may depend on specific factors (e.g., assets

value, equity level) associated with the acquisition

transaction. The simplest case will involve cooperatives with similar types of equity. A simple

exchange can be made. However, in some cases an

acquiring cooperative may wish to issue different

types of equity instruments to different members in

a way that makes the equity capitalization plan of

the acquiring cooperative more fair to members.

For example:

Issue stock and debenture bonds. Cooperative A is

acquiring Cooperative B. Cooperative A has a 7-

year equity redemption schedule while its partner

has not redeemed equity in many years.

Cooperative A issues one share of common (voting)

stock and preferred stock (its primary member

equity instrument) to Cooperative B’s current-user

members in exchange for their accrued equity.

Cooperative A then issues debenture bonds (with

given due dates) to the inactive members of

Cooperative B in exchange for their accrued equity.

This allows the current-user members of

Cooperative B to participate in Cooperative A’s

equity capitalization and redemption program and

provides a way to retire the old equity of

Cooperative B’s inactive members. Their equity will

be redeemed in the form of debenture bonds that

become due in the future. Most cooperatives allow

members to cash in debenture bonds before they

are due.

Acquisitions are disruptive, particularly to the

members of the dissolving cooperative who may

feel a severe sense of loss. For this reason, it is

important that the interests of all members effected

15
be respected and protected by the individual

boards as the transaction is completed.

Summary

The six alternatives described earlier as developed by Hatfield, et al., provide sound examples of

consolidating the equity of merging cooperatives.

The first four options should be included

among equity combination considerations of cooperatives with revolving fund plans (or cooperatives

that have no set redemption plan but are willing to

implement a revolving fund plan). The last two

options should be included among equity combination considerations of cooperatives with base capital, percentage of all equities, or other special plans.

Of course, the last two options also could be used

by cooperatives with revolving funds.

Five additional alternatives are described in

the second part of this section. The first two alternatives involve the simple transfer and exchange of

stock. The third and fourth should be considered by

cooperatives with revolving fund plans or whose

merger plan involves implementing a revolving

fund. The fifth alternative would fit any merger situation. The example corresponding to this alternative indicates that equity is adjusted to reflect asset

reevaluation. The other four alternatives could be

made more equitable to members of merging cooperatives by adjusting members’ equity in accordance with an asset reevaluation.

Acquisition, another way to combine cooperatives, is a popular alternative to merger and consolidation. The authority granted to the acquiring

cooperative via the acquisition makes difficult

asset-utilization, financial, personnel, and other

operational decisions a little easier to carry out.

COOPERATIVE EXAMPLES OF COMBINING

EQUITY

Up to this point, general information and

examples of consolidating member equity among

merging cooperatives have been presented, some

from previous studies and some developed. While

they demonstrate different methods, they don’t

indicate precisely how cooperatives complete member equity transfers/exchanges during actual mergers.

This section provides some examples and case

studies of actual cooperative mergers, consolidations, and acquisitions. Ten cases are described.

Four originate from a report by Haskell (FCS

Research Report 8-Results and Methods of Four

Mergers By Local Farm Supply Co-ops) completed

in 1970. The others stem from a survey of recently

merged cooperatives.

In the first four case examples, two farm supply cooperatives participated in each merger. They

are identified as Cooperative A or Cooperative B.

Merger-Different Size and Strength

A relatively larger and stronger Cooperative A

merged with Cooperative B. After the merger,

Cooperative A assumed operation of all facilities

and services previously operated by Cooperative B.

Cooperative A became the unified cooperative and

assumed all assets, debts, and other liabilities of

Cooperative B.

The shares of common stock, share credits,

deferred patronage refunds, and patrons’ equity

reserves held by members of Cooperative B were

converted, at par value, into shares and partial

shares of common stock of Cooperative A (the unified cooperative). Preferred stock was carried into

the unified cooperative at par value.

Cooperative B was 9 years behind Cooperative

A in stock redemption prior to the merger, so two

alternative redemption methods were described in

the merger plan.

Alternative 2. The board of directors of the unified

cooperative could call stock for redemption or

retirement in the order of issuance by years. The

oldest outstanding stock would be called first.

Whenever common stock of Cooperative A issued

prior to the effective date of merger would be

called for redemption or retirement, the board of

directors would also call a proportionate share of

stock issued to common stockholders of

Cooperative B, in the order of issuance by years.

Further, no common stock of the unified cooperative issued after the effective date of the merger

would be retired until all common stock issued by

Cooperative B prior to the effective date had been

retired.

16
Alternative 2. The board of directors of the unified

cooperative could retire common stock after the

date of merger on the basis of a percentage of all

the common stock outstanding. In this event, the

same percentage of the stock of each common

shareholder would be called at the same time,

regardless of issue date.

Consolidation-Different Size and Strength

In this case, a smaller but more financially

sound Cooperative A was consolidated with a

slightly weaker Cooperative B. The existence of

Cooperatives A and B ended and a new cooperative

emerged. The unified (surviving) cooperative

assumed ownership and operation of all facilities

and services of the original cooperatives.

The plan of consolidation contained specific

arrangements concerning the conversion of stock

and stock credits of the original cooperatives to

stock and allocated reserves of the unified cooperative.

Cooperative A had preferred stock, first issue

(6 percent cumulative dividend), preferred stock,

second issue (5 percent cumulative dividend), and

patronage common stock and credits (no dividends). Cooperative B had preferred stock (5 percent noncumulative dividend) and patronage common stock and credits (no dividends).

An owner of stock and/or stock credits in

either original cooperative could determine the

securities (i.e., of those offered) of the unified association that he/she would receive for presently

held stock. All exchanges were completed on a dollar-fordollar basis as to stated or par amounts.

The consolidated cooperative offered preferred stock (5 percent noncumulative dividend)

and 6 percent debenture bonds due in 15 years.

Bonds could be exchanged within 3 months from

the effective time of merger for preferred stock at 5

percent noncumulative dividend.

Acquisition l-Different Size and Strength

A stronger and slightly larger Cooperative A

acquired Cooperative B, a smaller cooperative

experiencing management and financial difficulties.

Cooperative A purchased all of Cooperative

B’s plant facilities and equipment, supplies, furniture, fixtures, office equipment, accounts receivable,

contracts, leases, and interests in all real and personal property, all at book values.

Cooperative B agreed to exert all possible

effort to assure transfer of at least 75 percent of its

outstanding preferred stock held by its members to

the surviving association at par value. Preferred

stockholders of Cooperative B would receive no

dividends that had been passed. At its option,

Cooperative A could void the transaction if 75 percent of the stock had not transferred.

Acquisition 24imilar Size and Strength

In this case Cooperative A acquired

Cooperative B. Both were about the same size and

strength but there was a sharp contrast in the types

of businesses and services they offered.

Cooperative A (surviving) assumed operation of all

facilities and services of Cooperative B.

The shares of common stock of Cooperative B

were converted into shares of common stock of the

unified cooperative at par value. The unified cooperative ended up with common stock at $5 a share

entitling each holder to one vote, and nonvoting

common stock with a par value of $5 a share.

Dividends on both types were eligible for declaration by the board of directors out of any net savings

not distributable as patronage refunds.

Preferred stockholders of Cooperative B were

apportioned one or more subordinated promissory

notes bearing interest at 4 percent a year, and

maturing in 20 years from issue date. Promissory

notes were in the principal amount of the par value

of the preferred stock so exchanged. No dividends

were to be paid on the outstanding preferred stock

of Cooperative B for any year beginning on or after

the effective date of consolidation, whether or not

the stock had been surrendered in exchange for a

promissory note.

The oldest outstanding common stock of

Cooperative B was issued 18 years prior to merger

and 21 years in Cooperative A. To deal with stockholders of both cooperatives equitably, the unified

cooperative retired all of the common stock issued

18 years prior to merger. Next came stock issued 20

years prior to merger followed by 17 years, 19

years, and 21 years. Thereafter, stock issued 16

17
years prior and in any subsequent years was retired

in the order of issuance. This stock redemption

sequence is clarified as follows:

(1) Stock issued 18 years prior-Cooperative B’s

oldest stock and Cooperative A’s 18th year

stock.

(2) Stock issued 20 years prior-Cooperative A

stock.

(3) Stock issued 17 years prior--stock from both

cooperatives.

(4) Stock issued 19 years prior-Cooperative A

stock.

(5) Stock issued 21 years prior--Cooperative A’s

oldest stock.

(6) Stock issued 16 years prior-stock from both

cooperatives.

(7) Stock issued 15 years prior, followed

by 14,13, etc.

The stock redemption gap between members

of each cooperative would be equal following the

redemption of stock reflected in the 5th sequence

(stock issued 21 years prior).

Recent Case Study Examples

This section includes six case studies of farmer

cooperatives that have merged in recent years. Two

cooperatives were involved in each merger. They

were asked several questions pertaining to the

financial aspects of the merger (see Appendix B).

In all but one case, a committee was appointed

to study and negotiate various aspects of the merger. The average committee size was nine.

Participants consisted largely of directors and management personnel from both cooperatives

involved. A couple committees also had attorneys

and other outside individuals. In one case, accountants were used. One case study subject indicated

that the committee performed very well, two indicated that it performed well, and the others said it

performed okay.

The first case study is described in detail while

the others are summarized.

Case Study &Cooperatives 0 and P TWO

relatively small cooperatives were consolidated and

adopted a new name. A 1Zmember committee

negotiated merger issues. Member support was

moderate. (The cooperatives identified member

support as strong, moderate, weak, or none.)

The unified cooperative had assets of about

$3.8 million. Pie-merger data showed:

Cooperative 0

Sales of about

$3.3 million.

Assets of about

$2.2 million.

Low debt; short-term

debt-to-asset ratio of

14 percent; limited

long-term debt.

Membership common

stock, certificates of

indebtedness.

No set redemption

program; redeemed

equity at board

discretion.

Cooperative P

Sales of about

$2.2 million.

Assets of about

$1.6 million.

Low debt; short-term

debt-to-asset ratio of

about 17 percent;

no-long-term debt.

Common stock, preferred stock, preferred stock A.

No set redempton

program; redeemed

equity at board

discretion

Excess equipment assets were sold at book

value and the proceeds used to pay off some existing debt. Common stock from both cooperatives

was exchanged for unified cooperative common

stock (par value $10) to members of the participating cooperatives (0 and P). The conversion had to

be made within 30 days after the consolidation.

Members who neither wished to join nor convert

their common stock could surrender that stock for

cash payment. Stock surrenders also had to be

made within 30 days.

The cooperatives developed and followed a

plan for transferring equities. Records were examined to determine equity amounts. The board of

directors of the unified cooperative (within 60 days

of consolidation) determined the allocated and total

equities of each constituent cooperative.

For Cooperative 0, the amounts of allocated

patronage equities consisting of qualified, nonqualified, and certificates of indebtedness were determined as well as the total amount of Cooperative 0
equities less the face value of outstanding memberships (the difference being total Cooperative 0

equities).

For Cooperative P, the amount of preferred

stock A and preferred stock was determined as well

as the total patrons’ equities less membership or

capital stock (the difference being total Cooperative

P equities).

After stock determination, the board of directors allocated to Cooperative 0 equity holders a

portion of the total equities of Cooperative 0 not

already allocated. Total Cooperative 0 equity

divided by allocated Cooperative 0 equity had to

equal total Cooperative P equity divided by

Cooperative P stock. This ratio was calculated:

Total Cooperative 0 equity Total Cooperative P equity

Allocated Cooperative 0 equity = Allocated Cooperative P stock

Thus, equal proportions of allocated equities

of Cooperative 0 and Cooperative P to total equities of Cooperative 0 and Cooperative P were

brought into the consolidation. Because

Cooperative O’s ratio was larger than Cooperative

P’s, some of Cooperative O’s unallocated equity

was allocated to its members to make the ratios

similar.

Table 9 shows this procedure. In the example,

the allocated equity to total equity ratios are not

equal. Cooperative O’s ratio is 1.25 while

Cooperative P’s is 1.22. To make the ratios equal,

$27,400 of Cooperative 0 unallocated equity is

transferred to Cooperative 0 allocated equity. The

equities were allocated to members’ allocated equity accounts on a basis similar to that of the members’ original equity allocations made over the 5-

year period immediately preceding the effective

consolidation date.

The equities of Cooperative 0 members

brought into the merger were then converted to

preferred stock of the unified cooperative. Each

dollar of equity was converted to one share of preferred stock (par value $1).

Each share of preferred stock (par value $1)

held by the members of Cooperative P was converted to a similar share with the unified cooperative.

The same procedure was followed for preferred

stock A of Cooperative P.

Remaining unallocated equities of Cooperative

0 and Cooperative P became a part of the unified

cooperative’s unallocated reserve to be unallocated,

permanent capital.

After consolidation, the equity capital structure of the unified cooperative consisted of capital

stock-shares of common stock (par value of $10)

designating membership and voting rights, and

preferred stock A and preferred stock-two classes

T&I~ 4- Case study I, member equity transfer of Cooperative 0 and Cooperative PI

Prior to merger At mergeP

co-op 0 coop P ~OpO co-op P Unifii Co-op

DOliflrS

Allocated equity3 1.055,oOO 787,200 1,082,400 787,200 1,869,OOO

Unallocated equity 265,000 172,800 237,600 172,800 410,400

Total equity 1,320,OOO 960,000 1,320,000 960,000 2,280,OOO

Ratio 4

1.25 1.22 1.22 1.22 1.22

1 Numbers are hypothetical, for example purposes. Assumptions: total equity to total assets = 60 percent and for Cooperative P unallocated

equity to total equity = 18 percent and unallocated equity to total assets = 11 percent.

z To make ratios equal, unallocated Cooperative 0 equity was shifted to Cooperative 0 members allocated equity accounts (in the amount

of $27,400).

3 Allocated equity made up of common stock, preferred stock, and certificates of indebtedness.

4 Ratio derived by dividing total equity by allocated equity.

19
of stock that hold neither voting power nor rights

to participate in management of the cooperative.

The board of directors of the unified cooperative was authorized to establish book credits, capital funds, and other allocated reserves to provide

funds for corporate purposes as provided in the

unified cooperative’s bylaws (i.e., by retains from

margins or proceeds otherwise payable to the members or by other methods of collection).

The unified cooperative’s program for retiring

equities is to redeem patrons’ equities of Cooperative

0 and Cooperative P in the chronological order in

which they were issued. The unified cooperative’s

board of directors was authorized to use discretion in

carrying out the equity retirement plan.

Case Study II-Cooperatives Q and R The

merging two cooperatives were of significantly

different size. The larger one’s name was retained

after the merger. A g-person committee negotiated

merger issues. The merger had moderate member

support.

The unified cooperative emerged with assets

of about $4.5 million. Pre-merger data showed:

Cooperative Q

Sales near $15 million.

Assets of about

$4 million.

Carried no debt.

Common stock and

credit accounts.

Redemption plan:

pay 30 percent current

qualified allocated

refunds in cash;

lo-year revolving

schedule; redeem

loo percent of

remainingequity

when member reaches

70 years of age.

Coopem tive R

Sales near $1.5

million.

Assets of about

$0.5 million.

Debt-to-equity

ratio around 40 percent.

Common stock and

credit accounts.

No set redemption

program; no set

revolving schedule;

had not redeemed

any equity for several

years preceding the

merger.

During negotiations, both boards agreed to

write down the assets and equity of Cooperative R

by about 25 percent. Cooperative R was relatively

weaker than Cooperative Q. Cooperative R’s equity

was brought into the merger at the written-down

value while Cooperative Q’s equity was set at book

value.

The unified cooperative paid off Cooperative

R’s debt. Common stock of Cooperative Q was converted to common stock of the unified cooperative.

because Cooperative R was considerably further behind Cooperative Q in equity revolvement,

the merger committee decided to lump all member

equity credit accounts of Cooperative R into one

equity account. These equities were designated for

payment 2 years after the effective merger date.

The original allocation dates corresponding to

the equities were ignored and the equity in this

lumped account was made available for redemption under the unified cooperative’s policy, Equity

from each cooperative was placed into the allocated

equity pool of the unified cooperative for later

revolvement at its new designated allocation date.

Table 10 provides a hypothetical example of

the equity transfer. Cooperative R’s equity is written down by 25 percent at merger time and brought

into the unified cooperative. The Cooperative R

allocated equity of $184,500 is lumped into the

equity redemption schedule of the unified cooperative and designated for payment 2 years after the

merger, regardless of original allocation dates.

The unified cooperative adopted the redemption policy of Cooperative Q (i.e., revolve equity on

a lO-year cycle).

Case Study Ill-Cooperatives S and T In this

example, two similar-sized cooperatives were

merged. A committee of 11 negotiated merger

issues. Merger support was strong from the

members of Cooperative S (more than 80 percent

favored) and moderate in Cooperative T (about 70

percent favored it).

At the end of its first fiscal year, the unified

cooperative’s sales topped $20 million. It had assets

of about $13 million. Pre-merger data showed:

20
Cooperative S Cooperative T

Sales of nearly

$5 million.

Sales topped

$10 million.

Assets of about Assets of about

$5 million. $7 million.

Relatively high

short-term debt;

short-term debt-toasset ratio just

under 50 percent.

Relatively high shortterm debt; short-term

debt-to-asset ratio

over 50 percent.

Common and preferred stock (classes

A and B).

Common and preferred stock (classes A

and B).

Allocated member

equity redeemed when

the board determined

that there was a

sufficient balance of

working capital.

Allocated member

equity redeemed

when the board

determined there was

sufficient balance of

working capital.

12 years behind in

revolving member

allocated equity;

no.set revolving

period.

7 years behind in

revolving member

allocated equity; no

set revolving period

To keep this merger on equal terms, all assets,

liabilities, and member equities were consolidated

using book values. However, some of each cooperative’s assets were sold to eliminate duplication.

Proceeds were used to increase working capital.

Some short-term debt from each cooperative was

restructured and converted to long-term debt.’

A favorable majority vote of stockholders of

each class of stock had to approve consolidation.

Cooperative S redeemed all its class A preferred

stock (about $10,000 worth) controlled by only

seven members prior to the merger vote. (The cooperative was worried that the Class A stockholders

would not approve the merger.) Cooperative T

wanted to follow suit for its class A preferred stock

but lacked the capital to redeem it all valued at

$60,000.

The possibility of ending up with high

amounts of stock of dissenting members after the

merger also concerned the committee. So, the cooperatives limited the amount of this stock they

would pay to $12,000. After the merger was

approved by a two-thirds majority in each cooperative’s stock classes, the amount of stock of dissenting members was about $19,000. Even though this

exceeded the $12,000 cap, the cooperatives paid

that stock.

The allocated equity (common and preferred

stock) from both cooperatives was transferred to

the unified cooperative on a book-value basis.

The equity redemption program of the premerged cooperatives was adopted by the unified

~abis IO- Case study II, member equity transfer of Cooperative Q and COOperatiVe R1

Prior to merger At merge6

Coop 0 Co-op R Coop 0 Coop R’

Dollan

Unifii Coop

Allocated equtip 1,968,OOO 246,000 1,968,OOO 184,500 2,152,500

Unallocated equity 432,000 54,000 432,000 40,500 472,500

Total equity 2,400,OOO 300,000 2,400,OOO 225,000 2,625,OOO

1 Numbers are hypothetical, for example purposes. Assumptions: total equity to total assets = 80 percent, unallocated equity to total equity - 18

percent, and unallocated equity to total assets I 11 percent.

2 Cooperative R equity written down by 25 percent.

3 Allocated equity of $184,500 of Cooperative R was assigned a new date to be fit into the equity redemption schedule of unified cooperative

(taken from Cooperative Q-date designated as 2 years later than effective date of merger.

4 Allocated equity made up of common stock and credit accounts.

21
cooperative. Member-allocated equity would be

redeemed at the discretion of the board of directors

if working capital was sufficient. Even though

Cooperative S had older allocated equity, no special

preference was established for its redemption.

Case Study IV-Cooperatives U and V The two

merging cooperatives (U and V) complemented

each other--one being largely in marketing and the

other principally farm supplies. They shared more

than 100 members. A committee of eight negotiated

merger issues. Member support was strong. The

unified cooperative had assets of about $6 million.

Pre-merger-data showed:

Cooperative U

Sales near $20 million.

Assets of about $5

million.

Relatively low

short-term debt.

Total debt-to-equity

ratio under 40 percent.

Common stock and

allocated equity

certificates.

No set equity

evolvement schedule;

board discretion

for redeeming

allocated equity;

2-year revolvement

schedule; pays off

equity when member

reaches 70 years of

age.

Cooperu tive V

Sales near $2 million.

Assets of about $1

million.

Relatively low

short-term debt.

Total debt-toequity

ratio about 40 percent.

Common stock, pre

ferred stock, and

allocated equity

certificates.

No set equity IF+

volvement schedule;

board discretion

for redeeming

allocated equity,

4 year revolvement

schedule; pays off

equity when member

reaches 77 years of

age.

Assets, liabilities, and equity from both cooperatives were consolidated using book values. No

assets were sold. Cooperative U’s common (voting)

stock had a par value of $20 while Cooperative V’s

was $10. Because of this difference, each member of

Cooperative V was required to pay $10 to account

for the share differential. The other allocated equities were transferred on a dollar-for-dollar basis.

Case Study V-Cooperatives Wand X These

merging cooperatives had slightly different sales,

but about the same value of assets. A sevenmember committee negotiated merger issues.

Member support for the merger was strong.

Assets of the merged cooperative were about

$5 million. Pre-merger data showed:

Cooperative W

Sales of about

$5 million.

Assets of about

$2.5 million.

Short-term

debt-to-asset

ratio of 36 percent;

no long-term debt.

Total debt-to-equity

ratio of 55 percent.

Common stock and

preferred stock.

Allocated equity

redeemed at board

discretion and when

member reached certain

age; no set revolving

schedule.

Coopem tive X

Sales of about

$4 million.

Assets of about

$2.5 million.

Short-term debt-toasset ratio of 35 percent; no long-term

debt.

Total debt-toequity

ratio of 55 percent.

Common stock and

preferred stock.

Allocated equity redeemed at board

discretion and when

member reached certain

age; no set revolving

schedule.

22
Assets were combined at book values. No

assets were sold. All common stock, preferred

stock, per unit retains, and revolving fund credits

were combined into one member equity credit

account.

One cooperative carried forward a loss from

past years. To compensate, the equity credit

account of that cooperative was reduced by the loss

amount (the equity of each member was reduced

proportionately). After this was completed, all

member equity was consolidated.

Every member’s equity requirement in the

unified cooperative was set at $1,000 (10 shares of

common stock with a par value of $lOO/share).

This is like a modified base capital plan. At merger

time, if a member has more than $1,000 equity in

his/her account, the excess is placed into a deferred

equity account and not immediately redeemed.

Conversely, a member with less than $1,000 in equity is required to make up the difference. However,

if the member has more than $100 of equity, the difference is to be made up through equity allocations

over time. The member with less than $100 equity

must pay cash to bring the account up to $100.

Subsequent allocations over time would make up

the $900 difference.

Equity Redemption Plan

Equity in deferred accounts becomes available

for redemption only when members turn 65 years

of age. (This is a modified version of a base capital

plan.) Portions of the deferred equity of members

at age 65 or older are redeemed annually on a percentage basis at the discretion of the board given

the cooperative’s financial performance.

Case Study VI-Cooperatives Y and Z This

merger included two large similar-sized

cooperatives. The name of one of the cooperatives

was retained for the new organization. No special

merger committee was formed. Member support

was strong.

Sales of the merged cooperative exceeded $2

billion. Assets topped $430 million. Pre-merger data

showed:

Gwpem tive Y

Sales of about

$1.1 billion.

Assets of about

$240 million.

Short-term debt-toasset ratio of about 43

percent; long-term

debt-to-asset ratio of

13 percent.

Common stock,

preferred stock, and

allocated equities.

Revolving plan;

no set schedule.

Coopem tive Z

Sales of about

$1 billion.

Assets of about

$200 million.

Short-term debt-to-asset

ratio of 34 percent;

long-term debt-to-asset

ratio of 24 percent.

Common stock,

preferred stock, and

allocated equities.

Revolving plan;

no set schedule.

Assets were combined at book values. No

assets were sold. All allocated equities (common

stock, preferred stock, and allocated equities) were

transferred at face (book) value. Unallocated

reserves were identified as pre-merger reserves. As

such, they are distributable to owners of merging

companies in liquidation. During the merger, certain items under warranty (due diligence) were

charged to these pre-merger reserves. After these

charges were assessed, the remaining equity was

combined.

Difficult financial issues related to the merger

included (1) significantly different amounts of unallocated reserves held by the cooperatives, (2) contingent liabilities held by each cooperative, and (3)

non-member equities issued and outstanding by

one of the cooperatives. The first two issues were

resolved through the use (applicable transfer) of the

established pre-merger reserves. To resolve the

third issue, the non-member allocated equities were

accepted as is by the other merging cooperative.

Summary

Four cases were discussed from the Haskell

report-a merger, a consolidation, and two acquisitions. All involved a stock/equity conversion or

23
exchange. Two cases, however, included special

provisions for redeeming equity.

The merger case involved setting up an equity

redemption plan to retire members’ old outstanding stock brought to the merger. The plan redeemed

a percentage of old outstanding stock provided by

board authorization. This plan is similar to the percentage-of-all-combined-equities plan described

earlier.

The second acquisition case (acquisition 2)

involved cooperatives with a 3-year age difference

between their old outstanding stock. To correct the

redemption gap, an equity redemption revolving

plan was devised that included redeeming equity

on a past allocation-year alternating schedule. This

creative approach was designed to alleviate the

redemption gap after completion of five sequences

of the schedule.

Six case studies of cooperatives that had .

recently merged were described. Some assets were

sold in two of the cases (case studies I and III). Debt

was paid off in one case (case study II) and some

short-term debt was converted to long-term debt in

another case (case study III).

In four of the six case studies, allocated equity

was converted or transferred on a strict book-value

basis. In the other two cases, allocated equity was

converted or transferred after adjusting book values. Case study II involved the writedown of assets

and equity of one cooperative because of financial

difficulties. Case study V involved an equity writedown of one cooperative by the amount of its losscarry forward.

In all six cases, equity was revolved at the discretion of the board. In case study II, one cooperative had not redeemed any equity for some time,

but the unified cooperative adopted the IO-year

revolvement cycle of the other cooperative.

Some cases had special clauses attached to

equity redemption. For instance, the unified cooperative of case study V redeems equity only when

working capital is at “sufficient levels” as determined the board. This cooperative stipulates that

its members first must have $l,ooO of base capital

accumulated. Then, any allocated equity above the

$1,000 is redeemable on a revolving cycle after the

member has reached a certain age.

OTHER FINANCIAL ISSUES

Evaluating Equity

The interpretation that equity being brought to

a merger is debt can lead to problems, especially if

one cooperative has more old allocated equity than

the other merger participant(s). Members of the

cooperative(s) with more current equity may be

concerned with the additional debt being assumed

by the unified cooperative.

The status of old allocated equity must be

resolved during negotiations. Old equity may be

paid immediately, paid by some future installment

system, or rolled into a redemption plan of the new

cooperative. Old equity paid immediately can be

construed as a debt obligation at its face value. On

the other hand, if paid in future installments or

rolled into the redemption rotation, then the value

of the obligation is relative to when it will be

redeemed.

Equity to be redeemed at some future time

should not be interpreted as face-value debt.

Rather, the interpretation should be tied to the present value relative to when it may be redeemed.

Table 11 (example VIII) illustrates present values of the equity of Cooperative A and Cooperative

B (revised equity values from example I of table 2)

calculated at a discount rate of 8 percent. This

analysis indicates that the present value of the

$847,000 equity of Cooperative A is $626,000 and

the present value of the $975,000 equity of

Cooperative B is $719,000 (present value figures are

26 percent less than the face value).

Thus, while allocated equity is essentially a

debt obligation, its value is directly tied to when it

will be redeemed and the discount rate applied.

That is how cooperative leaders examining merger

need to explain equity to counter negative publicity

generated by concerned members and/or those

opposing the merger.

Tax Considerations

When examining a potential merger, pay special attention to the tax considerations relating to

the resulting change in cooperative capital structure. This section provides a cursory view of some

restrictions and implications regarding taxes that

24
Table II- Example VIII, present value of allocated equity of Cooperative A and Cooperative B relative to time it

would be redeemed’

Cooper&e A Cooperative B

Age in Year

Years Redeem& Face vafue Present value Face value Present valueS

_________~_~~~~_~~~~~~~~~~_~~~~~~~~~~~~~~~~~~~~~~ ti,,sa,,d D&rs _________________________________________________

7 1 67 62 55 51

6 2 177 152 200 171

5 3 135 107 125 99

4 4 110 81 150 110

3 5 103 70 250 170

2 6 143 90 95 60

1 7 110 64 100 58

Totals 645 626 975 719

Percent change -26% -26%

1 Equity data (face values) from revised equity totals of table 2.

2 Assumes 7-year rotation and that equity 7 years of age will be redeemed after first year and so on.

3 Present values calculated with multipliers from appendix table 2 (discount rate of 8 percent used).

cooperatives involved in merger talks should consider. It is not meant to be all-inclusive, but merely

touches on some cooperative merger tax issues.

Merger or consolidation can create major

changes in an organization, disappearance of one or

more cooperatives, and creation of a new or greatly

changed survivor. Capital structure changes that

occur because of merger or consolidation are considered corporate reorganization (as defined in

Appendix A).

Although cooperatives are taxed under

Subchapter T as to patronage distributions, they are

subject to the same rules regarding corporate reorganizations as other organizations taxed as corporations under the Internal Revenue Code.

Reorganizations refer to transactions that

involve the cooperative’s capital structure itself and

go beyond generating and redeeming capital

instruments as an ongoing capitalization process.

These transactions may be subject to specially

defined tax treatment. The object of most corporate

reorganization tax rules is to establish conditions

under which transactions are not taxable like under

other circumstances.

Corporate reorganization tax rules do not

specifically address any of the unique financing

characteristics of a cooperative. However, cooperative reorganizations may be closely analogous to

noncooperative corporate reorganizations. An

important challenge in cooperative reorganizations

is to identify those situations in which corporate tax

principles will apply to cooperatives and, if so,

how.

The Internal Revenue Code treats certain

transactions in corporate reorganizations as tax

free. Much of corporate reorganization tax analysis

deals with whether a transaction is in fact tax free,

in whole or in part, and how to meet all qualifications to make it tax free if desired.

A tax-free transaction has two major implications. First, no taxable income is recognized when

stock or assets are sold or exchanged under circumstances in which a taxable gain would be recognized absent corporate reorganization rules.

Second, the basis of property in the recipient’s

hands is a carryover or substituted basis. The tax

implications to the new property holder will be

incurred upon future sale or exchange. For coopera25
tives, certain allocated equities may retain their status in a tax-free reorganization.

Sections 368(a)(l)(A) through (P) of the

Internal Revenue Code define six types of reorganizations that are essentially tax free, if all of the various statutory requirements are satisfied.

Cooperative mergers or consolidations may fit

under any one of these six reorganizations.

However, cooperative mergers and consolidations are often type “A” reorganizations-statutory

mergers or consolidations. They often fit this type

of reorganization because the unique capital structures of cooperatives simply do not usually lend

themselves to other types of reorganizations.*

Further, they are called “statutory” mergers

and consolidations because the merger or consolidation is effected under State incorporation statutes

and meet all those requirements.

Statutory provisions that affect merging or

consolidating cooperatives will vary. Most State

incorporation statutes covering cooperatives contain no provisions for merger or consolidation. In

such cases, cooperatives should use the business

corporation laws on merger to the extent possible.

However, some State statutes contain a reference to

cooperative merger among other cooperatives or

with noncooperative business organizations. The

statutes describe merger procedures in varying

detail. A typical procedure described included

approval by boards of directors of all merging

cooperatives, adoption of a resolution and a written

plan of merger, submission to cooperative membership for approval, and formal filing with a State

office.3

Most merger provisions also specify the contents of the plan. Common requirements include

old and new names, terms and conditions of the

proposed merger, proposed effects on all members

2 See Clark and Erickson (Taxation of Cooperatives) for

more information pertaining to cooperative reorganizations.

3 See Baarda (ACS Information Report 30-State

Incorporation Statutes for Farmer Cooperatives) for more

information on State statutes that apply to farmer cooperatives.

or stockholders of each association, and the articles

of the new association.

Provisions typically describe the effects of the

merger. The effects are important to implement

results compatible with the tax-free nature of a

statutory merger.

To be wholly or partially tax free, a reorganization must follow a plan. It may not include a subsequent exchange of one kind of equity for another

brought over from a predecessor cooperative if that

exchange was not part of the specified reorganization plan.

In most reorganizations, several other overall

requirements must be met. For example, courts

have required a continuity of interest for stockholders (member/owners) between the old and the new

corporations. This means they have retained a substantial interest in the enterprise. The business

enterprise itself must show continuity. That is, the

merged, consolidated, or acquiring cooperative

must continue the “business enterprise” of the predecessors. Such continuity will exist if the successor

cooperative either carries on the “historic business”

or uses a significant portion of the predecessor

“historic business assets” in conducting.the new

business.

If reorganization does not have a business purpose, it will be denied tax-free treatment. This

requirement aims to prevent reorganization solely

for tax purposes. The typical cooperative reorganization will have a clear business purpose.

Finally, while this section has provided some

information and described implications that cooperative leaders need to consider while examining a

specific merger, the financial transactions that can

occur during mergers, consolidations, and acquisitions are limitless. No specific steps can be analyzed in depth for their tax consequences to cooperatives, members, or patrons.

Thus, identifying all the tax consequences and

implications specifically related to such transactions is beyond the scope of this study. However,

when complicated financial transactions arise during negotiations, leaders must analyze the related

consequences and implications. In these cases,

cooperative leaders should seek professional exper26
tise and legal counsel so that suitable and accurate

reorganization plans can be drawn.

SUMMARY AND IMPLICATIONS

Cooperative leaders examining merger need to

decide how to combine the major balance sheet

components of each merger participant. A plan

should be developed to make the decision-making

process a well organized exercise. The plan should

include alternative methods and their implications

(i.e., positive and negative impacts) for combining

assets, liabilities, and equity given the merger situation and attributes of the cooperatives involved.

Assets may be combined using book values or

some situations may dictate that assets be reevaluated. Leaders need to carefully examine all the

assets of the cooperatives involved in the merger

and determine which ones will be needed to operate the unified organization.

The structure and types of liabilities will be

examined. Are the structures and debt levels similar? Are any changes needed to alleviate major differences?

Alternative methods for combining member

equity must be studied because of the seemingly

endless variations of cooperative equity structures

with mergers. Equities may be identified and developed in different ways, redemption plans may differ, or cooperatives may be in different stages of

redemption.

Cooperative leaders must examine the differences between the merger participants and then

consider alternatives for consolidating member

equities. Then, they must recommend those alternatives that best fit the structure of the emerging

organization and have the best chance of being well

received by members. Narrowing the field of alternatives will allow for closer assessment of the positive and negative characteristics of each. A final

choice must then be made.

Cooperatives merging with similar equity

structures and amounts will usually find the combination of financial instruments to be rather straightforward. Conversely, cooperatives with different

structures and amounts may find that combining

financial elements is difficult and requires careful

examination of several options to find the best

method.

This report provides information, examples,

and implications of 21 alternatives for consolidating and handling member equity during cooperative mergers. Eleven general options and 10 actual

cooperative merger case examples are described.

Cooperative leaders developing their own

merger plans can study these options and case

examples to identify similarities between the equity

structures with which they are working and those

of the alternatives. With some modification, they

may wish to include some of the similar ones as

alternatives in their plan or develop their own.

There are two schools of thought about combining equity during mergers. One is that merging

cooperatives should seek to achieve complete

equality among members of each cooperative. The

second is that equity consolidation should be

approached from the perspective of building a

stronger cooperative for the future, rather than trying to attain complete equality for members of each

cooperative at the time of merger.

The best scenario would be one in which a

strong equity base and financial position are

achieved and equality between members is maintained.

However, in most mergers, maintaining member equality is difficult. For instance, alternatives

that include redeeming or paying off a significant

amount of member equity at the time of merger

will not likely be equitable to all members. On the

other hand, alternatives that include equity adjustments contingent on asset reevaluation and expected cooperative performance will help to achieve

greater member equality.

Acquisition is an option for combining cooperative organizations that can alleviate some of the

problems commonly confronting mergers. When

one cooperative is significantly larger and financially stronger, acquisition is often the only choice the

large cooperative will even consider. In other cases,

acquisition is often chosen because it is easier to

carry out.

Cooperative leaders should work to ensure

that they as well as their constituent members fully

27
understand the present-value versus face-value

relationship of member equity.

If equity planned for future redemption is considered as face-value debt and the merging cooperatives have significantly different amounts of equity (relative to assets), then ill will may develop

among the membership. For proper disclosure and

to thwart any potential negative feelings among

members, cooperatives should include a section in

the merger plan that explains how to correctly analyze the present value of member equity.

Cooperatives developing a merger plan for

combining assets and equity must also consider any

tax implications that coincide with alternatives in

the plan. In short, cooperatives reorganizing due to

merger or consolidation are subject to the rules

regarding corporate reorganizations. Most often,

cooperative mergers and consolidations are statutory mergers or consolidations. As such, cooperatives

must adhere to various statutory provisions. A plan

must be developed for the reorganization to be

wholly or partially tax free.

This report covers only some of the tax issues

and information regarding merging cooperatives.

When mergers involve more complicated financial

transactions other issues will surface. Cooperative

leaders should consult legal counsel and accountants when examining various asset, liability, and

equity consolidation alternatives.

In a successful merger, members feel their

interests have been well represented and protected

and that their relative stake in the new organization

is important. They also believe that the unified

cooperative will have sufficient financial strength

to provide services for their benefit. The unified

cooperative should develop an equity financing

and redemption plan that assures a significant

financial stake by members who are current users.

REFERENCES

Abrahamsen, Martin A. and J. Warren Mather,

Approaches and Problems In Merging Cooperatives. FCS

Inf. Rep. 54, USDA, Washington, DC, July, 1966.

Abrahamsen, Martin A., Cooperative Business

Enterprise. McGraw-Hill, 1976.

Baarda, James, R., State Incorporation S tutu tes for

Farmer Cooperatives, ACS Inf. Rep. 30, USDA,

Washington, DC, October, 1982.

Clark, Erving, Esq. and Philip L. Erickson, Esq.,

Taxation of Cooperatives, Tax Management Portfolios,

Tax Management, Inc.-subsidiary of The Bureau of

National Affairs, Washington, DC, 1984.

Cobia, David W., et al., Cooperatives in Agriculture.

Prentice Hall, Englewood Cliffs, New Jersey 07632,1989.

Haskell, James E., Results and Methods ofFour

Mergers By Local Supply Co-ops. FCS Res. Rep. 8,

USDA, Washington, DC, January, 1970.

Hatfield, Harlan K., David W. Cobia, Gordon W.

Erlandson, and Lawrence E. Mack, Consolidation of

Allocated Equity for Merging Cooperatives Previously

Operating on a Revolving Fund. Dept. of Agr. Econ.,

Misc. Rep. 96, North Dakota State Univ., April, 1986.

Matthews, Mary Beth, Financial Instruments Zssued

by Agricultural Cooperatives. ACS Res. Rep. 68,

USDA, Washington, DC, March, 1988.

Rathbone, Robert C. and Roger A. Wissman, Equity

Redemption and Member Equity Allocation Practices of

Agricultural Cooperatives. ACS Res. Rep. 124, USDA,

Washington, DC, October, 1993.

Siphor, Erton, The Gene Revolution, The History of

Cooperative Artificial Breeding in New York and New

England, 1938-2990. Eastern A.I. Cooperative, Inc.,

Syracuse, New York, 1991.

Swanson, Bruce L., Merging Cooperatives: Planning,

Negotiating, Implementing. ACS Res. Rep. 43, USDA,

Washington, DC, January, 1985.

28
APPENDIX A-GLOSSARY

TERMS/CONCEPTS

OF

Acquisition. The outright purchase of a cooperative’s assets by another cooperative. The purchased

cooperative’s members then join the other cooperative. Cooperative A acquires assets of Cooperative

B; Cooperative B members join Cooperative A.

Allocated Equity. Equity assigned by amounts

(based on proportion of patronage) to a member’s

account.

Base Capital Plan. Both an equity capital formation

and redemption plan. Plan emphasizes both developing a base amount of required equity and systematically adjusting it to the current needs and to

patrons’ use of the cooperative. A member’s equity

contribution is tied directly to use of the cooperative.

Certificate of Indebtedness. These certificates represent obligations to repay money advanced by

members, or resulting from the conversion of equity investment held by members. Unlike the normal

equity certificate, certificates of indebtedness are

usually interest bearing.

Consolidation. Combining two or more businesses

into a new organization. It survives and the component firms cease to exist. A, B, and C form D; A, B,

and C disappear; D survives.

Debenture Bond. A debenture bond is an unsecured bond. Cooperative bonds are generally longterm and bear competitive interest rates. They are

often subordinated to other cooperative debt.

Member. An owner-user who meets cooperative

membership requirements and is entitled to voting

privileges.

Member equity. Ownership or risk capital in the

cooperative generally arising from direct investment, retained patronage refunds, per-unit capital

retains, and nonmember business. Members’

investment or ownership in the assets of the cooperative. Equal to total assets less total liabilities.

Merger. The absorption of one or more businesses

by another firm. The survivor maintains its identity.

Many of its organizational features are operated on

an expanded basis, given its increased size and

capacities. A and B merge into C; C survives; A and

B dissolve.

Nonstock Cooperatives. The equity capital of nonstock cooperatives takes the form of membership

and/or.capital certificates. Membership certificates

are fee oriented and represent membership in the

organization. Capital certificates supplement membership certificates. They are similar to preferred

stock. Capital certificates are sold directly to members, issued as part of patronage refunds, or sold to

nonmembers.

Reorganizations. In this report, reorganization

refers to a range of actions associated with varying

degrees of change in a cooperative’s capital structure. Changes may be minimal for modifying the

capital structure component identity or major and

result from merger.

Revolving Fund. This type of systematic equity

redemption plan usually follows a first-in, first-out

format. Cooperative pays or retires in cash the oldest outstanding equities when required net worth

has accumulated. The revolving fund returns previous investments to patrons on a regular and

chronological basis.

Stock Cooperative. Capital of a stock cooperative is

divided into shares of stock owned by members.

Some cooperatives have only common stock while

others have both common and preferred stock.

Some stock cooperatives also issue other forms of

equity such as membership certificates, which may

or may not be owned by members. These cooperatives usually restrict stock transfers to limit ownership of the cooperative primarily to qualifying

member-patrons.

Unallocated equity. Equity not assigned to a member’s account. Tax-paid retained earnings or

reserves.

29
APPENDIX &--CASE STUDY SURVEY

QUESTIONS

Cooperative Merger Survey

0)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

(14)

(15)

(16)

What size were the participating cooperatives

prior to merger (sales and assets)?

What was the size of the new cooperative following the merger (sales and assets)?

Were any assets sold off during the merger?

What assets were sold?

How were the proceeds allocated or used?

_ Pay existing debt

_ Settle differences in member equities

_ Satisfy members that were merger dissenters

_ Minimize duplicate or unused assets

_ Other, specify

Were the assets brought into the new cooperative at book value or revalued?

How were assets reevaluated and who completed the reevaluation?

What was the short-term debt/total asset ratio

of each participating cooperative prior to

merger?

What was the long-term debt/total asset ratio

of each participating cooperative prior to

merger?

What was the total debt/total equity ratio of

each participating cooperative prior to merger?

Was any long-term debt restructured or paid off?

How was debt restructuring handled and

what was done?

What type of equity redemption program did

the participating cooperatives have before the

merger?

If an equity revolvement schedule was in

effect, what was the revolving period?

Were the cooperatives current in redeeming

their equity? (If no, years behind?)

Was a committee set up to negotiate how

equity would be handled during the merger?

(17a) How many people were on the committee?

(17b) Who was on the committee? (mark all that

apply)

_ Directors

_ Members

_ Management

_ Personnel

_ Attorney

_ Accountant

_ Other outside individuals

(18) How often did the committee meet?

(19) How well did the committee perform its function?

_ Performed very well

_ Performed well

_ Performed okay

_ Did not perform well

_ Was a waste of time

(20) What plan was followed for

consolidating/transferring the equity of the

merging cooperatives? (brief summary)

(21) In general, where did information for devising

the plan come from? (mark all that apply)

_ Obtained from other cooperatives that

had merged

_ Obtained from professional sources

_ Obtained from reports or books

_ Creativity--original idea

(22) Did the plan have member support?

_ Strong support

_ Moderate support

_ Weak support

_ No support

(23) What types of equity were issued by the participating cooperatives prior to the merger? (e.g.,

common stock, preferred stock, membership

certificates, unallocated equity, etc.)

(24) If applicable, please provide a numerical

example of how equity transfer/consolidation

was handled (e.g., formula used)

(25) What were some of the financial consolidation

difficulties experienced by the merging cooperatives?

(26) How were these differences resolved?

30
~p~ndbc table I- Example A-l, prorating old allocated equity of Cooperative A and Cooperative B

Age in

years’

Allocated equity

Co-op A’ Co-op 8’

Combined

equity4

Percent of

7-year total5

Coop A Coop B

prorated prorated

equW equity’

Revised equity total

Coop Aa Coop Be Comb’0

9 7 5

8 60

7 50

6 125

5 100

4 7 5

3 55

2 110

1 80

Thousand dollars

65

100

55

200

125

150

250

95

100

140

160

105

325

225

225

305

205

180

Percent

7

9

6

17

12

12

16

11

10

8

10

7

20

14

14

18

13

11

Thousand dollars

9 83 7 4 157

11 70 111 181

8 57 63 120

21 145 221 366

15 114 140 254

15 89 165 254

20 73 270 343

14 123 109 232

12 91 112 203

Totals 730 1,140 1,870 100 115 125 845 1,265 2,110

Equity over

9 years old

Total equity

115 125 240 0 0 0 0 0

845 1,265 2,110

1 Cooperative B has been revolving equity on a lo-year schedule (3 years behind its 7-year revoking fund plan) and Cooperative A has been revofving on a 12-year

schedule (3years behind its Q-year revolving fund plan). A Q-year schedule is chosen for the unified cooperative.

2 Allocated equity of Cooperative A--last 9 years and total allocated equity over 9 years old.

3 Allocated equity of Cooperative B-fast 9 years and total allocated equity over 9 years old.

4 Allocated equity from Cooperative A and Cooperative B added together for each year, overall, and old.

5 Combined equity in each year of the Q-year period divided by the total equity of the 9 years.

6 The $115 old equity of Cooperative A multiplied by the corresponding percent data in the preceding column.

7 The $125 old equity of Cooperative B multiplied by the corresponding percent data.

8 Revised equity of Cooperative A-original allocated equity (2nd column) plus prorated old equity.

0 Revised equity of Cooperative B-original allocated equity (3rd column) plus prorated old equity.

lo Combined revised equity totals of Cooperative A and Cooperative B.
mmda hbie 2-Multipliers-present value of $11

Years

(n) 1% 2% 3% 4%

Discount rate(r)

5% 6% 7% 8% 9% 10% 11% 12%

Present value multipliers

0

6

c

@J

7

8 8

6 9

2 10

2 11

: 12

z 13

A

$ 14

8 15

; 16

m

G

17

w 18

: 19 ulI ," 20

? 21

z 22

: 23 al

24

25

26

27

28

29

30

0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893

0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797

0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712

0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636

0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567

0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507

0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452

0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404

0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361

0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322

0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287

0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257

0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229

0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205

0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183

0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163

0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146

0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130

0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116

0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104

0.811 0.660 0.538 0.439 0.359 0.294 0.242 0.199 0.164 0.135 0.112 0.093

0.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.083

0.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.091 0.074

0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.066

0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059

0.772 0.598 0.464 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053

0.764 0.586 0.450 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.047

0.757 0.574 0.437 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.054 0.042

0.749 0.563 0.424 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037

0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033
U.S. Department of Agriculture

Rural Business and Cooperative Development Service

Ag Box 3255

Washington, D.C. 20250-3255

Rural Business and Cooperative Development Service (RBCDS) provides research,

management, and educational assistance to cooperatives to strengthen the economic

position of farmers and other rural residents. It works directly with cooperative leaders

and Federal and State agencies to improve organization, leadership, and operation of

cooperatives and to give guidance to further development.

The cooperative segment of RBCDS (1) helps farmers and other rural residents develop

cooperatives to obtain supplies and services at lower cost and to get better prices for

products they sell; (2) advises rural residents on developing existing resources through

cooperative action to enhance rural living; (3) helps cooperatives improve services and

operating efficiency; (4) informs members, directors, employees, and the public on how

cooperatives work and benefit their members and their communities; and (5)

encourages international cooperative programs.

RBCDS also publishes research and educational materials and issues Farmer

Cooperatives magazine. The United States Department of Agriculture (USDA) prohibits

discrimination in its programs on the basis of race, color, national origin, sex, religion,

age, disability, political beliefs and marital or familial status. (Not all prohibited bases

apply to all programs). Persons with disabilities who require alternative means for

communication of program information (braille, large print, audiotape, etc.) should

contact the USDA Office of Communications at (202) 720-7808 (TDD).

To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture,

Washington, D.C. 20250, or call (202) 720-7327 (voice) or (202) 720-1127 (TDD). USDA

is an equal employment opportunity employer.