Two Rivers Cooperative - Annual Report 2014

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TRIBUTARY2 0 1 4 ANNUAL REPORT

OTLEY PELLA MONROE TRACY

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Jerry Parker, President

Dan Wichhart, Vice-President

Stan Woody, Secretary

Jason Ver Ploeg, Treasurer

David Willemsen, Director

Bryce Kelderman, Director

Greg Van Walbeek, Director

Joe Rempe, Director

Brad Rietveld, Director

Matt Overbergen, Associate Director

Scott Marshall, Associate Director

Tracy Gathman General Manager

January 1920

Within 150 Days of Close of Year

Iowa

NAME, POSITION LOCATION TERM EXPIRESOFFICERS AND DIRECTORS

SUPERVISORY PERSONNEL

ORGANIZATIONAL DATA

2014 ANNUAL REPORT

2013-2014 Financial Statements

Two Rivers CooperativePella, Iowa

Bussey, Iowa

Otley, Iowa

Reasnor, Iowa

Pella, Iowa

Pella, Iowa

Tracy, Iowa

Monroe, Iowa

Leighton, Iowa

Otley, Iowa

Oskaloosa, Iowa

Monroe, Iowa

2016

2015

2014

2014

2014

2015

2015

2016

2016

2014

2014

Incorporated

Annual Meeting Date

Under Chapter 499 of the Code of

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Cash $1,424,224 $1,261,395Receivables Notes and Contracts 19,083 358,774 Trade – Net of Allowance for Doubtful Accounts of $58,923 & $48,00 2,109,527 1,807,473 Grain in Transit 0 394,696 Other 133,500 158,773Margin Account 600,486 144,930Inventories Grain 142,273 2,161,320 Merchandise 3,583,393 3,109,732 Petroleum 501,446 504,692Prepaid Expenses and Purchases 2,605,079 1,657,678Deferred Income Taxes 55,805 52,177Total Current Assets 11,174,816 11,611,640

Land 306,376 306,376Buildings and Equipment 21,143,083 20,846,947 21,449,459 21,153,323Accumulated Depreciation (11,714,436) (11,203,080) Undepreciated Cost 9,735,023 9,950,243Construction in Process 9,852 0 Net Property, Plant and Equipment 9,744,875 9,950,243

Notes and Contracts 19,038 25,951

CURRENT ASSETS 2014 2013

PROPERTY, PLANT AND EQUIPMENT

OTHER ASSETS

EQUITY IN OTHER ORGANIZATIONS 4,215,094 4,033,857

TOTAL ASSETS $25,153,823 $25,621,691

ASSETS


Balance Sheets - August 31, 2014 and 2013

5The accompanying notes are an integral part of the financial statements.

Checks Written in Excess of Bank Balance $268,279 $209,770Current Maturities of Long–Term Debt 750,000 750,000Payables Trade 2,166,309 1,200,523 Customer Credit Balances and Prepaid Sales 843,480 938,543 Unpaid Grain 3,917,094 4,484,811 Other 23,818 21,343Deferred Revenue 3,667 3,667Accrued Expenses Property Taxes 207,289 223,496 Interest 16,158 17,307 Other 189,341 324,141Equity Revolvement 0 209,131 Total Current Liabilities 8,385,435 8,382,732

Notes Payable – Net of Current Maturities 4,550,000 5,300,000Deferred Revenue – Net of Current 10,996 14,663Pension Liability 226,134 392,146Deferred Income Taxes 776,205 833,852 Total Long–Term Liabilities 5,563,335 6,540,661

Class A Common 73,650 72,000Class B Common 25,800 26,950Preferred Stock Local 1,392,900 1,404,257Preferred Stock Regional 1,908,754 1,934,673Preferred Stock Non–Qualified 1,484,489 446,993Accumulated Other Comprehensive Loss (226,134) (392,146)Allocated Patronage Dividends 296,443 1,039,052Retained Savings 6,249,151 6,166,519 Total Members’ Equity 11,205,053 10,698,298

CURRENT LIABILITIES 2014 2013

LONG–TERM LIABILITIES

MEMBERS’ EQUITY

TOTAL LIABILITIES AND MEMBERS’ EQUITY $25,153,823 $25,621,691

LIABILITIES AND MEMBERS’ EQUITY


Balance Sheets - August 31, 2014 and 2013


Sales $87,862,700 $98,370,889

Cost of Goods Sold 82,830,879 92,456,932

Gross Savings on Sales 5,031,821 5,913,957

Other Operating Revenue 2,538,760 2,469,355

Total Gross Revenue 7,570,581 8,383,312

Operating Expenses, Including Interest 8,109,288 7,861,063

Operating Savings (Loss) (538,707) 522,249

Patronage Dividend Income 879,870 1,141,261

Partnership Loss (44,720) (28,885)

Savings Before Income Taxes 296,443 1,634,625

Income Tax Expense (Benefit) (68,659) 239,175

Net Savings $365,102 $1,395,450

Patronage Dividends Non–Qualified $296,443 $1,039,052Retained Savings 68,659 356,398 $365,102 $1,395,450

2014 2013

DISTRIBUTION OF NET SAVINGS


Statements of Savings - August 31, 2014 and 2013


Net Savings $365,102 $1,395,450Other Comprehensive Income Frozen Pension Plan Adjustment 166,012 83,385Total Comprehensive Income $531,114 $1,478,835

2014 PATRONAGE RATESGrain – In & Out 0.55 Cent/BushelMerchandise & Services 1.26%Petroleum 2.00 Cents/Gallon

2014 2013


Statements of Comprehensive Income- August 31, 2014 and 2013


Balance – August 31, 2012 $9,446,529 $71,400 $27,250 Stock Issued 1,850 1,800 50 Estate and Retirement Program Paid (237,813) (1,200) (350) Transfers 0 0 0 Regional Preferred Redeemed Less Than Par 8,897 0 0 Overaccrual of Prior Year Patronage 0 0 0 Comprehensive Income 1,478,835 0 0 Patronage Dividends Allocation Non–Qualified 0 0 0Balance – August 31, 2013 10,698,298 72,000 26,950 Stock Issued 2,150 2,100 50 Estate and Retirement Program Paid (39,340) (450) (1,050) Transfers 0 0 (150) Regional Preferred Redeemed Less Than Par 12,831 0 0 Overaccrual of Prior Year Patronage 0 0 0 Comprehensive Income 531,114 0 0 Patronage Dividends Allocation Non–Qualified 0 0 0Balance – August 31, 2014 $11,205,053 $73,650 $25,800

CAPITAL STOCK CLASS A CLASS B TOTAL COMMON COMMON


Statements of Members’ Equity - August 31, 2014 and 2013


$1,622,676 $1,952,466 $0 $0 $(475,531) $447,300 $5,800,968 0 0 0 0 0 0 0 (218,419) (17,793) (51) 0 0 0 0 0 0 447,044 0 0 (447,044) 0 0 0 0 0 0 0 8,897 0 0 0 0 0 (256) 256 0 0 0 0 83,385 0 1,395,450

0 0 0 0 0 1,039,052 (1,039,052) 1,404,257 1,934,673 446,993 0 (392,146) 1,039,052 6,166,519 0 0 0 0 0 0 0 (11,507) (25,919) (330) (84) 0 0 0 150 0 332,116 705,794 0 (1,037,992) 82 0 0 0 0 0 0 12,831 0 0 0 0 0 (1,060) 1,060 0 0 0 0 166,012 0 365,102

0 0 0 0 0 296,443 (296,443)

$1,392,900 $1,908,754 $778,779 $705,710 $(226,134) $296,443 $6,249,151

CAPITAL QUALIFIED NON-QUALIFIED

LOCAL PREFERRED

LOCAL PREFERRED

OTHER COMPREHENSIVE

LOSSREGIONAL

PREFERREDREGIONAL

PREFERREDRETAINED SAVINGS

ALLOCATED PATRONAGE DIVIDENDS


Statements of Members’ Equity - August 31, 2014 and 2013



Statements of Cash Flows - August 31, 2014 and 2013

Net Savings $365,102 $1,395,450Adjustments to Reconcile Net Savings to Net CashProvided by Operating Activities Patronage Dividends Income Received as Equity (473,369) (624,457) Depreciation 1,236,580 1,260,558 Gain on Sale of Property, Plant and Equipment (55,057) (37,988) Bad Debt Expense (Income) 12,618 (4,820) Deferred Revenue Recognized (3,667) (3,667) Loss on LLC Investments 44,720 28,885 Deferred Income Taxes (61,275) 200,940Changes in Assets and Liabilities Decrease in Receivables 444,988 440,473 (Increase) Decrease in Margin Account (455,556) 466,411 Decrease in Inventories 1,548,632 3,204,510 (Increase) Decrease in Prepaid Expenses (947,401) 138,202 Increase (Decrease) in Payables 305,481 (901,080) Increase (Decrease) in Accrued Expenses (152,156) 125,621 Net Cash Provided by Operating Activities 1,809,640 5,689,038

Additions to Property, Plant and Equipment (1,024,664) (974,022)Change in Construction in Process (9,852) 14,076Proceeds from Sale of Property, Plant and Equipment 58,361 37,988(Increase) Decrease in Notes and Contracts 6,913 (10,286)Equity in Other Organizations Redeemed 247,412 427,499 Net Cash Used in Investing Activities (721,830) (504,745)

Change in Checks Written in Excess of Bank Balance 58,509 (1,557,211)Net Payments Under Line–of–Credit Agreement 0 (1,623,780)Retirement of Long–Term Debt (750,000) (750,000)Stock Issued 2,150 1,850Stock Redeemed (248,471) (28,682)Regional Preferred Equity Redeemed at a Discount 12,831 8,897 Net Cash Used in Financing Activities (924,981) (3,948,926)

CASH FLOWS FROM OPERATING ACTIVITIES 2014 2013

CASH FLOWS FROM INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES



Statements of Cash Flows - August 31, 2014 and 2013

Net Increase in Cash $162,829 $1,235,367Cash – Beginning of Year 1,261,395 26,028Cash – End of Year $1,424,224 $1,261,395

Cash Paid During the Year for: Interest $359,058 $386,252 Income Taxes 30,000 25,802

Allocated Patronage Dividends $296,443 $1,039,052

2014 2013

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 2014 2013

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES 2014 2013


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The Company was incorporated in 1920 under Iowa Law and is operating as a cooperative for the mutual benefit of its members. Voting common stock ownership is limited to agricultural producers on a one share-one vote premise. Net savings on business transacted by members is allocated to them on the books of the Corporation or paid to them through

patronage dividends.The Company operates a licensed public grain warehouse;

provides grain marketing and related services, sells feed, petroleum and agronomy in and around Marion, Jasper and Mahaska counties in Iowa.

The Company’s gross revenues were derived from:

The significant accounting practices and policies are summarized below.

COMPREHENSIVE INCOME REPORTINGThe Company accounts for comprehensive income in

accordance with the Comprehensive Income Topic of the Financial Accounting Standards Board (FASB) Accountivng Standards Codification (ASC), which requires comprehensive income and its components to be reported when a company has items of other comprehensive income. Comprehensive income includes net income plus other comprehensive income (i.e., certain revenues, expenses, gains and losses reported as separate components of stockholders’ equity rather than in net income).

RECEIVABLES, NETReceivables are shown on the balance sheet net of the

allowance for doubtful accounts for book purposes. The amount of the allowance is based on historical bad debt experience and a current evaluation of the aging and collectibility of receivables.For tax purposes, uncollectible amounts are charged against current operations and no allowance for doubtful accounts is maintained.

Because of uncertainties inherent in the estimation process, management’s estimate of credit losses inherent in the accounts receivable and the related allowance may change in the near term.

Trade receivables with credit balances have been included in the customer credit balances and prepaid sales as a current liability.

GRAIN IN TRANSITIn accordance with industry practice on contracts, subject to

final grade and weight determination at the destination point, the Company consistently records a sale at the time grain is shipped.

HEDGINGThe Company generally follows a policy of hedging its grain

transactions to protect gains and minimize losses due to market fluctuations. Gains and losses from these hedge transactions are reflected in the margins of the respective commodity.

INVENTORIESGrain inventories are valued at market (realizable value

adjusted for freight, test weights, discounts and other differentials), including a provision for gains or losses on future sales and purchase commitments. Merchandise inventories are valued at the lower of cost (first-in, first-out method) or market prices.

PROPERTY, PLANT AND EQUIPMENTLand, buildings and equipment are stated at cost. Depreciation

methods are discussed in Note 5.Maintenance and repairs are expensed as incurred.

Expenditures for new facilities and those which increase the useful lives of the buildings and equipment are capitalized. When assets are sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and gains or losses on the dispositions are recognized in earnings.

NOTES TO FINANCIAL STATEMENTSNote 1: Organization and Nature of Business

Note 2: Summary of Significant Accounting Policies

Agronomy Sales and Related Services 38% 34%Grain Sales and Related Services 24 32Petroleum Sales and Related Services 24 20Feed Sales and Related Services 12 12Other Merchandise Sales and Services 2 2

2014 2013

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EQUITY IN OTHER ORGANIZATIONSEquities in other organizations are recorded at cost, plus

unredeemed patronage dividends received in the form of capital stock and other equities. Cooperative stocks are not transferable, thereby precluding any market value, but they may be used as collateral in securing loans. Patronage dividends received are recognized as income and any impairment of equities is not recognized by the Company until formal notification is received, or when there has been permanent impairment of the carrying value of the investment. Redemption of these equities is at the discretion of the various organizations.

MEMBERS’ EQUITYCommon stock may be issued only to members who are

agricultural producers or other users. Equities are issued and/or redeemed at par value. All equity transactions require Board of Director approval.

DEFERRED REVENUEThe Company recognizes revenues as they are earned.

Amounts collected in advance of the period in which they are earned are recorded as a liability.

PATRONAGE DIVIDEND INCOMEPatronage refunds from other cooperatives are recognized as

income in the year the Company receives notification from the distributing cooperative.

DISTRIBUTION OF NET SAVINGSNet savings is allocated to patrons on a patronage basis,

based on taxable income and in accordance with the articles and bylaws of the Company.

Patronage refunds to members of the cooperative may take the form of either qualified or nonqualified written notices of allocation. The terms qualified and nonqualified refer to the tax aspect of a refund. For a patronage refund to be qualified as an income tax deduction for the Company at least 20% of the refund must be paid in cash. A nonqualified refund then, is a refund where less than 20% of the refund is paid to the member in cash and does not qualify as a tax deduction for the Company.

Unallocated savings, after provision for income taxes, is accounted for as an addition to unallocated retained savings.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITIONThe Company provides a wide variety of products and

services, from production agricultural inputs such as livestock

feeds, crop nutrients, fuels and other farm supplies, to grain marketing, storage and drying services as well as feed grinding and mixing, agronomy spreading and spraying, transportation, and other agricultural related services. Sales are recorded upon transfer of title, which could occur at the time commodities are shipped or upon receipt by the customer, depending on the terms of the transaction. Service revenues are recorded once such services have been rendered.

SALES TAXESVarious entities impose a sales tax on specific categories

of the Company’s sales. The Company collects the sales tax from patrons and remits the entire amount to the respective taxing authorities. The Company excludes the tax collected and remitted from sales and the cost of sales, respectively.

INCOME TAXESThe Company, as a non-exempt cooperative, is taxed on

non-patronage earnings and any patronage earnings not paid or allocated to patrons.

The Company evaluates uncertain tax benefits arising from tax positions taken or expected to be taken based upon the likelihood of being sustained upon examination by applicable tax authorities. If the Company determines that a tax position is more likely than not of being sustained, it recognizes the largest amount of the arising benefit that is greater than 50% likely of being realized upon settlement in the financial statements. Any tax positions taken or expected to be taken that do not pass the more likely than not test, the Company establishes reserves offsetting the benefits related to such positions. Interest and penalties, if any, are included in the current period provision for income taxes in the Company’s statement of savings and are included as a current liability in the balance sheet.

DEFERRED INCOME TAXESDeferred income taxes reflect the net tax effects of temporary

differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The principal temporary differences are due to the use of different financial reporting and income tax methods for depreciation, bad debts, inventory capitalization and compensated absences.

LEASESLeases which meet certain criteria are classified as capital

leases, and assets and liabilities are recorded at amounts equal to the fair value of the leased properties at the beginning of the respective lease terms. Such assets are amortized evenly over the related lease terms of their economic lives. Leases which do not meet such criteria are classified as operating leases and related rentals are charged to expense as incurred.

ADVERTISING EXPENSESThe Company’s advertising expenses are charged against

income during the year in which they are incurred. Total

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CREDIT RISK – FINANCIAL INSTITUTIONSThe Company had deposits in an account with CoBank, ACB.

The balance of the account which is not insured or guaranteed by any government agency, was $1,375,132 and $1,256,702 at August 31, 2014 and 2013, respectively.

CREDIT RISK – RECEIVABLESThe Company is a locally owned agri-business supplier

with facilities in Marion, Jasper, and Mahaska counties. In the normal course of business, the Cooperative grants credit to customers, substantially all of whom are agricultural producers and members of the Cooperative residing and/or operating in the above-mentioned counties under standard terms without collateral. As these receivables are concentrated in the agricultural industry, collection of the receivables may be dependent upon economic returns from farm crop and livestock production. Additionally, the Company grants credit to other customers purchasing processed agricultural products in trade areas beyond the above counties. The Company’s credit risks

are continually reviewed and management believes that adequate allowances have been made for doubtful accounts.

CREDIT RISK – SUPPLIERSThe Company historically prepays for or makes deposits

on undelivered inventories. Concentration of credit risk with respect to inventory advances, are primarily with a few major suppliers of agricultural inputs.

OFF–BALANCE SHEET RISK – COMMODITY CONTRACTSRealized and unrealized gains and losses from futures and

forward hedge contracts and commitments are included in gross savings. There is the possibility that future changes in market prices may make these contracts more or less valuable, thereby, subjecting them to market risk. Risk arises from changes in the value of these contracts and commitments and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the value of these contracts and commitments, including market volatility.

The Company, organized on a cooperative basis, conducts a substantial portion of their operations with members (owners) of the Company and has ownership interest in various regional cooperatives for whom they purchase products for resale and sell products to.

The Company sells supplies to and purchases grain from the Board of Directors and certain employees. The aggregate of these transactions is not significant to

the financial statements. The Company had trade receivables due from directors and

employees of $39,222 and $72,377 as of August 31, 2014 and 2013, respectively.

The Company had patron credit balances due to directors and employees of $13,399 and $15,701 as of August 31, 2014 and 2013, respectively.

advertising costs charged to expense for the years ended August 31, 2014 and 2013 are $197,479 and $130,939, respectively.

DERIVATIVE FINANCIAL INSTRUMENTSThe Company has only limited involvement with derivative

financial instruments and does not use them for trading purposes. They are used to manage well-defined commodity price risks. The Company may use futures, forward, option and swap contracts to reduce the volatility of grain. These contracts permit final settlement by delivery of the specified commodity. These contracts are not designated as hedges as defined by the Derivatives and Hedging Topic of the FASB ASC. Unrealized gains or losses are recognized in the valuation of the respective commodity’s ending inventory.

FAIR VALUE OF FINANCIAL INSTRUMENTSThe Fair Value Measurements and Disclosures Topic of the

FASB ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered when determining the fair value of liabilities. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.

Note 3: Concentrations of Risk

Note 4: Related Party Transactions

TRGS, LLC 46% $26,070 46% $69,999OPI – TRC RTK, LLC 49% 3,732 49% 4,523 $29,802 $74,522

Equity in other cooperatives consist of purchased equities, which are valued at cost, and equities received as patronage dividend income, which are carried at face value. Losses are recognized on these investments when the Company receives formal notification of loss allocations from the investee, or when there has been permanent impairment of the carrying value of

the investment. Redemption of these equities is at the discretion of the various organizations, thereby making it impracticable to estimate future cash flows from these investments.

At August 31, 2014 and 2013 the Company had equity in other cooperatives as follows:

The August 31, 2014 cost of depreciable assets by depreciation method is as follows:

The August 31, 2013 cost of depreciable assets by depreciation method is as follows:

At August 31, 2014, the Company had the following construction projects in process:

Note 6: Equity in Other Organizations

Note 5: Property, Plant and Equipment

Buildings 7-50 $8,095,302 $0 $8,095,302Equipment 3-33 9,688,068 151,375 9,839,443Vehicles 3-10 3,208,338 0 3,208,338 $20,991,708 $151,375 $21,143,083

Buildings 7-50 $8,127,490 $0 $8,127,490Equipment 3-33 9,155,809 151,375 9,307,184Vehicles 3-10 3,412,273 0 3,412,273 $20,695,572 $151,375 $20,846,947

Grain Conveyor – Monroe 10-14 $9,852 $39,407 $49,259

LIFE IN YEARS STRAIGHT-LINE DECLINING BALANCE TOTAL

LIFE IN YEARS STRAIGHT-LINE DECLINING BALANCE TOTAL

ESTIMATED COSTS TO ESTIMATED COSTS TOTAL ESTIMATED COMPLETION DATE TO COMPLETE COSTS

CHS, Inc. $2,808,840 $2,526,625Land O’Lakes, Inc. 816,538 893,107Cooperative Finance Association, Inc. 235,038 238,999CoBank, ACB 233,181 212,437Ag Processing, Inc. 90,111 86,583Western Co-op Transport Association 1,584 1,584 $4,185,292 $3,959,335

2014 2013

PERCENTAGE AMOUNT PERCENTAGE AMOUNT 2014 2013

The Company acquired interest in partnerships. The investments are being accounted for using the equity method.

At August 31, 2014 and 2013, the Company had investments in partnerships as follows:

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Unpaid grain at August 31, 2014 and 2013 consisted of deferred payment, price later contracts and priced not paid grain. Deferred payment and priced not paid contracts represents grain on which title has passed to the Company with payment to be made at a later date. Price later contracts represent grain on which title has passed to the Company with a price to be fixed at

a later date. The Company includes these bushels as purchases and reflects the corresponding liability based on the bid price at August 31.

The contracts as of August 31, 2014 and 2013 are summarized as follows:

During the year ended August 31, 2004, the Company assigned its rights of all rent payments from TeleCorp Realty, LLC to Wireless Capital Partners, LLC for a lump sum payment of $55,000. The assignment period is from October 1, 2003

through September 30, 2018. The rental payments are for space on the Pella elevator for a cell phone tower. The amount of income recognized for each of the years ended August 31, 2014 and 2013 was $3,667.

Information regarding financing at August 31, 2014 and 2013 is as follows:

Seasonal borrowings in effect at August 31, 2014 and 2013 are as follows:

*Denotes continuously variable interest rate.

Note 7: Unpaid Grain

Note 8: Deferred Revenue

Note 9: Financing Arrangements

CoBank, ACB RI0302T01 3.66%* $5,300,000 $6,050,000 $187,500 Less: Current Maturities 750,000 750,000Long–Term Debt $4,550,000 $5,300,000

CoBank, ACB RI0302S01 3.41%* $0 $0 Due 07-01-15

Corn 74,504 $264,490 89,935 $514,430Soybeans 15,498 201,321 33,765 491,957 465,811 1,006,387

Corn 466,189 2,064,524 342,680 2,382,832Soybeans 96,772 1,262,663 73,580 1,095,592 3,327,187 3,478,424

Corn 24,812 98,752 0 0Soybeans 1,884 25,344 0 0 $3,917,094 $4,484,811

LENDER INTEREST RATE 2014 2013 REPAYMENT BASIS

LENDER INTEREST RATE 2014 2013 REPAYMENT BASIS

PRICE LATER CONTRACTS BUSHELS AMOUNT BUSHELS AMOUNT

DEFERRED PAYMENT CONTRACTS

PRICE NOT PAID

BALANCE

BALANCE

2014 2013

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Quarterly through 05-20-21; Balance due 08-20-21

2015 $750,0002016 750,0002017 750,0002018 750,0002019 750,000Thereafter 1,550,000 $5,300,000

OPERATING 2014 2013

At August 31, 2014 and 2013, capital stock consisted of the following:

The CoBank, ACB notes are secured by a first mortgage lien on all real property owned by the

Company and a security agreement covering all personal property, including inventory and accounts receivable

arising from the sale thereof, subject only to first mortgages and security agreements for other contracts. They are further secured by $233,181 of equity in CoBank, ACB.

The loan agreements with CoBank, ACB, contain restrictive and affirmative covenants which provide, among other things; (1) restrictions on incurring additional indebtedness, (2) making loans to any one person or entity outside the ordinary course of business, (3) limitations on the type and amount of guarantees, and (4) maintaining certain levels of working capital on a monthly and year-end basis.

Note 10: Capital Stock

Class A Common Stock $150 3,000 491 480Class B Common Stock 50 2,000 516 539Class A Preferred Stock 1 6,000,000 1,187,686 1,195,126Class B Preferred Stock 1 6,000,000 895,922 900,198Class C Preferred Stock 1 3,000,000 205,214 209,131Class D Preferred Stock 1 3,000,000 1,012,832 1,034,475Class E Preferred Stock 1 3,000,000 778,779 446,993Class F Preferred Stock 1 3,000,000 705,710 0Class G Preferred Stock 1 3,000,000 0 0Class H Preferred Stock 1 3,000,000 0 0

PAR VALUE SHARES AUHORIZED 2014 2013SHARES OUTSTANDING

Loan commitments in effect at August 31, 2014 and 2013, were as follows:

Aggregate annual maturities of the long–term debt outstanding at August 31, 2014, are as follows:

Interest expense charged to operations at August 31, 2014 and 2013 was $357,909 and $366,642, respectively.

All stock will be issued at its par value. The Company may pay dividends not to exceed eight percent per year of par value on Classes G and H Preferred Stock, but will not pay dividends on any other class

of its stock. Class A Common Stock is the only class of stock with voting rights. A person may only own one share of common stock.

CoBank, ACB $12,000,000 $12,000,000 Cooperative Finance Assoc. 500,000 500,000Term – CoBank, ACB 5,300,000 6,050,000

MATURITY DATE - YEAR ENDING AUGUST 31

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Substantially all of the Company’s employees participate in the Coop Retirement Plan, which is a multiple employer defined benefit plan that is funded by contributions from employer and employees and provides for monthly income for life upon retirement or upon total and permanent disability. The amount of benefits is based upon length of service and compensation. The plan is administered by United Benefits Group.

The Company intends to continue to participate in the plan indefinitely; however, it may voluntarily discontinue the plan at any time. The Company’s annual contributions are consistently charged to expenses as they are due. The plan, which has no funding deficiencies, uses the aggregate cost method of valuations. Under this method, the normal cost is adjusted each year to reflect the experience under the plan, automatically spreading gains or losses over future years. The relative position of each employer associated with the plan, with respect, to the actuarial present value of accumulated benefits isn’t determinable.

The Company is one of approximately 400 employers that

contributes to the Co–op Retirement Plan (the “Plan”), which is a defined benefit plan constituting a “multiple employer plan” under the Internal Revenue Code of 1986, as amended, and a “multiemployer plan” under the FASB Accounting Standards Master Glossary. The risks of participating in these multiemployer plans are different from single–employer plans in the following aspects:

A. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;

B. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and

C. The Company intends to participate in the plan indefinitely, however it may voluntarily elect to discontinue the plan at any time, and may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability that could be material to the financial statements.

The Company’s contributions for the years stated above constitute its total contributions made to all multiemployer plans and did not represent more than 5 percent of total contributions to the Plan as indicated in the Plan’s most recently available annual report (Form 5500). There have been no significant changes that affect the comparability of 2014 and 2013 contributions. Plan–level information is included in From 550 and therefore is available in the public domain.

The Company participates in a 401(k) thrift plan administered by Associated Benefits Corporation. The plan covers full-time employees over 21 years of age who have completed at least four

months of continuous employment. Presently, only employee contributions are being made to the plan. The Company paid administration fees for the years ended August 31, 2014 and 2013 in the amount of $23,044 and $21,824, respectively.

Prior to the merger, employees of Farmers Cooperative Exchange and its joint venture Cornerstone Feeds participated in separate defined benefit plans administered by Association Benefits Corporation. Each of these plans has been frozen and will remain frozen until each plan is terminated.

Termination shortfalls for each of the plans for the years ended August 31, 2014 and 2013 were as follows:

The Company’s participation in the Plan, including administration costs, for the years ended August 31, 2014 and 2013 is outlined in the table below:

Contributions to each of the plans for the years ended August 31, 2014 and 2013 were as follows:

The effects of any curtailments of the plan were not reasonably estimable at August 31, 2014 and 2013, and accordingly, the Company has not reflected any gains or losses.

Note 11: Pension Plans

Co–op Retirement Plan 01-0689331 001 $269,465 $248,521PLAN NAME EIN PLAN NUMBER 2014 2013

CONTRIBUTIONS

2014 2013

2014 2013

Farmers Cooperative Exchange $219,000 $380,854 Cornerstone Feeds 7,134 11,292 $226,134 $392,146

Farmers Cooperative Exchange $118,633 $118,050Cornerstone Feeds 3,174 3,023 $121,807 $121,073

19

Depreciation Difference $(1,992,512) $(2,103,645)Net Operating Loss 588,340 737,554Non–Qualified Allocation 605,517 505,255Acquired Customer List 12,930 15,084Non–Compete 4,535 5,668Deferred Revenue 4,985 6,232 $(776,205) $(833,852)

Components of the provision for income tax expense (benefit) for the years ended August 31, 2014 and 2013 was as follows:

Amounts for deferred tax assets and liabilities at August 31, 2014 and 2013 are as follows:

Total income tax expense for the years ended August 31, 2014 and 2013, was less than the normal amount computed by applying the U.S. federal income tax rate to savings before income taxes primarily because of the surtax exemption, permanent timing differences, and temporary timing differences creating deferred income taxes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities

for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from timing differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the timing differences are expected to reverse.

The Company recognizes any uncertain tax benefits if such benefits are a result of a tax position that is more likely than not sustainable upon examination by Federal or State tax authorities. When an uncertain benefit is determined to be more likely than not sustained, the Company values the position, for financial statement purposes, of the largest amount of the tax benefit that is more than 50% likely of being realized upon resolution of the benefit. For any tax positions taken that do not meet the more likely than not criteria, the Company establishes a tax reserve for 100% of the position taken.

For the year ended August 31, 2014, no significant amounts of

unrecognized tax benefits existed nor does the Company anticipate any significant changes in unrecognized tax benefits to occur within the next year, other than tax settlements.

The Company files tax returns with the Internal Revenue Service and the State of Iowa. As of August 31, 2014, the Company is no longer subject to examinations by relevant tax authorities for the fiscal years prior to August 31, 2011.

At August 31, 2014 the Company has available an unused net operating loss carry forward of $1,730,413 that may be applied against future taxable income. The carry forward will expire August 31, 2032.

Note 12: Income Taxes

DEFERRED TAX ASSET – CURRENT 2014 2013

DEFERRED TAX ASSET – CURRENT 2014 2013

DEFERRED TAX ASSETS (LIABILITIES) – NON-CURRENT 2014 2013

Federal Income Tax $0 $(17,838)State Income Tax 0 56,073Overaccrual Prior Year Taxes (7,384) 0 $(7,384) $38,235

Deferred Income Tax $(61,275) $200,940

Allowance for Doubtful Accounts $20,034 $16,320Accrued Compensated Absences 28,585 26,038263A Inventory Capitalization 7,186 9,819 $55,805 $52,177

20

2015 $72,4942016 43,1262017 15,6082018 375 $131,603

The Company has various non–cancelable and cancelable operating leases on property and equipment. The rent expense on non–cancelable lease agreements was $57,268 and $29,109 for

2014 and 2013, respectively. The rent on cancelable operating leases and rental agreements was $8,227 and $29,289 for 2014 and 2013, respectively.

The Company determines the fair market value of its instruments as of August 31, 2014 and 2013 based on the three levels of fair value hierarchy which are:

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation

techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following table sets forth assets and liabilities measured at fair value and the respective levels to which fair value measurements are classified within the fair value hierarchy:

Minimum future rental payments under non–cancelable operating leases having remaining terms in excess of one year as of August 31, 2014, are as follows:

Level 1 - Values are based on unadjusted quoted prices in active markets for identical assets or liabilities. These assets or liabilities include commodity derivative contracts on the Chicago Board of Trade.

Level 2 - Values are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities exchanged in inactive markets.

Level 3 - Values are based on unobservable inputs reflecting management’s own assumptions and best estimates that market participants would use in pricing the asset or liability.

Note 13: Operating Leases

Note 14: Fair Value Measurements

YEARS ENDING AUGUST 31

Assets Futures Contracts $606,133 $0 $0 $606,133 Grain Inventories 0 1,181,084 0 1,181,084 $606,133 $1,181,084 $0 $1,787,217

Assets Forward Contracts $0 $208,842 $0 $208,842 Futures Contracts 5,284 0 0 5,284 Grain Inventories 0 1,952,478 0 1,952,478 $5,284 $2,161,320 $0 $2,166,604

Liabilities Forward Contracts $0 $1,644,944 $0 $1,644,944

LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4

LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4

FAIR VALUES AS OF AUGUST 31, 2014

FAIR VALUES AS OF AUGUST 31, 2013

21

The accompanying notes are an integral part of the financial statements.

The carrying value of the Company’s other financial instruments,

consisting principally of cash, trade receivables, accounts payable, lines of credit and other obligations,

approximates fair value due to the short-term maturity of these instruments. The carrying value of long-term borrowings

approximates fair value as the interest the Company could obtain on similar debt instruments approximate the interest rates of current debt obligations. The Company’s investments in other cooperatives are stated at cost. There is no established market for these investments, and it is not otherwise practical to determine the fair value of investments in cooperatives.

The Company’s purpose for entering into derivative and its overall risk management strategies are discussed in Note 2. The fair value of commodity derivatives is presented in Note 14.

Additional information regarding the fair value of derivative transactions is as follows:

A. The Company is contingently liable for any weight or grade deficiencies that may occur at time of delivery on the following bushels of grain in storage under warehouse receipts or awaiting disposition at August 31, 2014:

B. The Company is subject to various federal and state regulations regarding the care, delivery and containment of products which the Company handles and has handled. The Company is contingently liable for any associated costs which could arise from the handling, delivery and containment of these products. These costs cannot be determined at present. While resolution of any such costs in the future may have an effect on the Company’s financial results for a particular period, management believes any such future costs will not have a material adverse effect on the financial position of the Company as a whole.

In addition, gains and losses on commodity derivatives are located in gross savings on sales in the Statement of Savings. Net gains on commodity futures contracts amounted to $437,057

and $1,979,739 for the years ended August 31, 2014 and 2013, respectively

Note 15: Derivative Financial Instruments and Hedging Activities

Note 16: Commitments and Contingencies

Open Futures Contracts Margin Account $606,133 $5,284

Open Storage 290,334 74 3,677Warehouse Receipted 10,011 0 0 Storage Obligation 300,345 74 3,677

Company Owned – Unpaid 565,505 0 114,155Company Owned – Paid (425,436) 1,359 (62,043) Total Company Owned 140,069 1,359 52,112

Total Stocks Per DPR 440,414 1,433 55,789

DERIVATIVE ASSETS (LIABILITIES): BALANCE SHEET LOCATION 2014 2013

DAILY POSITION RECORD (DPR) CORN OATS SOYBEANS

FAIR VALUE AS OF AUGUST 31

22

C. The Company has entered into an agreement with the Cooperative Finance Association, Inc., where the Cooperative Finance Association, Inc. will provide input financing to certain company patrons. The Company agrees to perform services regarding the origination, servicing, and collection of completed documents from patrons and related parties. The Company will guarantee 0%–30% of the total non-collectible producer loan amounts, as well as 0%-30% of any expenses incurred by the Cooperative Finance Association, Inc., in the collection or attempted collection of any patron loan. Total patron note balances and the outstanding balances as of August 31, 2014, are as follows:

The Company has considered the effect, if any, that events occurring after the balance sheet date and up to October 24, 2014 have on the financial statements as presented. This date coincides with the date the financial statements were available to be issued.

Note 17: Subsequent Events

Outstanding Principal Balance $1,922,578Accrued Interest 23,216Maximum Potential Liability 697,003

23

24


Annual Meeting - Years in Review

Total Sales $87,862,700 $98,370,889 $90,235,057 $71,647,696 $54,951,796

Local Savings -$538,707 $522,249 $264,654 $298,144 $365,318

Total Savings $296,443 $1,634,625 $937,584 $835,982 $941,452

Total Member’s Equity $11,205,053 $10,698,298 $9,446,529 $8,487,517 $8,179,182

Cash Returned to Members $39,340 $237,813 $31,621 $78,384 $274,370

Fixed Asset Expenditures $1,031,212 $959,946 $1,796,726 $5,108,877 $830,274

2014 2013 2012 2011 2010

25

-$538,707

$522,249

$264,654

$298,144

$365,318

-$600,000 -$400,000 -$200,000 $0 $200,000 $400,000 $600,000

2014

2013

2012

2011

2010

LOCAL SAVINGS

$98,370,889

$98,370,889

$90,235,057

$71,647,696

$54,951,796

$0 $20,000,000 $40,000,000 $60,000,000 $80,000,000 $100,000,000 $120,000,000

2014

2013

2012

2011

2010

ANNUAL SALES

26

$296,443

$1,634,625

$937,584

$835,982

$941,452

$0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000

2014

2013

2012

2011

2010

TOTAL SAVINGS

$11,205,053

$10,698,298

$9,446,529

$8,487,517

$8,179,182

$0 $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000

2014

2013

2012

2011

2010

TOTAL MEMBERS’ EQUITY

27

CASH RETURNED TO MEMBERS

$1,031,212

$959,946

$1,796,726

$5,108,877

$830,274

$0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000

2014

2013

2012

2011

2010

ANNUAL FIXED ASSET EXPENDITURES

$39,340

$237,813

$31,621

$78,384

$274,370

$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000

2014

2013

2012

2011

2010

2 0 1 4 ANNUAL REPORT

Two Rivers Cooperative - Annual Report 2014

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