Missouri: Glasgow Cooperative, Inc., was
organized in 1923 as a farm supply purchasing association. It serves farmers in a 15-mile
radius of Glasgow. In its 70-year history, it has returned nearly 8 percent of the gross
sales in patronage back to the members. The cooperative also has an excellent history of
revolving member equities. Both activities have reduced the cost of providing farm
supplies to the members.
Organizing
Steps
Starting a cooperative is a complex project. A small group of prospective members discuss
a common need and develop an idea of how to fulfill it. Depending on the situation
generating the idea, a new cooperative may be welcomed with enthusiasm or may be met with
vigorous competitive opposition.
If opposed, leaders, must be prepared to react to various strategies of
competitors such as price changes to retain potential cooperative members' business;
better contract terms or canceled contracts; attempts to influence lenders against
providing credit; and even publicity, misstatements, and rumors attacking the cooperative
business concept.
Regardless of the business climate for the
proposed cooperative, leaders must demonstrate a combination of expertise, enthusiasm,
practicality, dedication, and determination to see that the project is completed.
Figure 1 - Sequence of Events
Outline
1. Invite leading potential
member-users to meet and discuss issues. Identify the economic need a cooperative might
fill.
2. Conduct an exploratory meeting
with potential member-users. If the group votes to continue, select a steering committee.
3. Survey prospective members to
determine the potential use of a cooperative.
4. Discuss survey results at a
second general meeting of all potential members and vote on whether to proceed.
5. Conduct a needs or use cost
analysis.
6. Discuss results of the cost
analysis at a third general meeting. Vote by secret ballot on whether to proceed.
7. Conduct a feasibility analysis
and develop a business plan.
8. Present results of the
feasibility analysis at the fourth general meeting. If participants agree to proceed,
decide whether to keep or change the steering committee members.
9. Prepare legal papers and
incorporate.
10. Call a meeting of charter
members and all potential members to review and adopt the proposed bylaws. Elect a board
of directors.
11. Convene the first meeting of
the board and elect officers. Assign responsibilities to implement the business plan.
12. Conduct a
membership drive.
13. Acquire
capital and develop a loan application package.
14. Hire the
manager.
15. Acquire
facilities.
16. Begin
operations.
Leadership
and Advisers
Responsibility for starting a cooperative and seeing the project through rests mostly with
the leadership group. Leaders begin by discussing their idea at one or more small group
meetings with other prospective members or users. If the group supports the idea, the next
step is to seek the advice of someone familiar with cooperatives.
Specialized help is needed throughout the
various stages of starting a cooperative. Leaders need someone familiar with the
cooperative-forming process to work with them step by step concerning legal, economic, and
financial aspects.
Depending on the resources available and
interest found among sources of specialized help, the group should request a person from
one of the organizations to serve as an adviser
Business and cooperative specialists are
needed. Most States have Rural Development offices and many have a cooperative development
specialist on the staff who can help you get started. They can recommend other specialized
services and talents that will be needed during organization stages.
Other resource people are available from
county Extension Service offices or land-grant universities, State cooperative councils,
Centers for Cooperatives, National Cooperative Bank, area offices of CoBank, St. Paul Bank
of Cooperatives, or an established cooperative in your area. USDA's Rural
Business-Cooperative Service in Washington, DC, also assists groups seeking to develop
cooperatives by conducting feasibility studies, providing educational services, and
helping with implementation.
Legal Counsel, preferably an attorney familiar
with State cooperative statutes, is needed. Among sources to check for one are State
Extension specialists working with cooperatives, the State cooperative council, CoBank,
St. Paul Bank for Cooperatives, National Cooperative Bank, National Society for
Cooperative Accountants, USDA's Cooperative Services, or an established cooperative in the
area.
An attorney prepares the organization papers or checks the legality of those written by
someone else. Early expertise is needed to acquire property, make capitalization plans,
borrow money, and write agreements and contracts. Even after the cooperative is operating,
an attorney should be retained who can help ensure the organization conforms to applicable
laws.
Financial counsel from
some financial institution should be sought early regarding anticipated capital needs
and methods of financing.
This institution can provide
advice on designing the feasibility study to meet requirements of a lending agent. Staff
specialists on finance and accounting matters can also advise the cooperative. An
independent accounting firm that has the knowledge of cooperative operations should be
hired to establish the bookkeeping system, tax records, and a plan for revolving capital
prior to sale of stock or collection or handling of members' money. Later, the board will
need to hire an outside accounting firm to conduct the annual audit.
Technical advice may be needed periodically from
a variety of technicians and persons experienced in cooperative business operations.
Exploratory Meeting
To determine the level of interest in starting and supporting a cooperative, invite
potential members to a general meeting. Announce the meeting date, time, and place via
newspapers, radio, telephone, at other meetings, by letter, or word of mouth. Invite
outside advisers.
The leadership group should develop an agenda
and select a presiding officer who can conduct a business meeting. Sometimes, an adviser
can act as chair or help answer questions. Primary agenda items should include:
What is the need;
Possible solutions;
Cooperative principles and
terminology;
Cooperative operating practices;
Advantages and disadvantages of a
cooperative;
General risk capital equity and
financial requirements; and
Various forms of member-user
commitment needed.
One approach is to have one member of the leadership group discuss the need and another
summarize how the proposed cooperative might solve it. In addition, a representative of a
successful cooperative might explain its operations, benefits, and
limitations.
Allow plenty of time for discussion.
Prospective members should be encouraged to express their views and ask questions. All
issues raised should be addressed, although answers may be delayed until later meetings
when more information becomes available.
Cooperative Bulletins
Answers to some of the frequently asked questions may be found in an array of cooperative
bulletins published by USDA's Rural Business-Cooperative Service (Appendix VII, Helpful
References).
1. What is a cooperative
and how is it different from other business?
2. Who controls a cooperative?
3. What is the risk investment (equity) and why is it needed?
4. How much is my initial investment (equity capital)?
5. Will my investment (equity) requirement be determined by volume or by number of
members?
6. Can we simply cosign a bank note instead of raising a cash investment (equity)?
What risks are involved in cosigning?
7. How much money can I lose if the cooperative falls?
8. Can I sell my stock and other investments (equities) and get out of the
cooperative whenever I want? Can I sell it to whomever I want?
9. What are marketing or purchasing agreements and why are they needed? How long do
they last? If I can't meet the terms of the agreement, do I have to pay a penalty?
10. What are net margins and net earnings?
11. What are patronage refunds and retained patronage refunds?
12. Why can't the cooperative pay 100 percent cash patronage refunds?
13. Why do we have to pay income taxes on our patronage refunds, particularly the retained
portion, if we don't actually receive money?
14. What are per-unit capital retains and what's their purpose?
15. When will the cooperative refund my retained allocations and per-unit retain? Will I
be able to get this money when I retire? Will my estate be able to get it after I die?
16. Can we restrict cooperative membership?
17. If a cooperative is supposed to help its members, why are prices at the cooperative no
better and sometimes worse than prices elsewhere?
Steering Committee Formation
and Duties-
If the group wants a more detailed study after discussion is
completed, it should select a steering committee. This group should have a keen interest
in the cooperative, be well-respected within the community, and have sound business
judgment. Committee members often become the initial organizers and members of the
cooperative's first board of directors.
The first function is to select officers of the
steering committee, usually at the close of the general informational meeting. Next,
establish a deadline for completing a business analysis, including a target date for
surveying potential members. Periodic progress meetings retain interest of prospective
members.
The steering committee, with the help of one or
more advisers, determines if a cooperative is feasible. First, it judges whether the
proposed cooperative is likely to succeed and benefit its members. Second, if the proposal
passes this test, the committee prepares a specific, detailed business plan for the new
cooperative.
Assistance from specialists in law, accounting,
finance, economics, engineering, and cooperative business operations is critical during
the business analysis phase.
Economic need is fundamental to the formation
and successful operation of any cooperative. The committee should examine what products or
services the cooperative could provide, those needed from other sources, and whether costs
would be reduced or quality improved. Intangible functions also should be considered. Will
the cooperative provide a needed service, preserve a market, stabilize prices, or
encourage more orderly marketing?
Is the projected initial investment (equity)
within the financial ability of the potential members involved?
The committee should consider alternatives to
starting a new cooperative. Could similar services be provided by another nearby
cooperative, either directly or by establishing a branch? If forming a new cooperative is
the best alternative, the group should consider linking with regional cooperatives to
obtain additional benefits.
A new cooperative should initially limit
services to avoid elaborate or costly facilities above those absolutely needed. If
successful, services can later be expanded.
Member-User Survey
Formal survey techniques are best for estimating potential membership. The adviser usually
drafts the survey questionnaire for the steering committee to review. Appendix I carries a
sample questionnaire, but the following list gives a general idea of the needed
information:
1. Volume of need or use in an appropriate unit of measure for the most recent or typical
year;
2. Member-user experience and capabilities-years in present location, overall success,
demand specific to the cooperative venture, and production and marketing success;
3. Variety of products or services to be offered or needed;
4. Period of need or services;
5. Current unit value-sales price or cost per unit;
6.. Member-user--location of use or need;
7. Familiarity with and use of other cooperatives and willingness to join, finance, and
use one.
While the questionnaire is being prepared, the steering committee should develop a list of
potentially interested members. When the questionnaire is completed and approved, the
committee interviews potential members.
Steering committee members might travel with
the adviser or advisers to locate potential users or otherwise fix locations on a map. But
the adviser, not committee members, should conduct the survey interview to preserve
confidentiality of information provided. Such occasions should be carefully assessed
beforehand.
The adviser should also discuss and answer
questions about the proposed cooperative venture. Surveys also can be conducted at
scheduled group meetings at a central location.
Estimates of both membership and volume should
be conservative. Not all persons interested will join initially and some may wait to join
later. And, unfortunately, not all who join will make the fullest use of the cooperative's
services.
The adviser analyzes the survey, prepares a
report, and presents it to the steering committee. The results and implications are then
discussed at a meeting of all persons surveyed. Survey results should reveal how potential
members identify the economic need and the degree of interest in a cooperative to fulfill
that need. The survey should indicate the level of support in terms of business volume and
if financial commitment is sufficient to organize and successfully operate the
cooperative. The final action at this meeting is a vote on whether to continue.
Market, Supply Sources,
Cost Analysis
A vote to continue challenges the steering committee and adviser to identify suitable
markets, sources of supply, and service providers and their requirements. Here are some
ways to gain this information:
1. Use previous research and industry common knowledge.
2. Survey market, supply, or service provider sources. Although the advisor should be
primarily responsible for developing the questionnaire, this phase should be a joint
effort. Contact users of the services, potential buyers or suppliers, to determine their
requirements.
3. Ask State and/or Federal offices (such as the Rural Development offices, Extension
Service, or community action agencies), universities, cooperative centers, commodity
organizations, or private consulting firms to conduct the research and use their findings.
The adviser analyzes the survey results. This
process may determine the scope of the cooperative's activities. Contacts are then made,
either by the adviser or steering committee members, with engineers, equipment dealers,
real estate agents, and others for cost estimates on establishing and operating the
cooperative's physical facilities.
The adviser reports on the potential markets or
supply sources to the steering committee. Once the report is approved, the steering
committee calls the third general meeting. The adviser presents the preliminary market or
supply estimation and cost analysis. Both are subject to change.
After the market or supply report is discussed
and accepted, the group should vote by secret ballot on whether to continue the
organizational process. By now, the steering committee and adviser should have a good idea
of the minimum volume of business, number of members, and financial commitment needed to
justify starting the cooperative. Where support is questionable, the token investment
should be refunded.
Supporters should sign a premembership
agreement (Appendix III). This agreement helps determine the extent of serious interest in
the proposed cooperative. The signer agrees to join, patronize, and furnish a specific
amount of initial risk capital.
Initial investment by members should be in
proportion to their intended use of the cooperative, but start at a minimal amount such as
10 percent of potential risk capital (equity) needed to operate. This goal should be met
before continuing organizational efforts.
Potential members should be given a written
statement about how their investment will be used and procedures for returning unused
funds if the project is terminated or the individual later decides not to join. The money
should be deposited in an interest-bearing account and records kept of investments and
expenditures. Generally, this money is used for organizational costs like supplies,
postage, phone bills, and attorney fees.
Feasibility Analysis
The emerging picture of the size
and scope of the cooperative now permits the adviser and the steering committee to develop
basic operating assumptions. Together, they consider facilities needed, operating costs,
capitalization, and financial requirements.
An important part of the feasibility analysis
is to review the sensitivity of the business to changes in volume or operating costs. For
example, what impact will a 25-percent decrease in product sales, perhaps due to adverse
weather, have on profitability? Other key factors might include wage rates, operating
efficiencies, interest rates, etc.
The adviser determines operating efficiencies,
estimates labor needs, develops service and payment schedules, and gathers other cost
data. The steering committee will have to contract with an engineering firm or equipment
dealer, for instance, to obtain specialized data on facilities, equipment, and labor
costs.
Facilities needed may include land, buildings,
and equipment. The committee bases estimates on the expected business volume by the
probable members, plus some allowance for future expansion. The cost of buying or leasing
existing facilities and equipment should be investigated. Professionals and skilled
technicians should be consulted to determine the need for new facilities and assess the
value of any existing facilities being considered.
Operating costs include employee salaries,
utilities, taxes, depreciation, interest, and costs of office and other supplies. The
adviser, with help of the committee, determines what items to include and their probable
cost, based on operating assumptions. If the operating revenues for the projected volume
of business show little or no margins over estimated costs, the committee should project
the volume needed to produce acceptable margins. In most businesses, per-unit operating
costs tend to decline as the volume increases.
A cooperative's lowest possible operating costs
occur when its members furnish it with the maximum amount of business it can handle.
Capitalizing the
Cooperative
Capitalization is the amount and source of
money needed to start and operate the cooperative. The committee recommends a plan of
capitalization including: (1) determine whether the capital structure is to be stock or
nonstock; (2) estimate the amount of member investment (risk capital); and (3) estimate
the amount and source of borrowed money needed (debt capital).
While many State incorporation statutes permit
organizing as either a stock or nonstock cooperative, a number limit them to agricultural
producers. In a stock cooperative, members are issued stock certificates as evidence of
their membership and capital investment. More than one type of stock may be issued.
Common Stock-
Stock cooperatives issue shares
of common stock to show membership and voting rights. Common stock may be divided into
classes. Each class may have different par values and carry different voting privileges.
Usually, cooperatives don't pay interest on common stock.
Preferred Stock-
Preferred nonvoting stock may be
issued to both nonmembers and members for additional capital investment. This stock may be
divided into classes. Each has different par value and/or other conditions. Interest paid
on preferred stock may be limited by State statute and redemption determined by the board
of directors. If the cooperative is changing structure or going out of business, preferred
stock is paid before the common stock.
Membership Certificates-
If the cooperative is organized
as a nonstock organization, usually membership and capital certificates are insured, This
certificate is issued when membership fees are paid and establishes voting rights in the
cooperative. The amount of capital collected from membership fees is usually considered as
incidental to capitalizing of the cooperative. Membership certificates are generally
noninterest bearing.
Capital Certificates-
Capital certificates of a
nonstock cooperative are the equivalent of preferred stock issued by a stock cooperative.
They are sold in various denominations, may bear interest, and may or may not have a due
date. They have no voting privileges and may be owned by nonmembers.
The combination of membership fees, sale of
capital certificates, and capital certificates issued for retained patronage are sources
of risk capital (equity) for nonstock cooperatives. (Certificates issued for retained
patronage may carry a due date to implement systematic rotation.)
Stock or Nonstock
Structure ?-
A new cooperative may choose
either method for structuring risk capital. A stock structure is more easily understood by
most potential members. If organizing as a nonstock cooperative, more member education may
be needed to explain the risk capital structure described in the bylaws.
The Member Investment
Investing risk capital is a basic member responsibility. The initial investment required
(equity capital) from each member will be determined by the projected cost of facilities,
estimated daily volume of business, cash flow requirements, projected number of members,
and their volume or use of the business.
Members' initial risk capital investment should
be large enough for them to realize they have a financial stake in the business to
protect. If the investment ( equity) requirement is based on volume (vs. number of
members), the investment should be in proportion to their expected use. Those who wish to
contribute more than their share may purchase preferred stock or capital certificates that
earn fixed dividends, but carry no additional voting privileges. Members may also provide
short-term debt capital in the form of certificates of investment.
Members provide additional amounts of risk
(equity) capital as they use their cooperative. One method is through per-unit capital
retains. The cooperative deducts from transactions an amount based on the value or
quantity of services provided or products marketed. Another method is to retain part of
the cooperative's net earnings at the end of each business year. Under both of these
methods, the risk capital (equity) investments are credited to members' equity account in
the cooperative's accounting system.
Like other businesses, cooperatives must build
financial reserves. These can be used both to carry them through times when operating
expenses exceed income and to financial growth. Sometimes, part of these reserves is
dedicated to a specific purpose, such as covering uncollectible accounts (bad debts).
Another portion may be set aside to fund a new facility or the startup of a new member
service.
Accumulated reserves relieve the pressure on
the cooperative to borrow money or reduce important services through tough times. And they
lessen the likelihood the cooperative will have to ask the members for a direct investment
of additional risk capital to meet unexpected needs.
As part of the capitalization plan, the
steering committee estimates the amount of reserves that will be needed and the method of
obtaining them. State law should be checked for rules on reserve levels or methods of
accumulation.
The membership fee or payment for a share of
stock is usually retained by the cooperative, at least until the membership is terminated.
However, another element of the capitalization plan should be a strategy for revolving
member equity capital related to business done with the cooperative, retained patronage
refunds, and per-unit retains. When the cooperative's equity is sufficient to meet its
needs, a portion of each year's income should be used to redeem the oldest patronage-based
equity.
This equity is replaced by funds retained from
the current year's patrons. The schedule for revolving equity is set by the board of
directors, A systematic equity redemption program keeps the cooperative financed by
current users in proportion to their use.
Sources of Debt Capital
How much debt capital the cooperative can borrow depends on how much risk (equity) capital
members initially invest, cash flow, quality of management, and the degree of risk in the
venture. Members should contribute equity capital amounting to at least half the total
capital requirements. But, it usually takes several years of operations to reach this
goal.
Long-term credit is the usual way of acquiring
part of the money to finance land, buildings, and equipment. The period of the fixed asset
loan depends on a number of factors, but it is usually related to the facility's projected
life.
The committee should explore various sources of
long-term loans and recommend the source that can supply the financing best suited to the
proposed cooperative. Among sources of facility loans are State offices of USDA's Rural
Development, CoBank, St. Paul Bank for Cooperatives, National Cooperative Bank, programs
of commercial banks, credit unions, and insurance companies. Other financial arrangements
may be available that are temporary or unique to the new cooperative venture.
Operating capital may be obtained through
short-term loans (1 year or less) after the cooperative becomes established. A new
cooperative, however, can obtain only part of its operating funds from short-term loans.
Member equity must make up the balance.
Sources of short-term credit include credit
unions, commercial banks, banks for cooperatives in the Farm Credit System, and the
National Cooperative Bank. The committee should explore all sources and recommend the
lender that best meets the requirements of the proposed cooperative
Projecting Capital Needs
The adviser prepares a feasibility analysis report that outlines all assumptions and
income and expense projections based on standard financing practices and presents it to
the steering committee. The report is reviewed and revised to develop a realistic business
plan that can be approved by potential members and implemented without significant change.
This report is discussed at a fourth general
meeting of potential members. It should cover the cooperative's purpose, goals, and
economic functions, including assumptions and financial projections for startup and at
least the first 3 years of operations. Specific topics include:
1. Volume projections;
2. Risk capital (equity) investment requirements-initial and continuing;
3. Financing projections, including tables for monthly cash flows, annual projections of
operating statements, balance sheets, and a statement of cash flow;
4. Financial package and method of capitalization;
5. Payment schedules;
6. Projected patronage refunds-cash and retained; and
7. Implementation schedule.
Financial projections may include "best" and "worst" case scenarios to
demonstrate sensitivity to changes in operating assumptions.
By now, most specific operational plans have
been determined. Yet to be decided is the selection of a manager, facility location, and
subjects to be covered in the articles of incorporation and bylaws.
If members elect to continue the process, the
steering committee is instructed to arrange for incorporation and carry out the business
plan.
Legal Considerations
Organizing committee members should become acquainted with legal aspects of cooperatives
by studying laws applicable to them and businesses generally (Appendix VII).
Every State has one or more laws authorizing
the formation of cooperative corporations, although a number of them are restricted to
agricultural producers. Copies may be obtained from an attorney, the Secretary of State,
or State Corporation Commissioner.
Several Federal laws are especially important
for cooperatives. The Capper-Volstead Act of 1922, sometimes called the "Magna
Charta" of farmer marketing cooperatives, recognizes the rights of producers to act
together in handling, processing, and marketing their production without violating
antitrust law. Producers may also form marketing agencies in common. But even though
cooperatives have this organizational protection, their operations are subject to the same
antitrust laws as other businesses.
The Farm Credit Act of 1971 defines a
cooperative that is eligible to borrow from the banks for cooperatives in the Farm Credit
System and the conditions the cooperative must meet. The National Consumer Cooperative
Bank Act created a similar financial institution, the National Cooperative Bank, to serve
nonfarm cooperatives. The Internal Revenue Code describes the tax treatment of
cooperatives and their patrons and tax reporting requirements.
Legal Papers-
Perhaps the most important process, other than
determining the business feasibility, is drafting articles of incorporation and bylaws.
Other legal documents include the membership application, membership or stock certificate,
revolving fund certificate, marketing/purchasing agreements, and meeting notices and
waivers of notice (Appendix III). Also review Sample Legal Documents for Cooperatives
(CIR 40).
Articles of Incorporation-
Incorporation is usually the best method of
organizing. Each State has special enabling laws under which cooperatives may incorporate.
It may be preferable to incorporate under the State's general corporation enabling act,
but structure bylaws to operate as a cooperative.
Incorporation gives the cooperative a distinct
legal standing. Members generally are not personally liable for the debts of an
incorporated organization beyond the amount of their investment. The articles indicate the
nature of the cooperative business. The articles should specify rather broad operating
authority when incorporating even though services may be limited at the beginning.
These articles usually contain the name of the
cooperative, principal place of business, purposes and powers of the association, proposed
duration of the association, names of the incorporators (in most States), and information
about the capital structure. In some States, the names of the first officers of the
association must be included.
Filing the articles of incorporation (usually
with the Secretary of State) activates the cooperative corporation. After the organizing
committee approves the articles, the attorney files for the corporation charter and
includes the recording fees. Once chartered by the State, the cooperative should promptly
adopt bylaws.
Bylaws-
They state how the cooperative will conduct
business and must be consistent with both State statutes and the articles of
incorporation.
Bylaws usually have membership requirements and
lists rights and responsibilities of members; grounds and procedures for member expulsion;
how to call and conduct membership meetings, methods of voting, how directors and officers
are elected or removed, and their number, duties, terms of office, and compensation; time
and place of director meetings; dates of the fiscal year; requirement to conduct business
on a cooperative basis; how net margins will be distributed; process for redemption of
members' equity; a consent provision that members will include the face value of
written notices of allocation and per-unit retain certificates as income in the year they
are received; distribution of nonpatronage income; handling of losses; treating nonmember
business; dissolution of the cooperative; indemnification of directors; and the process
for amending the bylaws.
Also covered is how the board is structured to
represent the membership, given geographical distribution and size of the membership and
the scope of business and function of the cooperative. Directors may be selected to
represent districts based on membership density, to reflect commodities or services to be
handled, or some other basis that provides equitable representation. The organizing
committee's recommended management structure should include the basis for director
representation, voting methods, and board officers, and their terms.
For marketing cooperatives that lack a
marketing agreement, the bylaws specify the extent of members' obligation to market
through the cooperative. They outline the terms and conditions under which the products
will be marketed and accounting procedures.
The committee prepares the articles and bylaws
with the help of an attorney so provisions comply with laws of the State in which the
cooperative is incorporated. The committee's role also is to assure the bylaw provisions
will not conflict with operating procedures.
Membership Application-
This form has five main parts: applicant's
statement asking to become a member of the cooperative, signature of the applicant,
statement of cooperative acceptance of applicant, signatures of the president and
secretary, and a statement of the duty and intent of the member.
The application, signed by the member and
approved by the board of directors, is the legal proof that a patron is a member. A
cooperative should have a completed membership application on file from every member.
Membership and the amount of business done with members and nonmembers are important
factors for certain antitrust and taxation provisions.
A membership certificate may be issued to each
member as evidence of entitlement to all of the rights, benefits, and privileges of the
association.
Marketing and Purchasing
Agreements-
In the marketing agreement, the association agrees to accept specified products of stated
or better quality, to market them to the best of its ability, and to return to members all
marketing proceeds less deductions for expenses and continuing capital needs. A similar
contract with members can be structured for service and supply cooperatives.
This continuing or self-renewing agreement
should specify that after it has been in force for some initial period, it should continue
indefinitely unless the member (or the cooperative) states in writing a desire to cancel
or modify it. A cancellation request must be made during a specified annual period as
noted in the contract.
An agreement ensures sufficient control over
products or services to be delivered so the cooperative can function. This is especially
helpful in the first few years of operation when the cooperative is establishing its
reputation as a responsible and successful business. Marketing and purchasing agreements
have helped some cooperatives get needed outside financial help.
In some cases, cooperatives that use
contractual agreements must file them with the State Government.
Revolving Fund
Certificates-
When a cooperative retains funds from business with or for patrons as capital investments,
it issues a written patronage refund certificate or a similar document to the member as a
receipt for capital investments that will eventually be revolved or redeemed. Meanwhile,
the retain is used to finance the business. Member investments may be deductions based on
per-unit of product handled or services used, reinvested patronage refunds, or original
capital subscriptions, if a nonstock cooperative.
Charter Member Meeting
According to most statutes under which cooperatives are organized, articles and bylaws
must be adopted by a majority vote of the members or stockholders.
For convenience in organizing, only the persons
named in the articles of incorporation, called the charter members, must vote to adopt the
bylaws. These persons are regarded as members or stockholders as soon as the articles of
incorporation are filed. A good practice, however, is to invite everyone who has signed a
premembership agreement to the meeting to ratify the bylaws.
A temporary presiding officer conducts this
first meeting and reports that the articles of incorporation, have been filed. A draft of
the proposed bylaws is presented, discussed, and adopted as read or amended.
Further action is usually needed to accept
those members or stockholders who have subscribed for stock or agreed to become members
but are not named in the articles of Incorporation. Under some statutes, however, the
incorporators can adopt the bylaws as incorporators rather than as members or
stockholders.
If members of the first board of directors have
not been named in the articles of incorporation, they should be elected at this meeting.
Here are some suggestions for selecting the
first board of directors:
use a nominating committee to develop a panel of candidates for
the board;
select only members as candidates;
nominate two candidates for each
position; and
vote by secret ballot.
Implementing the Business
Plan
Once the bylaws have been adopted, the board of directors should meet as soon as possible
to avoid having to send out legal notices of it to directors. Directors approve various
resolutions designed to make the cooperative an operational business and ready to serve
members.
Officers of the cooperative are elected and
directors assigned to individual or committee responsibilities to implement the business
plan. Members may be assigned to committees, but at least one board member should be on
each committee to enhance communications. Target dates are established for important
events such as groundbreaking, construction completion, dedication or open house, and
full-capacity operations
The board needs to act immediately on some
specific items:
conduct a membership drive; adopt a form of
membership application or stock subscription;
adopt the forms for contractual agreement if used;
acquire capital;
select a bank in which to deposit funds; initiate
steps to hire a manager;
authorize officers or employees to handle
cooperative funds and issue checks;
design and install an accounting system;
provide for bookkeeping and auditing services;
print the articles of incorporation, bylaws, and
other member documents for distribution to all
members;
bond officers and employees in accordance with
bylaws; and
pick a business location and seek bids for
facilities and equipment.
A director training schedule should be established to discuss topics such as legal
liability, cooperative finance, management supervision, and member relations. Session
topics for the entire membership should include member responsibilities, cooperative
operating policies, and tax treatment of patronage refunds.
Membership Drive
A new cooperative must have enough members to start operation and justify its existence.
Additional members may be needed to financially strengthen the association or increase its
volume.
Cooperatives that provide supplies and services
normally have open membership. Those that process and market or bargain for price and
contractual agreement or offer limited services may have a selective membership policy.
Members should feel a responsibility to recommend others believed to be qualified users.
That's why it's important for members to understand what their cooperative is, how it
operates, its benefits, and its limitations.
People join cooperatives primarily for economic
benefits-services and increased income. Most people want to be shown the advantages of
cooperative membership. If those benefits are not evident, few prospects will join and
even if they do, they probably won't regularly patronize the cooperative.
New members may be asked to join by purchasing
stock or paying a membership fee and signing an application. The applicant should get a
receipt for funds collected. The cooperative must follow-up with membership and stock
certificates and related material.
Accurate accounting of money is an extremely
sensitive issue. The cooperative should retain an independent accounting firm to assist in
recording funds prior to any sale of stock or the collection of substantial amounts of
money.
Acquiring Capital
Starting a new cooperative can create a need for substantial capital. A problem develops
when trying to operate with limited membership equity capital and sizable total capital
requirements. Therefore, member equity must be carefully weighed against projected
cooperative capital needs.
Methods for acquiring capital and
classification of financial instruments are covered under the "Feasibility
Analysis" section. The task of financing a new cooperative with member equity alone
is usually impossible. Therefore, additional sources for funds are needed. Local area
banks are good possibilities. Others are the cooperative banks in the Farm Credit System,
the National Cooperative Bank, State Rural Development offices, and other governmental
funds, depending on what may be available at the time. Another option may be to sell
preferred stock to members and others in the community.
The best source of financing for a cooperative
is from members. The more financing members provide, the less the cooperative business
will need to borrow from other sources. Usually, cooperatives sell common or preferred
stock to members to raise capital. The common stock is usually tied to voting rights, but
there are several types. For example, class A could be designated as voting stock and
limited to one share per member while class B could be nonvoting stock that members could
purchase based on their anticipated volume of business.
Preferred stock also can be sold to outside
investors and members. Although owners of preferred stock have no voting rights, this
stock carries less risk than common stock. Members of the community in which the
cooperative is to be located may purchase preferred stock to keep the cooperative as a
local business.
Conservatively estimate the amount of capital
raised from preferred stock sales. Some States limit dividends that can be paid on both
common and preferred, thereby making preferred stock unattractive to outside investors.
Stock sale programs should be carefully reviewed by an attorney to ensure conformance with
State and Federal security laws.
Commercial banks, particularly those in the
area where the cooperative will operate, are an important source for loans. Personnel of
these banks already are familiar with the economy in the area and probably know many of
the cooperative's prospective members. These banks also offer a variety of banking
services the cooperative will need once it begins operations. New cooperatives often can
get loans with the help of Federal Government agencies or other guarantees.
Farm Credit System banks, particularly the St.
Paul Bank for Cooperatives and CoBank, both of which are nationally chartered, are major
sources of credit to newly organized and established agricultural and rural utility
cooperatives and their members. Farm Credit System banks make loans to cooperatives to
purchase fixed assets and operating loans. Individual farmers borrow funds to purchase
land and to finance farm operations. The system is used also to finance members' share of
equity capital for a new or expanding marketing, purchasing, or related service
cooperative.
National Cooperative Bank is another source for
loans and startup financing. Its financing activities are directed primarily to
nonagricultural cooperatives including consumer, worker, retailer-owned, health, housing,
and other types of cooperatives. Funds may be available for certain types of cooperatives,
including those in rural communities.
Cooperative leaders need to carefully develop
the loan application to make a good first impression on the potential lender. Lenders will
insist on seeing certain key documents before considering a loan request. Special
expertise is important in helping prepare these documents, including that of an economist,
marketing specialist, attorney, certified public accountant, and perhaps others whose
specialty is related to the activities proposed for the cooperative.
The most requested documents are:
Projected Volume of
Business-
The best source for these
projections comes from the potential member survey conducted as a part of the feasibility
study. If the business is seasonal, it is important to accurately characterize how
production or purchasing and sales occur to determine the appropriate facility and
equipment needs.
Market Information-
Lenders don't want to finance a
proposed business without a market. They want to know who the customers are, if markets
have been located, and expected prices and volumes.
Cash Flow-
Projected cash flow (Appendix IV)
information may be the most important to the lender. It gives a continuous month-by-month
cash income and expense prediction. Key items in the final analysis are the net cash flow
for the month and the ending cash balance. Lenders are particular concerned with the net
ending cash balance. Does the cooperative have sufficient funds to operate and pay bills?
Should more equity capital be injected? Is additional borrowed capital needed,
particularly for operating during heavy seasonal periods? Can controllable expenses be
reduced during periods of low income? Are cash reserves adequate to overcome adverse
market swings? And, most importantly, can the cooperative repay its loans? Most lenders
want 3-year projections.
Operating Statement-
For a new cooperative, the
projected operating statement provides an expected picture of operations for one or more
years (Appendix IV). It contains information on sources of income as well as expenses. The
key figure is the "bottom line" that indicates whether net margins (profits) are
anticipated. A monthly operating statement provides information to lenders and assists the
board in making major policy and management decisions.
Balance Sheet-
For the newly formed cooperative
seeking financing from outside sources, the projected balance sheet is extremely important
(Appendix VI). It projects the future value of the cooperative and indicates its solvency
and ability to satisfy creditors' claims when due. In summary, it lists the cooperative's
assets, liabilities, and net worth.
Schedule of fixed asset costs and depreciation.
Lenders look for collateral to secure their loans. A condensed listing (Appendix V)
quickly conveys what the cooperative needs to purchase or lease. To assure the lender that
depreciation has been accurately noted, it is also desirable to outline in table form the
classes of assets, cost, life expectancy, and annual depreciation.
Loan Package-
A summary of scheduled financing
needs and sources saves the lender time in assembling the various pieces of data for
analysis. It should show major items for which loans and member equity will be spent
(Appendix VI). These items are extracted from the projected cash flow data. A brief resume
of the designated manager should be included in the documents given to the potential
lender. If a person has not been chosen, the manager's job description should be included.
Manager Selection
Selecting the manager is one of the most critical task for the board of directors. The
success of the cooperative depends more on the manager than any other individual. The
manager directs the day-to-day operations.
The organizing committee begins the task of
manager selection by developing a position description. A supplemental statement should
indicate the relationship and responsibilities of a manager and the board of directors in
a cooperative.
Long and varied lists have been compiled of
qualities to seek in a manager, but three areas are suggested-education, experience, and
ability to work with people. Manager candidates need to be judged in these areas from
three perspectives-commodity expertise, business requirements generally, and knowledge of
cooperatives in particular because of their unique characteristics.
Finding a manager with both education and
experience with cooperatives is important for several reasons. Unlike investor-owned
corporations, a cooperative manager should not participate in cooperative ownership.
Career decisions could conflict with ownership interests. Cooperatives do not offer
managers stock options or profit sharing, although some cooperatives have incentive plans.
The candidate needs to understand the special nature of the cooperative's patrons because
they're both customers and owners. This dual relationship adds a unique dimension to a
candidate's requirements to work with people on a daily business basis.
Good managers are hard to find, especially for
cooperatives. The best source is often other cooperatives. Leads may be obtained by
contacting the managers of other cooperatives, directors of State cooperative councils,
national cooperative organizations, the advisers who helped form the cooperative, and
employment agencies.
Acquiring Facilities
The job that probably takes the most foresight, analysis, judgment, and timing is
acquiring a business site, building, machinery and equipment, and other supplies. The
steering committee's business analysis is the blueprint. The newly selected manager should
participate in facility decisions.
Facilities should be located conveniently for
members but enable establishing good distribution links with suppliers, markets, and other
business services.
Directors need to study facility requirements
thoroughly. Their decisions will influence the cooperative's operations for many years.
It's important to avoid using so much capital for fixed facilities and startup that cash
flow is jeopardized.
A useful planning tool is an acquisition
schedule and budget. It would list items in the logical order they should be acquired,
based on need, delivery time, loan requirements, funds available, and other factors. This
should be built into the cash flow projection for the startup period. Changes to this plan
should be analyzed before enactment.
General Rules for Success
Several basic rules for successful formation of a cooperative apply to more than one step
of the process and to continuing operations. Some rules are unique to the cooperative form
of business. They include effective use of advisers and committees, keeping members
informed and involved, maintaining good board/manager relations, following sound business
practices, conducting businesslike meetings, and forging links with other cooperatives.
Use Advisers and
Committees Effectively
Organizing human resources and effectively using their expertise
is central to any successful business. Maximum participation by potential members is
crucial to the success of the cooperative.
Selecting potential members with an eye for
expertise is important in setting up the general steering committee. Finding true
specialists may not be possible among the leaders interested in organizing a cooperative.
However, some may have an interest in areas that enables them to better understand the
"language" of technical advisers.
It's important to have an adviser on
cooperative organization work with others in helping them apply their expertise to the
cooperative situation whenever it differs from other forms of business.
Subcommittees used in the formation process
should focus on membership, facilities, site selection, finance, legal documents, and
communications. In some cases, one or more of these can be combined.
Committees also are useful in the ongoing
management of the cooperative. Committees within the board can specialize in the same
areas used in the formation process. Additional temporary or permanent committees might
include advisory groups for youth and young member activities, education and training,
long-term planning, commodities and services, member and public relations, and legislative
affairs.
Keep Members Informed and
Involved
Member responsibilities start with the
conception of the cooperative and remain throughout its life to assure successful
organization, sound management, and operation.
The communications and education function needs
to be an integral activity of the management team. It requires the assistance, knowledge,
and involvement of cooperative staff and member leadership groups. Effective
communications and education programs require financial support and must be backed by
specific board and management policies.
When members are involved and informed about
the cooperative, they measure their needs in terms of dollars and are more willing to
invest in and patronize the cooperative. Cooperative members should be intimately familiar
with it and assume a positive, broad role in its management and direction:
understand its purpose, objectives, benefits,
limitations, operations, finances, and long-term plans,
read and understand the articles of incorporation
and bylaws,
know that laws limit their rights or powers and
those of their board of directors,
Understand that bylaws or policies of the elected
directors may further limit their operations by establishing member obligations,
regulations and quality controls exceeding those prescribed by legal statutes and provide
equity (risk) for the cooperative business.
Most cooperatives have a small beginning and find it necessary to borrow. Later, as they
become established and business services expand, they generally find it neither necessary
nor wise to rely on only member capital to meet all financial needs. The member or equity
capital is used as a base to apply for a loan.
In summary, members' participation in affairs
of their cooperative increases their feeling of ownership and responsibility for its
success.
Maintain Good
Board-Manager Relations
The differing responsibilities of the board of directors and the manager must be clearly
understood and carried out.
Directors represent members and are legally
responsible for the performance and conduct of the cooperative. All corporate powers of
the cooperative, other than those specifically conferred on members, are vested in its
directors and outlined in the bylaws and in State and Federal legal statutes.
Directors' three major responsibilities are to
set policies, employ and evaluate the general manager's ability to carry them out, and
provide adequate financing for the cooperative.
The board also has some specific management
responsibilities such as functioning as trustees for the members in safeguarding their
assets in the cooperative; setting goals, objectives, and general policies; adopting
long-term strategic plans; employing a competent manager and evaluating performance;
preserving the cooperative character of the organization; establishing an accurate
accounting system; adopting an annual operating budget; appointing an outside firm to
perform an annual audit; controlling the total operation; and authorizing distribution of
cooperative net earnings and redemption of members' equities.
The board, in turn, delegates responsibility
for daily operations to a hired general manager or chief executive officer. The general
manager hires or discharges employees, including department heads, who with the manager
comprise the hired management staff or team.
Responsibilities of hired management include
managing or directing daily business activities; carrying out policies set by the board;
setting goals and making short-term plans; employing, training, and discharging employees;
organizing and coordinating internal activities in compliance with cooperative goals and
objectives and board policies; keeping complete accounts and records and developing an
annual operating budget; and providing the board with periodic reports.
Questions often arise as to the division of
responsibilities between the board and hired management. Sometimes they overlap and an
exact division cannot be made. Some factors to consider are: the time period-long-term
decisions are the responsibility of the board while management makes short-term decisions;
idea decisions are usually introduced by the board and actual decisions implemented by
management; decisions involving policy are the responsibility of the board, and
cooperative functions are handled by management; broad primary control activities usually
concern the board, while secondary controls pertaining to short-run operations are the
responsibility of management. When it comes to staffing, the board hires the manager who,
in turn, selects the staff of the cooperative.
Use of policy and procedure manuals and job
descriptions along with frank discussions of questions when they arise can help maintain
an understanding of the division of responsibility.
Conduct Businesslike
Meetings
A cooperative is a business so its meetings should be conducted
in a businesslike manner.
Policy should be established for determining a
reasonable quorum for membership and board meetings. A quorum is the specific or minimum
percentage of members required to be present to conduct official business. Quorum
requirements are sometimes written into State statutes, but should be discussed in the
bylaws. As membership expands, the percentage quorum increases the actual number needed.
Setting the quorum too high increases the risk of not getting enough member participants
to deal with business matters needing attention.
Parliamentary procedure is appropriate for
orderly democratic group action. It enables the chair to lead a group smoothly and
efficiently in determining the wishes of the majority while protecting the rights of the
minority.
A good meeting just doesn't happen. It results
in carrying out several successive steps: planning ahead, involving members, following a
published agenda, and following through on meeting actions.
Follow Sound Business
Practices
The major challenge to cooperative members, the board of
directors, and operating management occurs after business operations begin. Many of the
startup responsibilities continue after the cooperative begins operating.
For example, it's critical to operate on a
sound business basis to avoid year-end losses. Requirements include developing and
installing a double-entry accounting system, preparing financial reports including
operating and capital improvement budgets, reporting to the membership in a clear and
timely manner, and conducting long-term planning.
Beyond complete and accurate documentation of
income and expenses, a cooperative must keep exact member records. They account for
members' initial and subsequent investments and member purchasing, marketing, and/or
services used to determine patronage allocations from net earnings. Members also need
these records for their own personal accounts, particularly for income tax purposes.
The management staff prepares periodic
operating statements and balance sheets to inform the board and members on how the
cooperative is performing and its financial condition. A full report is typically issued
annually, with abbreviated monthly or quarterly reports for board use. Reports should come
often enough for the board to satisfactorily monitor business activities, take appropriate
actions, and to keep members informed on how their cooperative is progressing. An annual
independent audit serves as an outside appraisal of the cooperative's financial condition,
a check on the business and accounting procedures, and how the cooperative has conformed
with tax and other legal requirements.
Once the cooperative is organized and
operating, members need to consider how they want it to grow. That takes both short- and
long-term strategic planning. Long-term planning, which looks 3-to-5 years ahead, usually
gets inadequate attention. But this is becoming more important because of more rapid
technological, economic, and social changes. Planning involves developing a vision and
mission statement, appraising the future, assessing the external and internal business
environment, defining desired goals with stated objectives, and developing a course of
action to reach them.
Forge Links With Other
Cooperatives
An early exercise to determine whether to start
a new cooperative was to investigate the alternative of linking with an existing
cooperative that could expand its service territory. Even if starting a new cooperative is
the best course of action, the search for beneficial links with other cooperatives should
continue.
Alliances with regional cooperatives or other
businesses may be valuable sources for supplies, marketing outlets, and related services.
Membership in State and national cooperative associations can keep the new cooperative
abreast of what others around the country are doing. These associations can be sources of
education and training programs, legislative and public relations support activities, and
help identify sources of special expertise.
Avoiding Potential Pitfalls
New organizations are most vulnerable in their early formative years. Here are some tips
for new cooperatives to avoid potential pitfalls:
1. Lack of clearly identified
mission-A new cooperative shouldn't be formed just for the sake of forming one. The
potential member-user must identify a clear mission statement with definite goals and
objectives.
2. Inadequate Planning-Detailed plans for reaching defined goals and the mission are
important. In-depth surveys of the potential member-user needs coupled with business
feasibility studies are necessary. Stop the organizational process if there isn't
sufficient interest in the cooperative by potential member-users or if it isn't a sound
business venture. The human cost in time and organization expense may be better used
elsewhere.
3. Failure to use experienced
advisors and consultants-Most persons interested in becoming member-users of a new
cooperative haven't had cooperative business development experience. Using resources
persons experienced in cooperative development can save a lot of wasted motion and
expense.
4. Lack of member
leadership-Calling on the services of experienced resource persons can't replace
leadership from the organizing group. Decisions must come from the potential member-user
group and its selected leadership. Professional resource persons should never be in
decisionmaking positions.
5. Lack of member commitment-To
be successful, the new cooperative must have the broad-based support of the potential
member-users. The support of lenders, attorneys, accountants, cooperative specialists, and
a few leaders won't make the cooperative a business success.
6. Lack of competent
management- Most cooperative members are busy operating and managing their own businesses
and lack experience in cooperative management. The directors hire experienced and
qualified management to increase the changes for business success.
7. Failure to identify and
minimize risks-The risk in starting a new business can be reduced if identified early in
the organizational process. Careful study of the competition, Federal, State, and local
Government regulations, industry trends, environmental issues, and alternative business
practices helps to reduce risk.
8. Poor assumptions-Often,
potential member-users and cooperative leaders overestimate the volume of business and
underestimate the costs of operations. Anticipated business success that ends in failure
places the organizers in a "bad light." Quality business assumptions tempered
with a dose of pessimism often proves to be judicious.
9. Lack of financing-Regardless
of the amount of time spent in financial projection, most new businesses are
underfinanced. Inefficiencies in startup operations, competition, complying with
regulations, and delays often are the causes. Often, the first months of business
operations and even the first years are not profitable, so adequate financing is important
to survive this period.
10. Inadequate
communications - Keeping the membership, suppliers, and financiers informed is critical
during the organization and early life of the cooperative. Lack of or incorrect
information can create apathy or suspicion. The directors and managment must decide
to whom and how communications are to be directed.
Considerable time and effort are spent in starting a new cooperative. Avoiding the
pitfalls experienced by others helps to increase your effort to be successful.
Appendix
I
Sample Member-User
Questionnaire
Prepare an introductory letter to
accompany the survey and state the purpose. Stress that the data will be kept confidential
and used only for the stated purpose.
Producer Survey: XYZ Vegetable
Cooperative
While you are not required to
respond, your help is needed to provide data for a new vegetable marketing cooperative.
All answers will be treated confidentially.
- Contact person for the farm ___________________________________________
Address ___________________________Phone ____________________
- Farm location-see attached map -
County____________ Grid No.____________
- How much of your vegetable acreage
is irrigated?______________ acres.
- Give type and capacity for any of
the following facilities and equipment you own.
type and capacity
Cooling
facilities_________________________________________________
Packing
equipment_______________________________________________
Refrigerated
truck________________________________________________
Nonrefrigerated
truck_____________________________________________
(over 1 ton)
___________________________________________________
Mechanical
harvester______________________________________________
5. Check the
following supplies or services you are interested in obtaining from the proposed
cooperative if a competititve fee is established.
_______Packing containers
_______Vegetable
marketing
_______Vegetable
packing
_______Seeds
_______Plants
_______Other (specify)
6. Are you
willing to follow the proposed cooperative's recommendations on varieties to plant and
cultural and harvesting practices?
Yes _____No_____
7. Banks generally require
cooperative owners to raise 35 to 50 percent of the needed capital. Assuming the
cooperative appears feasible, are you willing to make an initial cash investment in it in
proportion to your intended use?
Yes____ No_____
What is the maximum amount you
are willing to invest?
8. Per-unit retains are a capital
investment that is deducted from patron's sales proceeds in proportion to the volume of
products they market through the cooperative. Are you willing to finance the cooperative
with per-unit retains?
Yes____No_____
9. A delayed producer payment is
one way of reducing equity for operating capital. Are you willing to accept a delayed crop
payment in lieu of a larger initial cash equity investment?
Yes_____ No_____
If yes, for how long? ____ days
10. In a pool,
producers are grouped by type and grade over a selected period of time (week, month, or
season). Producers are paid the average price the cooperative receives for the pooled
products less packing and marketing fees. Are you willing to market your vegetables on a
pooled basis?
Yes _____ No______
11. Are you
willing to sign a marketing agreement to sell all or a fixed quantity (acreage) of you.r
vegetables through the proposed cooperative?
Yes _____No_____
12. Where do you plan to market your vegetables in the current year (by percentage of
production)?
a. Roadside stands______percent
b. Farmers' markets _____ percent
c. Other markets (specify)_______percent
13. Please record production and
marketing data in the accompanying table.
Crop |
Months
Usually harvested |
Major
markets in 199x |
Harvested or to be planted |
Volume
Sold |
Acreage
you plan to sell through coop. in 199Y |
Acreage
you plan to contract with coop. in 199Y |
Experience
in production |
199V |
199W |
199X |
199Y |
199Z |
199V |
199W |
Asparagus |
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Broccoli |
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Cabbage |
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Cauliflower |
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Eggplant |
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Greens |
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Peppers |
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Beans |
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Squash |
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Corn |
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Tomatoes |
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_1/ A-Roadside stands. B-Farmers'
markets. C-Other markets-as detailed to question 12.
_2/ 199x is current year.
Table of Contents
Appendix
II
Steering Committee
Report Online
I. Preface
A. How the project started.
B. Who is involved.
II. Contents listing
III. Summary of findings
IV Main text
A. Introductory statement of the economic
situation leading to the proposed cooperative.
B. Producer survey results.
C. Estimated volume of business.
D. Marketing alternatives.
E. Operating procedures.
F. Financing projections.
G. Financial alternatives.
H. Organizational structure.
I. Operating policies
J. Projected startup date.
K. Summary of estimated benefits.
Table of Contents
Appendix
III
Sample Legal Document
Outlines
Premembership Agreement
1. Statement of purposes
for which new cooperative is to be formed.
2. Description of steering organization committee and its powers.
3. Statement of what new cooperative's bylaws will provide when formed.
4. Notice that steering committee may call meeting of prospective members.
5. Duties of steering committee to keep records and make accounting to cooperative when
formed.
6. Subscription agreement for membership certificate or stock.
7. Agreement to sign marketing agreement if cooperative is to have one.
Articles of Incorporation
of
__________________________________________________________Association
We, the undersigned, all of whom are
residents and citizens of the State of _________________, engaged in the production of
agricultural products, do hereby voluntarily associate ourselves for the purpose of
forming a cooperative association, (with/without) capital stock, under the provisions of
the _________________ Cooperative Marketing Act of the State of _______________.
Article I- Name
Article II- Purposes
Article III- Powers; Limitations
Section 1. Powers
Section 2. Limitations
Article IV- Place of Business
Article V- Period of Duration
Article Vl- Directors
Article Vll- Membership (for nonstock
cooperative) or
Article Vll- Capital Stock (for stock
cooperative)
Section 1. Authorized Amounts; Classes.
Section 2. Common Stock.
Section 3. Preferred Stock.
In testimony whereof, we have hereunto set
our hands this________day of________,19__.
State of
County of _______SS.
Before me, a notary public, within and for
said county and State, on this ____day of ____, 19__, personally appeared ____, known to
me to be one of the identical persons who executed the within and foregoing instrument,
and acknowledged to me that he/she had executed the same as a free and voluntary act and
deed for the uses and purposes therein set forth.
Witness my hand and official seal the day,
and year, set forth.
Notary Public ___________________________
In and for the County of ______________ ,
State of__________________.
My Commission expires
______________________
Bylaws
Article I - Membership
Section 1. Qualifications.
Section 2. Suspension or Termination.
Article 11 - Meetings of Members
Section 1. Annual Meetings.
Section 2. Special Meetings.
Section 3. Notice of Meetings.
Section 4. Voting.
Section 5. Quorum
Section 6. Order of Business.
Determination of quorum.
Proof of due notice of meeting.
Reading and disposition of minutes.
Annual reports of officers and committees.
Unfinished business.
New business
Election of directors.
Adjournment.
Article III - Directors and Officers
Section 1. Number and Qualifications of Directors.
Section 2. Election of Directors.
Section 3. Election of Officers.
Section 4. Vacancies.
Section 5. Board Meetings.
Section 6. Special Meetings.
Section 7. Notice of Board Meetings.
Section 8. Compensation.
Section 9. Quorum.
Article IV - Duties of Directors
Section 1. General Powers.
Section 2. Employment of Manager.
Section 3. Bonds and Insurance.
Section 4. Accounting System and Audit.
Article V - Duties of Officers and Manager
Section 1. Duties of President.
Section 2. Duties of Vice President.
Section,, 3. Duties of Secretary.
Section 4. Duties of Treasurer.
Section 5. Duties of Manager.
Article VI - Executive Committee and Other
Committees
Section 1. Powers and Duties.
Section 2. Other Committees.
Article VII - Membership Certificates
If the association is organized with
capital stock, the outline might read:
Article VII - Stock Certificates
Section 1. Common Stock.
Section 2. Other Committees.
Article VIII - Operation at Cost and
Patrons' Capital
Section 1. Service at Cost.
Section 2. Refunds and Patrons' Capital.
Section 3. Revolving Capital.
Section 4. Transfer.
Section 5. Consent.
Section 6. Consent Notification to Members and Prospective Members.
Article IX - Dissolution and Property
Interest of Members
Article X - Unclaimed Money
Article XI - Fiscal Year
Article XII - Miscellaneous Provisions
Section 1. Waiver of Notice
Section 2. Bylaws Printed.
Section 3. Seal.
Article XIII - Amendments
We, the undersigned, being all of the
incorporators and members of the___________ association, do hereby assent to the foregoing
bylaws and do adopt the same as the bylaws of said association; and in witness whereof, we
have hereunto subscribed our names, this _____day of _________19___.
Membership Application and
Marketing Contract
THIS AGREEMENT between the ___________,
Inc., hereinafter referred to as the Association, and the undersigned Producer,
witnesseth:
The Producer
1. Applies for membership in the
Association, and if accepted as a member, agrees to be bound by its articles of
incorporation, bylaws, rules, and regulations as now or hereafter adopted.
2. Appoints the Association as agent to
sell all the_________ of marketable quality produced on any farm in control of or operated
by the Producer, except that required for consumption on the farm.
3. Will deliver such products at such
times and to such places in unadulterated form under such conditions as may be prescribed
by proper authorities.
4. Will notify the Association of any lien
on the products delivered hereunder, and authorizes the Association to pay the holder of
said lien from the net proceeds derived from the sale of such products before any payment
is made to the Producer hereunder.
5. Will provide capital in such
amounts and in such a manner as may be provided in the bylaws.
The Association
1. Accepts the application of Producer for
membership in the Association.
2. Agrees to act as agent for the
marketing of products of Producer as herein provided.
3. Will dispose of Producer's products in
a manner deemed to be most advantageous for its members.
4. Will account to the Producer in
accordance with this contract for all amounts received from the sale of products as herein
provided.
5. Will reflect in an appropriate capital
account the capital received from each patron.
The Producer and the Association
mutually agree that the Association shall have the power:
1. To establish various plans for making
returns to the Producer.
2. To blend or pool proceeds from sales of
products of the Producer with the proceeds of the sales of products of other Producers,
and to account to or settle with Producer therefore in accordance with established plans.
3. To process or cause to be processed
products of the Producer and dispose of the same in the manner deemed most advantageous to
its members.
4. To collect from buyers of products the
purchase price therefore and to remit the same to Producer under a plan authorized by this
contract after making uniform deductions deemed adequate for all necessary, expenses and
for capital purposes.
In case of a breach of this contract by the Producer, the actual damage to the Association
and other producers cannot be determined. Therefore, Producer agrees to pay to the
Association as liquidated damages for such breach, the sum of ________dollars (______) per
________on all products that would have been delivered had the Producer not breached the
said contract.
And the Association shall further be entitled
to equitable relief by injunction or otherwise to prevent any such breach or threatened
breach thereof and the payment of all costs of litigation in connection with the exercise
of any or all of the remedies available to the Association.
This contract shall remain in effect for an
initial term of (____) years from the date hereof. Following the initial term, the
contract may be cancelled by notice given in writing by either party to the other within
ten (10) days after any yearly anniversary date, and such cancellation shall become
effective on the last day of the second calendar month following the month during which
such notice is given.
Date ______________
Producer's signature______________________
(___________________)
print name here
Address
_____________________________________________________________
(R.F.D. or Street No.)
(Town) (State and Zip
Code)
Social Security
No.___________________ County ___________________________
Accepted this day of ________, 19___.
_______________________,Inc.
By ______________________, Pres.
By ______________________, Secy.
(Some State laws provide for filling or
recording cooperative marketing contracts in a county recorder's office to give notice to
third parties that the contract exists. And acknowledgment if the contract is to be filed
or recorded.)
Membership Certificate
This certifies that _____________________
of _________________________ is a member of ____________ Association and is entitled to
all of the rights, benefits, and privileges of the Association.
Date _________________.
______________________
(President)
Waiver of Notice of First
Meeting of Board of Directors
We, the undersigned, being all the
directors of
________________________________________________
(Name of association)
________________________________________________
(State)
(Town)
hereby waive notice of a meeting of such
directors at ________ o'clock am./pm. on______ the_____ day of _______,19_, at
___________________ in _____________, ____________
(Place of Meeting)
(Town)
(State)
for the purpose of electing officers of
the association to serve during the ensuing year, adopting the form of marketing contract,
and hereunto subscribed our names, this ____________day of ________________, 19____.
__________________________
__________________________
__________________________
Table of Contents
Appendix
IV
Sample Projected Financial
Statements-Examples of Gross Margins and Commission Fees
Table 1 - Projected cash flow
fiscal year ending July 31, 19__
Item |
Aug |
Sep |
Oct |
Nov |
Dec |
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Total |
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Dollars |
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Cash Received |
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Product
Sales |
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Capital
retain assessment |
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Commission
fees |
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Supply
sales |
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Interest
income |
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Operating
loan |
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Facility Loan |
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Total cash
received |
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Cash Disbursed: |
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Fixed
assets |
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Product purchases |
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Wages |
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Packing |
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Inspection
fees |
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Insurance |
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Transportation |
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Utilities |
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Maintenance |
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Office
supplies |
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Legal fees
& audit |
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Brokerage
fees |
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Taxes &
licenses |
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Loan
repayment |
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Facility loan-principal |
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Facility loan - interest |
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Inventory-principal |
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Inventory-interest |
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Total cash
disbursed |
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Net cash flow |
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Cash balance,
prev. year |
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Ending
cash balance |
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Table 2 - Projected
operating statement, year ending July 31, 19__
Item |
Dollars |
Income |
|
Product sales |
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Supply sales |
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Commission fees |
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Total sales |
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Cost of products sold |
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Cost of supplies sold |
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Gross margin |
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Other income
(interest) |
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Total Revenue |
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Expenses |
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Wages |
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Packaging |
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Inspection fees |
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Insurance |
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Transportation |
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Utilities |
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Maintenance |
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Office Supplies |
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Legal fees & audit |
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Brokerage fees |
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Taxes & licenses |
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Subtotal |
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Interest-inventory |
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Interest-operating
loan |
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Depreciation |
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Total Expenses |
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Net Margin |
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Allocation of net margin |
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Cash refund
payable |
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Allocated
reserve |
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Table 3 - Projected balance
sheet, as of July 31, 19__
Item |
Dollars |
ASSETS |
|
Current: |
|
Cash |
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Inventory |
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Accounts receivable |
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Prepaid insurance |
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Interest receivable |
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Total current |
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Fixed: |
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Land, buildings, equipment & organ. costs |
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Less reserve for depreciation |
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Net fixed assets |
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Total assets |
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LIABILITIES AND MEMBER EQUITY |
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Current
liabilities: |
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Inventory loan |
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Facility loan |
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Interest payable |
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Patronage refund payable |
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Accounts payable |
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Total current |
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Long term liabilities: |
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Facility loan |
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Total long term |
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Member equity: |
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Stock
purchased |
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Allocated
earnings |
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Unallocated earnings |
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Per
unit capital retains |
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Total member equity |
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Total liabilities and member
equity |
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Table 4 - Projected source
and use of funds statement, year ending July 31, 19__
Item |
Dollars |
SOURCE OF FUNDS |
|
Operations: |
|
Net margin |
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Deprecition |
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Per unit capital retains |
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Facility loan |
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Operation loan |
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Inventory loan |
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Total
sources |
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USE OF FUNDS |
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Patronage refunds payable in
cash |
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Additions to fixed assets |
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Additions to investments |
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Deferred charges |
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Loan prinicpal paid Net increase in working capital |
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Total uses |
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Changes in working capital: |
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Change in current assets: |
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Cash and
certificates of deposit |
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Accounts receivable |
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Operating loan payable |
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Term loan payable |
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Net change
in current liabilities |
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Net change
in working capital |
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Table of Contents
Appendix
V
Sample schedule of fixed asset
costs and depreciation
Item |
Cost |
Annual
depreciation |
|
Dollars |
Dollars |
Land |
|
NA |
Less timber sale |
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NA |
Total land, net |
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NA |
Building and
equipment |
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Buildings (18 year life): |
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Erected building, site prep. |
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Engineering |
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Equipment installed (12 year life) |
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Total buildings and equipment |
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Organizational
expense (5 year life) |
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Total fixed assets |
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NA=Not Applicable
Table of Contents
Appendix
VI
Sample schedule of
financing needs and sources
Total provided |
Item |
Fixed assets |
Inventory capital |
Operating capital |
|
Dollars |
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Total capital |
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Equity |
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Borrowed funds: |
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Bank loan |
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Long-term notes |
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Table of Contents