SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended February 28, 1998.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission File Number 333-17865
HARVEST STATES COOPERATIVES
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0251095
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1667 NORTH SNELLING AVENUE, ST. PAUL, MN 55108 (612) 646-9433
(Address of principal executive offices and zip code) (Registrant's telephone
number including area
code)
Include by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
NONE NONE
(Class) (Number of shares outstanding at
February 28, 1998)
INDEX
PAGE
NO.
PART 1. FINANCIAL INFORMATION
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of May 31, 1997, February 28, 1997, and
February 28, 1998
Consolidated Statements of Earnings for the three months and nine months
ended February 28, 1997, and February 28, 1998
Consolidated Statement of Capital for the nine months ended February 28,
1998
Consolidated Statements of Cash Flows for the three months and nine months
ended February 28, 1997, and February 28, 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
Item 1. Financial Statements (Unaudited)
Balance Sheets as of May 31, 1997, February 28, 1997, and February 28, 1998
Statements of Earnings for the three months and nine months ended February
28, 1997, and February 28, 1998
Statement of Defined Business Unit Equity for the nine months ended
February 28, 1998
Statements of Cash Flows for the three months and nine months ended
February 28, 1997, and February 28, 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
Item 1. Financial Statements (Unaudited)
Balance Sheets as of May 31, 1997, February 28, 1997, and February 28, 1998
Statements of Earnings for the three months and nine months ended February
28, 1997, and February 28, 1998
Statement of Defined Business Unit Equity for the nine months ended
February 28, 1998
Statements of Cash Flows for the three months and nine months ended
February 28, 1997 and February 28, 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART 11. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable or
answers are negative
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE PAGE
PART 1. FINANCIAL INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to:
SUPPLY AND DEMAND FORCES. The Company may be adversely affected by supply and
demand relationships, both domestic and international. Supply is affected by
weather conditions, disease, insect damage, acreage planted, government
regulation and policies and commodity price levels. Demand may be affected by
foreign governments and their programs, relationships of foreign countries
with the United States, the affluence of foreign countries, acts of war,
currency exchange fluctuations, and substitution of commodities. Demand may
also be affected by changes in eating habits, by population growth and
increased or decreased per capita consumption of some products.
PRICE RISKS. Upon purchase, the Company has risks of carrying grain, including
price changes and performance risks (including delivery, quality, quantity and
shipment period), depending upon the type of purchase contract entered into.
The Company is exposed to risk of loss in the market value of positions held,
consisting of grain inventory and purchase contracts at a fixed or partially
fixed price, in the event market prices decrease. The Company is also exposed
to risk of loss on its fixed price or partially fixed price sales contracts in
the event market prices increase. To reduce the price change risks associated
with holding fixed priced positions, the Company generally takes opposite and
offsetting positions by entering into grain commodity futures contracts
(either a straight futures contract or an option futures contract) on
regulated commodity futures exchanges.
PROCESSING AND REFINING BUSINESS COMPETITION. The industry is highly
competitive. Competitors are adding new plants and expanding capacity of
existing plants. Unless exports increase or existing refineries are closed,
this extra capacity is likely to put additional pressure on prices and erode
margins, adversely affecting the profitability of the Processing and Refining
Defined Business Unit.
MILLING BUSINESS COMPETITIVE TRENDS. Certain major competitors of the Wheat
Milling Defined Business Unit have developed long-term relationships with
customers by locating plants adjacent to pasta manufacturing plants. This
trend could potentially decrease the future demand for semolina from
nonintegrated millers.
The forward-looking statements herein are qualified in their entirety by the
cautions and risk factors set forth in Exhibit 99, under the caption "Cautionary
Statement" to the Quarterly Report on Form 10-Q, for the quarter ended February
28, 1998.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31, February 28, February 28,
1997 1997 1998
-------------- --------------------------------
(unaudited) (unaudited)
CURRENT ASSETS:
Cash $ 38,064,191 $ 6,568,569 $ 4,600,425
Receivables 267,517,690 337,521,170 366,655,486
Inventories 248,373,247 161,564,581 156,050,736
Prepaid expenses and deposits 25,562,366 53,612,416 58,229,994
-------------- --------------------------------
Total current assets 579,517,494 559,266,736 585,536,641
OTHER ASSETS:
Investments 126,547,616 123,967,470 142,076,842
Other 46,489,678 34,533,422 45,386,033
-------------- --------------------------------
Total other assets 173,037,294 158,500,892 187,462,875
PROPERTY PLANT AND EQUIPMENT 224,150,965 224,310,964 238,879,780
-------------- --------------------------------
$ 976,705,753 $ 942,078,592 $1,011,879,296
============== ================================
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Notes payable $ 98,000,000 $ 123,000,000 $ 112,000,000
Patron credit balances 25,190,513 39,668,949 112,166,457
Advances received on grain sales 125,071,207 136,573,747 108,992,354
Drafts outstanding 32,698,943 28,745,424 22,745,473
Accounts payable and accrued expenses 152,451,010 103,172,167 97,310,529
Patronage dividends payable 13,200,000 8,800,000 10,000,000
Current portion of long-term debt 21,094,774 17,746,083 16,505,486
-------------- --------------------------------
Total current liabilities 467,706,447 457,706,370 479,720,299
LONG-TERM DEBT 113,363,692 114,652,007 102,347,552
OTHER LIABILITIES 10,536,301 4,501,651 11,537,156
COMMITMENTS AND CONTINGENCIES
CAPITAL 385,099,313 365,218,564 418,274,289
-------------- --------------------------------
$ 976,705,753 $ 942,078,592 $1,011,879,296
============== ================================
See notes to consolidated financial statements
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
February 28, February 28,
-------------------------------- --------------------------------
1997 1998 1997 1998
---- ---- ---- ----
REVENUES:
Sales:
Grain and oilseed $1,347,181,612 $1,341,197,489 $4,895,823,810 $3,813,583,403
Processed grain and oilseed 170,619,575 164,490,780 566,997,937 457,430,021
Feed and farm supplies 35,252,183 33,723,383 149,076,530 146,242,394
-------------------------------- --------------------------------
1,553,053,370 1,539,411,652 5,611,898,277 4,417,255,818
Patronage dividends 3,062,133 2,073,183 7,789,427 7,396,271
Other revenues 20,091,794 23,000,921 53,901,006 65,537,310
-------------------------------- --------------------------------
1,576,207,297 1,564,485,756 5,673,588,710 4,490,189,399
COSTS AND EXPENSES:
Cost of good sold 1,535,885,774 1,525,409,325 5,565,810,727 4,376,526,323
Marketing, general and administrative 15,716,213 18,604,077 52,643,909 53,824,262
Interest 4,797,141 4,567,229 13,215,390 12,209,300
-------------------------------- --------------------------------
1,556,399,128 1,548,580,631 5,631,670,026 4,442,559,885
-------------------------------- --------------------------------
EARNINGS BEFORE INCOME TAXES 19,808,169 15,905,125 41,918,684 47,629,514
INCOME TAXES 2,350,000 1,700,000 4,950,000 5,300,000
-------------------------------- --------------------------------
NET EARNINGS $ 17,458,169 $ 14,205,125 $ 36,968,684 $ 42,329,514
================================ ================================
See notes to consolidated financial statements
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL
OILSEED
WHEAT PROCESSING &
PATRONAGE NONPATRONAGE MILLING REFINING PATRONAGE CAPITAL
TOTAL CERTIFICATES CERTIFICATES EPUS EPUS PAYABLE RESERVE
============ ============ ============ ============ ============ ============ ==========
BALANCE AT MAY 31, 1997:
Stated as capital $385,099,313 $267,384,011 $ 15,144,440 $ 9,574,000 $ 4,296,000 $ 30,800,000 $ 57,900,862
Stated as current liability 13,200,000 13,200,000
Distribution of patronage dividends
payable for preceding year
including cash payment of
$13,388,479 (unaudited) (13,388,479) 31,239,625 6,540,942 (44,000,000) (7,169,046)
Redemption of capital equity
certificates (unaudited) (6,643,917) (6,133,713) (510,204)
Equities issued (unaudited) 7,371,499 7,371,499
Other (unaudited) 306,359 83,808 (18,325) 240,876
Net earnings (unaudited) 42,329,514 33,300,000 9,029,514
Patronage dividends payable in cash,
stated as a current liability
(unaudited) (10,000,000) (10,000,000)
---------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998
(unaudited) $418,274,289 $299,945,230 $ 21,156,853 $ 9,574,000 $ 4,296,000 $ 23,300,000 $ 60,002,206
=============================================================================================
See notes to consolidated financial statements
HARVEST STATES COOPERATIVES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Nine Months Ended
February 28, February 28,
---------------------------- ----------------------------
1997 1998 1997 1998
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 17,458,169 $ 14,205,125 $ 36,968,684 $ 42,329,514
Adjustments to reconcile net earnings to
net cash flows:
Depreciation and amortization 4,601,860 5,148,148 18,377,418 16,298,782
Noncash income from joint ventures (3,421,698) (3,260,193) (7,728,631) (10,546,611)
Noncash portion of patronage dividends received (3,185,553) (1,831,770) (6,391,031) (5,394,523)
Gain (loss) on sale of property, plant, and
equipment (138,355) (129,853) 50,219 (336,062)
Change in assets and liabilities:
Receivables 56,307,761 69,476,969 49,393,607 (99,041,548)
Inventories 58,966,478 77,093,008 272,942,537 92,322,511
Patron credit balances (90,218,623) 51,652,252 10,661,530 86,975,945
Advances received on grain and oilseed sales (123,148,157) (113,675,764) (65,251,443) (16,078,852)
Accounts payable, accrued expenses, and
drafts outstanding (74,789,136) (68,241,953) (54,193,787) (64,056,051)
Prepaid expenses, deposits, and other (40,336,526) (35,065,163) (30,030,264) (35,605,907)
---------------------------- ----------------------------
Total adjustments (215,361,949) (18,834,319) 187,830,155 (35,462,316)
---------------------------- ----------------------------
Net cash (used in) provided by operating
activities (197,903,780) (4,629,194) 224,798,839 6,867,198
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant, and
equipment 223,962 558,208 1,229,229 12,527,115
Investments redeemed 414,766 1,168,796 6,314,791 6,553,426
Acquisition of property, plant, and equipment (8,791,362) (7,537,527) (34,138,386) (34,860,141)
Payments on notes receivable (28,926) 54,670 184,775 156,229
Investments (124,962) (2,500,000) (1,377,118) (3,050,000)
Investments in joint ventures 7,215,059 (5,000)
Other (418,874) (1,475) (36,898) (24,769)
---------------------------- ----------------------------
Net cash used in investing
activities (8,725,396) (8,257,328) (20,608,548) (18,703,140)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit
agreements 123,000,000 22,000,000 (201,000,000) 14,000,000
Long-term debt borrowings 10,000,000
Principal payments on long-term debt (2,869,961) (3,729,523) (9,268,247) (10,673,784)
Principal payments under capital lease obligations (711,430) (37,759) (1,254,311) (4,921,644)
Redemption of capital equity certificates (1,088,985) (3,017,158) (4,331,121) (6,643,917)
Cash patronage dividends paid 101,443 26,234 (13,194,270) (13,388,479)
---------------------------- ----------------------------
Net cash provided by (used in) financing
activities 118,431,067 15,241,794 (219,047,949) (21,627,824)
---------------------------- ----------------------------
INCREASE (DECREASE) IN CASH (88,198,109) 2,355,272 (14,857,658) (33,463,766)
CASH AT BEGINNING OF PERIOD 94,766,678 2,245,153 21,426,227 38,064,191
---------------------------- ----------------------------
CASH AT END OF PERIOD $ 6,568,569 $ 4,600,425 $ 6,568,569 $ 4,600,425
============================ ============================
See notes to consolidated financial statements
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MAY 31, 1997 AND THREE MONTHS AND NINE MONTHS ENDED
FEBRUARY 28, 1997 AND 1998 (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such unaudited consolidated
financial statements include all adjustments (consisting of only normal,
recurring accruals) necessary for a fair presentation thereof. Operating results
for the nine-month period ended February 28, 1998 are not necessarily indicative
of the results that may be expected for the year ending May 31, 1998.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's financial statements for the year ended May
31, 1997 included in the Company's Report on Form 10-K dated August 26, 1997,
previously filed with the Commission.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
NOTE 2. RECEIVABLES
May 31, February 28, February 28,
1997 1997 1998
------------- ----------------------------
Trade ............................. $ 213,501,012 $ 253,081,516 $ 269,687,559
Elevator accounts ................. 56,172,256 75,965,289 102,605,780
Other ............................. 8,819,422 15,959,351 6,379,209
------------- ----------------------------
278,492,690 345,006,156 378,672,548
Less allowance for losses ....... (10,975,000) (7,484,986) (12,017,062)
------------- ----------------------------
$ 267,517,690 $ 337,521,170 $ 366,655,486
============= ============= =============
NOTE 3. INVENTORIES
May 31, February 28, February 28,
1997 1997 1998
------------ ------------- ------------
Grain and oilseed .................... $176,605,333 $100,496,448 $ 77,589,015
Processed grain and oilseed products . 35,139,534 32,888,542 45,867,023
Feed and Farm supplies ............... 36,628,380 28,179,591 32,594,698
------------ --------------------------
$248,373,247 $161,564,581 $156,050,736
============ ============ ============
NOTE 4. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities are as follows:
February 28, February 28,
1997 1998
-------------------------
Net cash paid during the nine months ended:
Interest .............................. $14,972,873 $11,437,097
Income taxes .......................... 3,684,510 1,589,490
Significant noncash transactions:
Noncash patronage refunds issued from
prior year's earnings ................. $30,877,406 $31,239,625
Noncash nonpatronage certificates issued
from prior year's earnings ............ 6,115,487 6,540,942
Capital equity certificates issued in
exchange for elevator properties ...... 4,193,985 7,371,499
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On January 29, 1998 the boards of directors of the Company and Cenex, Inc.
signed documents to merge the two companies. A two-thirds favorable vote from
each company's membership is needed to go forward with the merger. The vote will
be concluded on April 15, 1998 and if approved, the merger is expected to be
effective June 1, 1998. Cenex, Inc. is a cooperative with operations centering
on providing supplies and services to its members, including refined fuels,
propane, lubricants, tires and accessories, plant food and crop protection
products. In fiscal year ending September 30, 1997 Cenex had annual sales of
approximately $3 billion and had equity of approximately $600 million. The
Company already has close ties with Cenex, since it is one of Cenex's largest
customers for agronomy products. The two cooperatives also have similar
membership areas.
The Year 2000 issue is the result of computer systems being written using
two digits rather than four to define the applicable year. Any of the computer
programs used by the Company that have date-sensitive software may recognize a
date using "00" for the year 1900 rather than the year 2000, or vice versa. This
could result in a system failure or miscalculations causing disruptions of
operations including an inability to process transactions or engage in similar
normal business activities.
Based on its assessment, the Company's management presently believes that
all essential computer systems and programs are Year 2000 compliant, and that
any problems will not have a material effect on operations or financial results.
The Company continues to bear some risk related to the Year 2000 issue if other
entities not affiliated with the Company do not appropriately address their own
Year 2000 compliance issues. The Commpany has not yet evaluated the full impact
of the Year 2000 issue if third-party vendors and/or customers do not resolve
this issue on a timely basis.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1998 WITH 1997
The Company's consolidated net earnings for the three months ended February
28, 1998 and 1997 were $14,200,000 and $17,500,000, respectively, which
represents a $3,300,000 (19%) decrease for the period ended in 1998. While the
company has increased its fixed cost structure through acquisitions and
expansion during the past year, volume activity during the three-month period
ended February 28, 1998 did not increase proportionately to those increased
costs.
Consolidated net sales of $1,539,000,000 decreased $14,000,000 (1%) during
the three-month period ended February 28, 1998 compared to the same period in
1997. Grain volume of approximately 294,000,000 bushels during the three months
ended February 28, 1998 declined 15,000,000 bushels compared to 1997. This
decline in grain volume was partially offset by a 19 cent a bushel weighted
average price increase for all commodities sold during the current three-month
period compared to the same period in 1997.
Patronage dividends received for the three months ended February 28, 1998
and 1997 were $2,100,000 and $3,100,000, respectively, which represents a
$1,000,000 (32%) decrease.
Other revenue of $23,000,000 for the three months ended February 28, 1998
increased $2,900,000 (14%) compared to the same period in 1997. Earnings from
the Company's nonconsolidated consumer products packaging joint venture
increased approximately $700,000 for the three months ended February 28, 1998
compared to the same period in 1997. The balance of the
1998 change is primarily attributable to the increased service revenues at the
Company's country elevator facilities and grain marketing operations.
Cost of goods sold of $1,525,000,000 decreased $11,000,000 (1%) for the
three months ended February 28, 1998 compared to the same period in 1997. This
decrease is primarily attributable to the decline in bushel volume discussed in
the sales section of this analysis, partially offset by increased facility
expenses and an 18 cent a bushel weighted average price increase for all
commodities purchased during the current three-month period compared to the same
period in 1997.
Marketing and administrative expenses of $18,600,000 for the three months
ended February 28, 1998 increased $2,900,000 (18%) compared to the same three
months ended in 1997. $900,000 of this increase is attributable to additional
staffing and system expansion within the Wheat Milling Defined Business Unit
related to the Houston Mill and in anticipation of future volumes from Mt.
Pocono. A significant portion of the balance of the change is related to the
Farm Marketing & Supply Division, which has acquired a number of additional
facilities within the past year.
Interest expense of $4,600,000 for the three months ended February 28, 1998
represents a decrease of $200,000 (4%) compared to the same period in 1997.
Income tax expense of $1,700,000 and $2,350,000 for the three-month periods
ended February 28, 1998 and 1997, respectively, result in effective tax rates of
10.7% and 11.9%.
COMPARISON OF NINE MONTHS ENDED FEBRUARY 28, 1998 WITH 1997
The Company's consolidated net earnings for the nine months ended February
28, 1998 and 1997 were $42,300,000 and $37,000,000, respectively, which
represents a $5,300,000 (14%) increase for the period ended in 1998. This
increase in net earnings is primarily the result of improved grain margins in
the 1998 period compared to 1997.
Consolidated net sales of $4,417,000,000 decreased $1,195,000,000 (21%)
during the nine-month period ended February 28, 1998 compared to the same period
in 1997. Grain volume of approximately 860,000,000 bushels during the nine
months ended February 28, 1998 declined 140,000,000 bushels compared to 1997. In
addition to the volume decrease, the weighted average sales price for all
commodities declined 42 cents a bushel for the nine months ended February 28,
1998 compared to the same period a year ago.
Patronage dividends received decreased $400,000 (5%) for the nine months
ended February 28, 1998 compared to 1997 resulting from lower patronage earnings
distributed by cooperative customers and suppliers.
Other revenue of $65,500,000 for the nine months ended February 28, 1998
increased $11,600,000 (22%) compared to the same period in 1997. This increase
is primarily attributable to the recognition of approximately $4,200,000 of
additional earnings from the Company's nonconsolidated consumer
products packaging joint venture, and additional service income from both
country elevators and grain marketing operations.
Cost of goods sold of $4,377,000,000 decreased $1,189,000,000 (21%) for the
nine months ended February 28, 1998 compared to the same period in 1997. This
decrease is primarily attributable to the decline in bushel volume discussed in
the sales section of this analysis, as well as a 44 cent a bushel decline in
weighted average purchase price for all commodities during the current
nine-month period compared to the same period in 1997.
Marketing and administrative expenses increased $1,200,000 (2%), from
$52,600,000 during the nine months ended February 28, 1997 to $53,800,000 for
the current nine-month period. While such costs of approximately $4,100,000
incurred in the 1997 period were eliminated as a result of transferring the
Company's consumer products packaging operation to a nonconsolidated joint
venture on August 30, 1996, other areas of the Company, specifically country
elevators and wheat milling incurred increased costs due to expansion of their
respective businesses.
Interest expense of approximately $12,200,000 for the nine months ended
February 28, 1998 represents a decrease of $1,000,000 (8%) compared to the same
period of 1997. This reduced expense is the result of decreased grain volume and
lower grain prices in 1997.
Income tax expense of $5,300,000 and $4,950,000 for the nine-month periods
ended February 28, 1998 and 1997, respectively, result in effective tax rates of
11.1% and 11.8%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $4,600,000 and
$197,900,000 for the three months ended February 28, 1998 and 1997,
respectively. Net cash used is attributable to increased working capital
requirements of $18,800,000 and $213,200,000 for the three months ended February
28, 1998 and 1997, respectively.
For the nine months ended February 28, 1998, net earnings of $42,300,000
were partially offset by increased working capital needs to provide net cash of
$6,900,000. During the same nine-month period of a year ago, net earnings of
$37,000,000, net noncash revenues and expenses of $4,300,000 and reduced working
capital requirements of $183,500,000 provided net cash of $224,800,000.
CASH FLOWS FROM INVESTING
Investing activities during the three months ended February 28, 1998 used
net cash of $8,300,000. Primary uses of cash for investing purposes during this
three-month period included the acquisition of property, plant and equipment
totaling $7,500,000, and the investment of $2,500,000 for convertible preferred
stock of Sparta Foods, Inc., a tortilla manufacturing
firm based in the Minneapolis-St. Paul area. This investment represents an 18%
ownership in that company. These uses of cash for investing purposes were
partially offset by proceeds from the sale of fixed assets and redemptions of
various investments. Investing activities during the same three-month period of
a year ago used net cash of $8,700,000 essentially all of which was for the
acquisition of property, plant and equipment.
Investing activities for the nine months ended February 28, 1998 used net
cash of $18,700,000. Expenditures for the acquisition of property, plant and
equipment during that period of $34,800,000 and equity investments of $3,000,000
were partially offset by proceeds from the sale of property, plant and equipment
of $12,500,000 and by approximately $6,600,000 received from joint ventures and
redemptions of investments. $10,300,000 of the $12,500,000 proceeds from the
sale of fixed assets resulted from a sales-leaseback transaction of
manufacturing equipment within the Oilseed Processing and Refining Defined
Business Unit. Investing activities during the nine months ended February 28,
1997 used net cash of approximately $20,600,000. Expenditures for the
acquisition of property, plant and equipment of $34,100,000 were partially
offset by incoming cash from joint ventures, investments and fixed asset
proceeds totaling approximately $14,800,000 during the nine-month period of a
year ago.
On August 30, 1996 the Company formed a joint venture with a regional
consumer products packaging company, and contributed substantially all of the
net assets of the consumer products packaging division then owned by the Company
as its capital investment in the joint venture. In return for these assets, the
Company received a 40% interest in the joint venture and the joint venture
assumed debt to the Company of approximately $33,700,000. Of this debt transfer,
$9,000,000 was related to non-current assets transferred and is reflected as a
source of cash from investing activities for the six-month period ended November
30, 1996.
CASH FLOWS FROM FINANCING
The Company finances its working capital needs through short-term lines of
credit with the banks for cooperatives and commercial banks. The Company entered
into a new loan agreement in October 1997, and as of February 28, 1998 the
Company had short-term lines of credit totaling $525,000,000, all of which is
committed, with $112,000,000 outstanding. On May 31, 1997, the Company had
$98,000,000 of this credit line outstanding.
The Company has financed its long-term capital needs, primarily for the
acquisition of property, plant, and equipment, with long-term agreements through
the banks for cooperatives with maturities through the year 2007. Total
indebtedness of these agreements totaled $114,700,000 and $125,000,000 on
February 28, 1998 and May 31, 1997, respectively.
The Company had no new long-term debt borrowings during the three months
ended February 28, 1998, and 1997, respectively. During the three months ended
February 28, 1998, and 1997, the Company repaid long-term debt of $3,770,000 and
$3,580,000, respectively.
The Company had no new long-term debt borrowings during the nine months
ended February 28, 1998 while in 1997, for the same nine-month period, the
Company incurred $10,000,000 of additional long-term debt. During the nine
months ended February 28, 1998 and 1997, the Company repaid long-term debt of
$15,600,000 and $10,525,000, respectively.
The Company has announced intentions to construct a flour mill in central
Florida and a soybean crushing and refining plant in either southwestern
Minnesota or in southeastern South Dakota. Plans are subject to due diligence,
routine regulatory review and cost verification. Projected cost for the mill is
approximately $35,000,000. Projected cost for the crushing and refining plant is
approximately $90,000,000. These projects may be financed with additional
long-term borrowing, equity, including additional equity participation units or
with a combination of these financing alternatives.
In accordance with the bylaws and by action of the Board of Directors,
annual net earnings from patronage sources are distributed to consenting patrons
following the close of each year and are based on amounts reportable for federal
income tax purposes as adjusted in accordance with the bylaws. Cash patronage
for fiscal year 1997 distributed in November, 1997 totaled approximately
$13,400,000.
The Board of Directors authorized the redemption of patronage certificates
held by patrons who were 72 years of age and those held by estates of deceased
patrons during the three months ended February 28, 1998 and 1997. These amounts
totaled $3,000,000 and $1,100,000, respectively. Redemptions made during the
nine months ended February 28, 1998 and 1997 were $6,600,000 and $4,300,000,
respectively.
During the year ended May 31, 1997, the Company offered registered
securities in the form of Equity Participation Units in its Wheat Milling and
Oilseed Processing and Refining divisions. These equity participation units give
the holder the right and the obligation to deliver to Harvest States a stated
number of bushels in return for a prorata share of the undiluted grain based
patronage earnings of these respective divisions. The offering resulted in the
issuance of such equity with a stated value of $13,870,000 and generated
additional capital and cash of $10,836,690, after issuance cost and conversion
privileges.
Holders of the Units will not be entitled to payment of dividends by virtue
of holding such Units. However, holders of the Units will be entitled to receive
patronage refunds attributable to the patronage sourced income from operations
of the applicable Defined Business Unit on the basis of wheat or soybeans
delivered pursuant to the Marketing Agreement. The Board of Directors' goal is
to distribute patronage refunds attributable to the Units in the form of 75%
cash and 25% Patrons' Equities, and to retire those Patron Equities on a
revolving basis seven years after declaration. However, the decision as to the
percentage of cash patronage will be made each fiscal year by the Board of
Directors and will depend upon the cash and capital needs of the respective
Defined Business Units and is subject to the discretion of the Board of
Directors. The redemption policy will also be subject to change at the
discretion of the Board of Directors.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
ITEM 1. FINANCIAL STATEMENTS
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
BALANCE SHEETS
ASSETS
MAY 31, FEBRUARY 28, FEBRUARY 28,
1997 1997 1998
----------- --------------------------
(Unaudited) (Unaudited)
CURRENT ASSETS:
Receivables $34,169,676 $31,769,322 $31,327,604
Inventories 22,850,699 21,629,586 30,384,745
Prepaid expenses and deposits 2,310,163 1,826,008 558,586
----------- --------------------------
Total current assets 59,330,538 55,224,916 62,270,935
PROPERTY, PLANT AND EQUIPMENT 33,085,560 31,922,758 34,314,008
----------- --------------------------
$92,416,098 $87,147,674 $96,584,943
=========== ==========================
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Harvest States Cooperatives $25,584,178 $19,693,173 $34,029,248
Accounts payable and accrued expenses 13,440,922 14,063,503 9,164,697
----------- --------------------------
Total current liabilities $39,025,100 $33,756,676 $43,193,945
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY 53,390,998 53,390,998 53,390,998
----------- --------------------------
$92,416,098 $87,147,674 $96,584,943
=========== ==========================
See notes to financial statements
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
REVENUES:
Processed oilseed sales $ 117,617,535 $ 110,443,756 $ 326,969,828 $ 304,973,969
Other revenue (430,661) 289,336 145,826 1,705,610
------------------------------- ------------------------------
117,186,874 110,733,092 327,115,654 306,679,579
COSTS AND EXPENSES:
Cost of goods sold 107,203,129 102,395,809 302,508,583 280,728,296
Marketing, general, and administrative 1,291,563 1,290,652 3,733,026 3,880,983
Interest 173,700 146,350 209,200 310,630
------------------------------- ------------------------------
108,668,392 103,832,811 306,450,809 284,919,909
------------------------------- ------------------------------
EARNINGS BEFORE INCOME TAXES 8,518,482 6,900,281 20,664,845 21,759,670
INCOME TAXES 850,000 100,000 2,050,000 900,000
------------------------------- ------------------------------
NET EARNINGS $ 7,668,482 $ 6,800,281 $ 18,614,845 $ 20,859,670
=============================== ==============================
See notes to financial statements
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
STATEMENT OF DEFINED BUSINESS UNIT EQUITY
BALANCE AT MAY 31, 1997 $ 53,390,998
Net earnings (unaudited) 20,859,670
Defined Business Unit equity distributed (unaudited) (20,859,670)
------------
BALANCE AT FEBRUARY 28, 1998 (UNAUDITED) $ 53,390,998
============
See notes to financial statements
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------ ------------
1997 1998 1997 1998
----- ----- ----- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 7,668,482 $ 6,800,281 $ 18,614,845 $ 20,859,670
Adjustments to reconcile net earnings
to net cash flows:
Depreciation and amortization 467,265 467,080 1,291,222 1,405,248
Gain on disposal of property,
plant, and equipment (458,024) (469,756) (658,290)
Changes in assets and liabilities:
Receivables 2,159,021 4,383,456 (8,973,710) 2,842,072
Inventories 8,412,758 (11,247,849) 4,605,634 (7,534,046)
Prepaid expenses and deposits 69,757 1,272,725 (1,515,316) 1,751,577
Accounts payable and accrued
expenses (6,559,199) 525,556 2,823,915 (4,276,226)
----------------------------- -----------------------------
Total adjustments 4,091,578 (4,599,032) (2,238,011) (6,469,665)
Net cash provided by
operating activities ----------------------------- -----------------------------
11,760,060 2,201,249 16,376,834 14,390,005
----------------------------- -----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceed from disposition of property,
plant, and equipment 10,722,956
Acquistion of property, plant, and
equipment (804,135) (1,229,400) (7,972,811) (12,698,361)
----------------------------- -----------------------------
Net cash used in investing activities (804,135) (1,229,400) (7,972,811) (1,975,405)
----------------------------- -----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from Harvest
States Cooperatives (3,287,443) 5,828,432 10,210,822 8,445,070
Defined business unit equity distributed (7,668,482) (6,800,281) (18,614,845) (20,859,670)
Net cash used in
financing activities ----------------------------- -----------------------------
(10,955,925) (971,849) (8,404,023) (12,414,600)
----------------------------- -----------------------------
INCREASE (DECREASE) IN CASH 0 0 0 0
CASH AT BEGINNING OF PERIOD -- -- -- --
----------------------------- -----------------------------
CASH AT END OF PERIOD -- -- -- --
============================= =============================
See notes to financial statements
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The accompanying unaudited Defined Business Unit financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such unaudited Defined
Business Unit financial statements include all adjustments (consisting of only
normal, recurring accruals) necessary for a fair presentation thereof. Operating
results for the nine-month period ended February 28, 1998 are not necessarily
indicative of the results that may be expected for the year end May 31, 1998.
These statements should be read in conjunction with the financial statements and
footnotes included in the Defined Business Unit financial statements for the
year ended May 31, 1997 which is included in the Harvest States Cooperatives'
Report on Form 10-K dated August 26, 1997, previously filed with the Commission.
NOTE 2. INVENTORIES
May 31, February 28, February 28,
1997 1997 1998
----------- --------------------------
Oilseed .................... $11,740,227 $15,082,519 $13,052,817
Processed Oilseed Products . 11,110,472 6,547,067 17,331,928
----------- --------------------------
$22,850,699 $21,629,586 $30,384,745
=========== ==========================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Patronage refunds to the Oilseed Processing and Refining Defined Business
Unit holders will be calculated on the basis of tax earnings per bushel. Because
of this, the Company believes that the calculation below is an important measure
of the Defined Business Unit's performance.
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------------------------------------------------
1997 1998 1997 1998
---- ---- ---- ----
Pretax Earnings $ 8,518,482 $ 6,900,281 $ 20,664,845 $ 21,759,670
Earnings from purchased oil (2,148,388) (866,736) (5,446,745) (2,682,211)
Nonpatronage joint venture income (571,744) (737,836)
Book to tax differences
---------------------------------------------------------------
Tax basis earnings $ 6,370,094 $ 6,033,545 $ 14,646,356 $ 18,339,623
===============================================================
Bushels Processed 8,026,767 9,848,521 24,010,420 23,709,351
Earnings per Bushel $ 0.79 $ 0.61 $ 0.61 $ 0.77
===============================================================
Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of sales.
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
--------------------------------------------------------
1997 1998 1997 1998
---- ---- ---- ----
Gross Margin percentage 8.85% 7.29% 7.48% 7.95%
Marketing and Administrative 1.10% 1.17% 1.14% 1.27%
Interest 0.15% 0.13% 0.06% 0.10%
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
The Oilseed Processing and Refining Defined Business Unit's net earnings of
$6,800,000 for the three months ended February 28, 1998 represents a $900,000
decrease (12%) compared to the same period in 1997. This decrease is primarily
attributable to lower gross margins on refined soybean oil products, partially
offset by a $750,000 decrease in income tax expense.
Net sales of $110,400,000 for the three-month period ended February 28, 1998
decreased by $7,200,000 (6%) compared to the same period in 1997. Lower sales
prices for both soymeal and refined oil products negatively impacted current
quarter sales by $17,700,000. This price variance was partially offset by
improved sales volume, particulary for soymeal.
Other revenues increased $700,000 for the three-month period ended February
28, 1998 compared to the same period ended February 28, 1997. During the quarter
ended February 28, 1997, the Defined Business Unit recognized losses on
equipment totaling approximately $450,000, which is the primary factor in the
favorable variance for the current three-month period compared to the same
period of a year ago.
Cost of goods sold for the three months ended February 28, 1998 decreased
$4,800,000 (4%) compared to the same period ended February 28, 1997. Although
the Defined Business Unit crushed almost 1.8 million more bushels during the
quarter ended February 28, 1998 than during the quarter ended February 28, 1997,
declining average costs for crude soybean oil resulted in reduced costs of
goods sold for the quarter ended February 28, 1998 versus February 28, 1997.
Marketing and administrative expenses remained unchanged for the three-month
period ended February 28, 1998 compared to the same period ended in 1997.
Interest expense decreased $28,000 for the three months ended February 28,
1998 compared to the same three-month period of a year ago.
Income taxes for the three-month period ended February 28, 1998 of $100,000
decreased $750,000 compared to the three-month period ended February 28, 1997.
This decrease is primarily attributable to a decline in the purchase of
nonpatronage eligible crude soybean oil during the current three-month period
compared to the same period of a year ago. Effective tax rates were 1.4% and
10.0% for the three months ended February 28, 1998 and 1997, respectively.
COMPARISON OF NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
The Oilseed Processing and Refining Defined Business Unit's net earnings of
$20,900,000 for the nine months ended February 28, 1998 represents a $2,300,000
increase (12%) compared to the same period in 1997. This increase is primarily
attributable to gains of $650,000 on the sale of replaced equipment and a
reduction of $1,150,000 in income tax expense.
Net sales of $305,000,000 for the nine-month period ended February 28, 1998
decreased by $22,000,000 (7%) compared to the same period in 1997. This decrease
is primarily attributable to the crushing plant shutdown for 41 days during the
first quarter of the current fiscal year to allow for the installation of new
equipment, and also to a reduction in the average sales price of both soymeal
and refined oil products during the current nine-month period compared to the
same period of a year ago.
Other revenues increased $1,600,000 for the nine-month period ended February
28, 1998 compared to 1997. Primary components of other revenues for 1998 include
gains on disposal of plant, property and equipment of approximately $650,000 and
income from an oilseed processing joint venture totaling $738,000. Primary
components of other revenues for the 1997 period included net losses on the
disposal of fixed assets of approximately $450,000 and income from the oilseed
processing joint venture of approximately $600,000.
Cost of goods sold for the nine months ended February 28, 1998 decreased
$21,800,000 (7%) compared to the same period ended February 28, 1997. The
primary cause of this decrease was the crushing plant shutdown to allow for the
installation of new equipment, and a decline in the cost of both soybeans and
crude soybean oil. The Defined Business Unit crushed approximately 23,700,000
bushels of soybeans during the current nine-month period, compared with about
24,000,000 bushels for the same period ended in 1997. Average soybean costs of
$7.01 per bushel during the current period declined from $7.36 during the same
period of a year ago. Crude soybean oil costs of 22.3 cents per pound also
declined from 24.5 cents per pound for the same period a year ago.
Marketing and administrative expenses increased $150,000 (4%) for the
nine-month period ended February 28, 1998 compared to 1997.
Interest expense increased $100,000 (50%) for the nine months ended February
28, 1998 compared to the same nine-month period of a year ago. This increase is
primarily attributable to somewhat higher capital spending during the current
fiscal year and increased working capital requirements during the second quarter
of the fiscal year.
Income tax expense of $900,000 and $2,050,000 for the nine months ended
February 28, 1998 and 1997 respectively, results in effective tax rates of 4.1%
and 9.9%. This decrease in the effective tax rate is the result of a higher
percentage of patronage eligible crude oil purchases during the current fiscal
year, compared to similar purchases during the first nine months of the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Oilseed Processing and Refining Defined Business Unit's cash
requirements result from capital improvements and from a need to finance
additional inventories and receivables based on increased raw material costs or
levels. These cash needs are expected to be fulfilled by the Company.
CASH FLOWS FROM OPERATIONS
Net earnings of $6,800,000, noncash expenses of approximately $500,000, and
an increase in working capital requirements of $5,100,000 resulted in net cash
provided by operating activities for the three months ended February 28, 1998 of
$2,200,000. For the same three-month period ended a year ago, net earnings of
$7,700,000, noncash expenses of $500,000 and reduced working capital
requirements of $3,600,000 provided $11,800,000 in net cash from operating
activities.
Operating activities for the nine months ended February 28, 1998 and 1997,
respectively, provided net cash of $14,400,000 and $16,400,000 due to net
earnings of $20,900,000 and $18,600,000, noncash income and expenses of $700,000
and $800,000, partially offset by increased working capital requirements of
$7,200,000 and $3,000,000, respectively.
CASH FLOWS FROM INVESTING
Investing activities for the three months ended February 28, 1998 and 1997
used net cash of $1,200,000 and $800,000, respectively. All such usage during
these periods was for the acquisition of property, plant and equipment.
Investing activities during the nine-month period ended February 28, 1998
used net cash of $2,000,000. Additions to property, plant, and equipment of
$12,700,000 during the period then ended were partially offset by proceeds from
the sale of such fixed assets totaling $10,700,000. During that period, the
Defined Business Unit entered into a sale and operating leaseback of certain
equipment purchased and installed within the past twelve months. Proceeds from
that transaction were approximately $10,300,000. Investing activities during the
nine months ended February 28, 1997 used approximately $8,000,000, all of which
was for the acquisition of property, plant and equipment.
CASH FLOWS FROM FINANCING
The Defined Business Unit's financing activities are coordinated through the
Company's cash management department. Cash from all of the Company's operations
are deposited with the Company's cash management department and disbursements
are made centrally. As a result, the Defined Business Unit has a zero cash
position. Financing is available from the Company to the extent of the Company's
working capital position and corporate loan agreements with various banks, and
cash requirements of all other Company operations.
Working capital requirements for each division and Defined Business Unit of
the Company are reviewed on a periodic basis, and could potentially be
restricted based upon management's evaluation of the prevailing business
conditions and availability of funds.
The Defined Business Unit has announced intentions to construct a soybean
crushing and refining plant in southwestern Minnesota or southeastern South
Dakota. Plans are subject to due diligence, routine regulatory review and cost
verification. Anticipated cost is approximately $90,000,000 and may be financed
with additional debt, open member capital from the Company, additional equity
participation units, or a combination of these financing alternatives.
Debt outstanding and payable to the Company on February 28, 1998 was
$34,000,000, an increase from May 31, 1997 of $8,400,000, which reflects working
capital requirements and fixed asset financing requirements.
Debt outstanding to the Company on May 31, 1997 was $25,600,000 which
represents working capital and fixed asset financing requirements through that
date.
WHEAT MILLING DEFINED BUSINESS UNIT
ITEM 1. FINANCIAL STATEMENTS
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
BALANCE SHEETS
ASSETS
MAY 31, FEBRUARY 28, FEBRUARY 28,
1997 1997 1998
------------ ----------------------------
(Unaudited) (Unaudited)
CURRENT ASSETS:
Receivables $ 26,860,772 $ 47,651,612 $ 34,486,394
Due from Harvest States Cooperatives
Inventories 12,271,615 11,258,956 15,482,278
Prepaid expenses and deposits 840,730 201,768 331,967
------------ ----------------------------
Total current assets 39,973,117 59,112,336 50,300,639
OTHER ASSETS 11,814,555 12,081,225 11,014,545
PROPERTY, PLANT AND EQUIPMENT 69,130,520 70,244,648 77,472,390
------------ ----------------------------
$120,918,192 $141,438,209 $138,787,574
============ ============================
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Harvest States Cooperatives $ 22,413,445 $ 39,646,885 $ 7,199,778
Accounts payable and accrued expenses 9,493,405 15,523,263 11,342,704
Current portion of long-term debt 10,005,000 9,330,000 10,005,000
------------ ----------------------------
Total current liabilities 41,911,850 64,500,148 28,547,482
LONG-TERM DEBT 51,209,270 49,140,989 43,643,020
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY 27,797,072 27,797,072 66,597,072
------------ ----------------------------
$120,918,192 $141,438,209 $138,787,574
============ ============================
See notes to financial statements
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
REVENUES:
Processed grain sales $ 48,878,729 $ 54,047,025 $160,305,189 $152,456,052
Other income 370,294
---------------------------- ----------------------------
48,878,729 54,047,025 160,305,189 152,826,346
COSTS AND EXPENSES:
Cost of goods sold 44,206,167 49,754,699 146,154,554 139,536,583
Marketing, general, and administrative 1,804,218 2,202,385 4,734,734 6,028,180
Interest 1,472,690 858,385 4,298,669 2,897,483
---------------------------- ----------------------------
47,483,075 52,815,469 155,187,957 148,462,246
---------------------------- ----------------------------
EARNINGS BEFORE INCOME TAXES 1,395,654 1,231,556 5,117,232 4,364,100
INCOME TAXES 150,000 100,000 400,000 375,000
---------------------------- ----------------------------
NET EARNINGS $ 1,245,654 $ 1,131,556 $ 4,717,232 $ 3,989,100
============================ ============================
See notes to financial statements
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
STATEMENT OF DEFINED BUSINESS UNIT EQUITY
BALANCE AT MAY 31, 1997 $ 27,797,072
Harvest States capital contributed (unaudited) 38,800,000
Net earnings (unaudited) 3,989,100
Defined Business Unit equity distributed (unaudited) (3,989,100)
------------
BALANCE AT FEBRUARY 28, 1998 (UNAUDITED) $ 66,597,072
============
See notes to financial statements
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 1,245,654 $ 1,131,556 $ 4,717,232 $ 3,989,100
Adjustments to reconcile net earnings
to net cash flows:
Depreciation and amortization 1,045,636 1,523,532 3,072,700 3,661,666
Changes in assets and liabilities:
Receivables (8,636,263) 9,140,444 (3,902,478) (7,625,622)
Inventories (1,080,755) 2,027,841 (1,950,681) (3,210,663)
Prepaid expenses and deposits 49,392 159,738 (51,895) 508,763
Accounts payable and accrued
expenses 1,519,220 (5,145,989) 3,042,921 1,849,299
----------------------------- -----------------------------
Total adjustments (7,102,770) 7,705,566 210,567 (4,816,557)
Net cash (used in) provided by
operating activities ----------------------------- -----------------------------
(5,857,116) 8,837,122 4,927,799 (827,457)
----------------------------- -----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquistion of property, plant, and
equipment (4,162,057) (4,695,400) (13,284,291) (11,203,526)
----------------------------- -----------------------------
Net cash used in investing activities (4,162,057) (4,695,400) (13,284,291) (11,203,526)
----------------------------- -----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments to)
Harvest States Cooperatives 13,521,546 (571,416) 8,602,735 (15,213,667)
Capital from Harvest States Cooperatives 38,800,000
Long term debt borrowings 10,000,000
Principal payments on long-term debt (2,256,719) (2,438,750) (5,529,011) (7,566,250)
Defined business unit equity distributed (1,245,654) (1,131,556) (4,717,232) (3,989,100)
Net cash provided by (used in)
financing activities ----------------------------- -----------------------------
10,019,173 (4,141,722) 8,356,492 12,030,983
----------------------------- -----------------------------
INCREASE (DECREASE) IN CASH 0 0 0 0
CASH AT BEGINNING OF PERIOD -- -- -- --
----------------------------- -----------------------------
CASH AT END OF PERIOD -- -- -- --
============================= =============================
See notes to financial statements
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The accompanying unaudited Defined Business Unit financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such unaudited Defined
Business Unit financial statements include all adjustments (consisting of only
normal, recurring accruals) necessary for a fair presentation thereof. Operating
results for the nine-month period ended February 28, 1998 are not necessarily
indicative of the results that may be expected for the year end May 31, 1998.
These statements should be read in conjunction with the financial statements and
footnotes included in the Defined Business Unit's financial statements for the
year ended May 31, 1997 which is included in the Harvest States Cooperatives'
Report on Form 10-K dated August 26, 1997, previously filed with the Commission.
NOTE 2. RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the 1998 presentation. These reclassifications had no
effect on the operating results as previously reported.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Patronage refunds to the Wheat Milling Defined Business Unit holders will be
calculated on the basis of tax earnings per bushel. Because of this, the Company
believes that the calculation below is an important measure of the Defined
Business Unit's performance.
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
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1997 1998 1997 1998
---- ---- ---- ----
Pretax Earnings $ 1,395,654 $ 1,231,556 $ 5,117,232 $ 4,364,100
Book to tax differences
----------- ----------- ----------- -----------
Tax basis earnings $ 1,395,654 $ 1,231,556 $ 5,117,232 $ 4,364,100
=========== =========== =========== ===========
Bushels Milled 7,261,415 7,893,141 21,865,810 22,827,651
Earnings per Bushel $ 0.19 $ 0.16 $ 0.23 $ 0.19
=========== =========== =========== ===========
Certain operating information pertaining to the Wheat Milling Defined
Business Unit is set forth below, as a percentage of sales.
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
--------------------------------------------------
1997 1998 1997 1998
---- ---- ---- ----
Gross Margin percentage 9.56% 7.94% 8.83% 8.47%
Marketing and Administrative 3.69% 4.07% 2.95% 3.95%
Interest 3.01% 1.59% 2.68% 1.90%
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
The Wheat Milling Defined Business Unit's net earnings of $1,100,000 for the
three-month period ended February 28, 1998 decreased $100,000 (8%) compared to
the same period in 1997. While total volume and resulting gross margin remained
essentially unchanged between the two periods, the Houston mill, which commenced
operations in June, operated at only 45% of its production capacity during the
three months ended February 28, 1998. Total gross margins generated from this
mill were inadequate to cover increased expenses related to its operation and
this situation resulted in a deterioration of net earnings for the Defined
Business Unit.
Net sales for the three months ended February 28, 1998 of $54,000,000
increased $5,100,000 (10%) compared to the same period in 1997. Increased sales
volume for all products of approximately 400 hundred weights along with a slight
increase in overall sales prices produced this increase in sales dollars for the
current quarter.
Cost of goods sold of $49,800,000 for the three months ended February 28,
1998, increased $5,600,000 (13%) compared to the same period in 1997. This
change is primarily the result of increased bushel grind during the current
three-month period of 7.9 million bushels compared to 7.3 million bushels during
the three months ended February 28, 1997. In addition to greater volume, the
average cost per bushel for grain increased 16 cents during the current quarter
compared to the same period ended on February 28, 1997. The mill expense
component of cost of goods sold increased $300,000 for the three-month period
ended February 28, 1998 compared to the same period ended in 1997. While Houston
incurred new milling expenses during the three months ended February 28, 1998 of
$800,000, the other three mills, particularly Rush City because of reduced run
time, incurred lower costs during the current three month-period than that of a
year ago.
Marketing and administrative expenses were $2,200,000 during the three months
ended February 28, 1998, an increase of $400,000 (22%) compared to 1997. This
increase is primarily attributable to additional staffing and system expansion
costs related to the Houston mill, and in anticipation of future volumes from
the Mt. Pocono mill.
The Wheat Milling Defined Business Unit incurred interest expense of $900,000
and $1,500,000 during the three months ended February 28, 1998 and 1997,
respectively. This decrease of approximately $600,000 (40%) in 1998 is primarily
the result of additional capital contributed by Harvest States on June 1, which
decreased short term borrowing requirements.
Income tax expenses of $100,000 and $150,000 for the three months ended
February 28, 1998 and 1997, respectively, result in effective tax rates of 8.1%
and 10.75%.
COMPARISON OF NINE MONTHS ENDED FEBRUARY 28, 1998 WITH 1997
The Wheat Milling Defined Business Unit's net earnings of $4,000,000 for the
nine-month period ended February 28, 1998 decreased $700,000 (14%) compared to
the same period in 1997. The primary cause of this decrease in net earnings is
the under-utilization of the Houston, Texas mill, which commenced operations in
June. For the nine months ended February 28, 1998, the Houston mill has operated
at approximately 39% of its production capacity. Gross margins generated from
this limited volume have been inadequate to cover related expenses and has
resulted in a deterioration of net earnings for the Defined Business Unit.
Net sales for the nine months ended February 28, 1998 of $152,500,000
decreased $7,800,000 (5%) compared to the same period in 1997. Lower prices
during the current nine-month period resulted in a decrease in net sales of
$12,400,000, while increased sales volume contributed $4,600,000 in sales to
partially offset this price variance.
Interest income of $370,000 was generated during the nine months ended
February 28, 1998 on the Wheat Milling Defined Business Unit's working capital
account with Harvest States. This income was primarily the result of additional
capital of $38,800,000 contributed by Harvest States on June 1, 1997 for the
purpose of constructing the mill at Mt. Pocono, Pennsylvania. Construction at
Mt. Pocono commenced in early September, 1997, and as disbursements have been
made for that purpose, interest generating funds have declined so that as of
February 28, 1998, the Defined Business Unit is in a payable position to Harvest
States on the working capital account.
Cost of goods sold of $139,500,000 for the nine months ended February 28,
1998,
decreased $6,700,000 (5%) compared to the same period in 1997. The raw material
component of cost of goods sold decreased $8,400,000 compared with 1997. Lower
per bushel grain prices produced a reduction of $13,700,000 of such costs,
partially offset in the amount of $5,300,000 by additional costs resulting from
increased volume. The mill expense component of cost of goods sold increased
approximately $800,000 during the current nine months compared to the same
period of a year ago. This increase is primarily the result of additional run
time at Kenosha, the commencement of operations at Houston in June, offset
partially by reduced variable costs at Rush City. The Rush City mill, which was
closed throughout the month of June and early July, has operated during the
current nine-month period at approximately 50% of the production level of the
same nine-month period ended a year ago.
Marketing & administrative expenses were $6,000,000 during the nine months
ended February 28, 1998, an increase of $1,300,000 (28%) compared to 1997. This
increase is primarily attributable to additional staffing and system expansion
costs related to the Houston mill, and in anticipation of future volumes from
the Mt. Pocono mill.
The Wheat Milling Defined Business Unit incurred interest expense of
$2,900,000 and $4,300,000 during the nine months ended February 28, 1998 and
1997, respectively. This decrease of approximately $1,400,000 (33%) in 1997 is
primarily the result of additional capital contributed by Harvest States on June
1, which decreased short term borrowings.
Income tax expenses of $375,000 and $400,000 for the nine months ended
February 28, 1998 and 1997, respectively, result in effective tax rates of 8.6%
and 7.8%.
LIQUIDITY AND CAPITAL RESOURCES
The Wheat Milling Defined Business Unit's cash requirements result from
capital improvements and from a need to finance additional inventories and
receivables based on increased raw material cost and levels. These cash needs
are expected to be fulfilled by the Company.
CASH FLOWS FROM OPERATIONS
Operating activities provided net cash of $8,800,000 during the three-month
period ended February 28, 1998. Net earnings of $1,100,000, noncash expenses of
$1,500,000 and decreased working capital requirements of approximately
$6,200,000 accounted for this change. Operating activities for the three-month
period ended February 28, 1997 used net cash of $5,900,000. Net earnings of
$1,200,000 and noncash expenses of $1,000,000 were offset by increased working
capital requirements of $8,100,000 during the three-month period ended February
28, 1997.
Operating activities used net cash of $800,000 during the nine-month period
ended February 28, 1998. Net earnings of $4,000,000 and noncash expenses of
$3,700,000 were offset by increased working capital requirements of
approximately $8,500,000. Operating activities for the nine-month period ended
February 28, 1997 provided net cash of $4,900,000. Net earnings of $4,700,000
and noncash expenses of $3,100,000 were partially offset by increased working
capital requirements of approximately $2,900,000.
CASH FLOWS USED FOR INVESTING
Cash expended for the acquisition of property, plant and equipment
during the three-month periods ended February 28, 1998 and 1997 totaled
$4,700,000 and $4,200,000, respectively.
Cash expended for the acquisition of property, plant and equipment during
the nine-month periods ended February 28, 1998 and 1997 totaled $11,200,000 and
$13,300,000, respectively.
CASH FLOWS FROM FINANCING
The Wheat Milling Defined Business Unit's financing activities are
coordinated through the Company's cash management department. Cash from all of
the Company's operations is deposited with the Company's cash management
department and disbursements are made centrally. As a result, the Wheat Milling
Defined Business Unit has a zero cash position. Financing is available from the
Company to the extent of the Company's working capital position and corporate
loan agreements with various banks and cash requirements of all other Company
operations.
Working capital requirements for each division and Defined Business Unit of
the Company are reviewed on a periodic basis, and could potentially be
restricted based upon management's evaluation of the prevailing business
conditions and availability of funds.
On February 28, 1998, the Wheat Milling Defined Business Unit had short-term
debt to Harvest States of $7,200,000, compared with short-term debt of
$22,400,000 due to Harvest States on May 31, 1997. This change is primarily the
result of $38,800,000 in additional capital contributed by Harvest States for
the construction of the Mt. Pocono plant.
On May 31, 1997 the Wheat Milling Defined Business Unit had long-term debt
of $61,200,000 which was incurred for the acquisition, expansion and
construction of its various plants since 1990. During the nine months ended
February 28, 1998, this balance was reduced by repayments of $7,566,250.
Construction of the Mt. Pocono, Pennsylvania mill commenced during the month
of September. Total cost for this mill is expected to be $41,350,000.
Approximately $8,100,000 of these costs have been expended through February 28,
1998.
The Defined Business Unit has announced intentions to construct a mill in
central Florida. Anticipated cost is approximately $35,000,000 and may be
financed with additional debt, open member capital from the Company, additional
equity participation units, or a combination of these financing alternatives.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
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99 Cautionary Statement
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARVEST STATES COOPERATIVES
(Registrant)
/s/ T. F. Baker
------------------ ---------------
(Date) T. F. Baker
Group Vice-President - Finance