SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q TRANSITION REPORT
(Mark One)
[ ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended
[X] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from June 1, 1998 to
August 31, 1998.
Commission File Number 333-17865
CENEX 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)
5500 CENEX DRIVE, INVER GROVE HEIGHTS, MN 55077 (651) 451-5151
(Address of principal executive offices and (Registrant's telephone
zip code) 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
August 31, 1998)
INDEX
PAGE
NO.
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PART I. FINANCIAL INFORMATION
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
Item 1. Financial Statements
Consolidated Balance Sheets as of May 31, 1998 and August 31, 1997
and 1998 (unaudited)
Consolidated Statements of Earnings for the three months ended
August 31, 1997 and 1998 (unaudited)
Consolidated Statements of Cash Flows for the three months
ended August 31, 1997 and 1998 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
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 CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of May 31, 1998 and August 31, 1997 and 1998
(unaudited)
Statements of Earnings for the three months ended August 31,
1997 and 1998 (unaudited)
Statements of Cash Flows for the three months ended August 31,
1997 and 1998 (unaudited)
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of May 31, 1998 and August 31, 1997 and 1998
(unaudited)
Statements of Earnings for the three months ended August 31,
1997 and 1998 (unaudited)
Statements of Cash Flows for the three months ended August 31,
1997 and 1998 (unaudited)
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. 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 I. FINANCIAL INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q Transition Report 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. The current
monetary crisis's in Asia has impacted, and is expected to continue to impact
exports of U.S. agricultural products. Reduced demand for U.S. agricultural
products may also adversely effect the demand for fertilizer, chemicals, and
petroleum products sold by the Company and used to produce the crop. 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 and
petroleum, including price changes and performance risks (including delivery,
quality, quantity and shipment period), depending upon the type of purchase
contract. The Company is exposed to risk of loss in the market value of
positions held, consisting of grain and petroleum 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
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.
Commencing in June 1998, the Wheat Milling Defined Business Unit began
conversion of a semolina line to bakery flour at the Huron mill. This project
is anticipated to be completed in late October 1998 and until then, will
negatively impact profitability.
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 Form 10-Q Transition Report for the period June 1, 1998 to
August 31, 1998.
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
May 31, August 31, August 31,
1998 1997 1998
-------------- --------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 76,740,575 $ 25,226,328 $ 112,485,699
Receivables 555,197,542 543,692,013 453,559,492
Inventories 523,019,559 477,519,865 478,997,710
Other current assets 36,996,360 57,393,212 51,477,895
-------------- --------------------------------
Total current assets 1,191,954,036 1,103,831,418 1,096,520,796
OTHER ASSETS:
Investments 356,546,154 327,213,415 358,081,678
Other 96,116,277 91,880,809 96,674,735
-------------- --------------------------------
Total other assets 452,662,431 419,094,224 454,756,413
PROPERTY PLANT AND EQUIPMENT 893,426,710 847,131,007 915,675,439
-------------- --------------------------------
$2,538,043,177 $2,370,056,649 $2,466,952,648
============== ================================
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Notes payable $ 53,500,000 $ 35,030,548 $ 475,200
Patrons credit balances 42,876,236 39,935,763 41,324,189
Patrons advance payments 107,935,453 154,007,555 147,009,462
Drafts outstanding 33,568,876 26,403,934 26,366,742
Accounts payable and accrued expenses 636,518,268 554,147,504 530,099,592
Patronage dividends and retirements payable 60,019,000 69,300,000 62,262,331
Current portion of long-term debt 39,548,281 27,691,588 13,855,262
-------------- --------------------------------
Total current liabilities 973,966,114 906,516,892 821,392,778
LONG-TERM DEBT 374,869,784 314,527,611 442,655,640
OTHER LIABILITIES 72,113,175 81,901,538 75,800,972
MINORITY INTERESTS IN SUBSIDIARIES 58,603,489 60,550,789 59,926,302
COMMITMENTS AND CONTINGENCIES
CAPITAL 1,058,490,615 1,006,559,819 1,067,176,956
-------------- --------------------------------
$2,538,043,177 $2,370,056,649 $2,466,952,648
============== ================================
See notes to consolidated financial statements (unaudited)
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
August 31,
--------------------------------
1997 1998
---- ----
REVENUES:
Sales:
Grain and oilseed $1,030,047,706 $ 810,722,850
Petroleum products 414,947,841 343,747,507
Agronomy 138,672,929 91,231,145
Processed grain and oilseed 130,769,655 145,644,623
Feed and farm supplies 126,568,160 126,906,519
--------------------------------
1,841,006,291 1,518,252,644
Patronage dividends 7,419,761 14,042,100
Other revenues 19,067,081 18,518,541
--------------------------------
1,867,493,133 1,550,813,285
--------------------------------
COSTS AND EXPENSES:
Cost of good sold 1,780,171,256 1,485,322,219
Marketing, general and administrative 29,586,496 31,105,355
Interest 8,197,413 12,303,315
Minority Interests 5,461,750 3,251,022
--------------------------------
1,823,416,915 1,531,981,911
--------------------------------
EARNINGS BEFORE INCOME TAXES 44,076,218 18,831,374
INCOME TAXES 8,865,000 2,895,000
--------------------------------
NET EARNINGS $ 35,211,218 $ 15,936,374
================================
See notes to consolidated financial statements (unaudited)
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
August 31,
-------------------------------
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 35,211,218 $ 15,936,374
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 18,313,845 20,551,534
Noncash net (income) loss from joint ventures (4,571,338) 8,502,146
Noncash portion of patronage dividends received (5,183,080) (9,305,325)
Gain on sale of property, plant and
equipment (1,010,392) (458,176)
Changes in operating assets and liabilities:
Receivables 60,703,797 102,666,975
Inventories 59,467,737 44,021,849
Prepaid expenses, deposits and other 76,209 (17,211,995)
Patrons credit balances 15,404,252 (1,552,047)
Patrons advance payments 3,015,614 39,074,009
Accounts payable, accrued expenses,
drafts outstanding and other (55,390,055) (109,933,013)
-------------------------------
Total adjustments 90,826,589 76,355,957
-------------------------------
Net cash provided by operating
activities 126,037,807 92,292,331
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant and
equipment 2,379,486 824,495
Investments redeemed 2,162,281 390,890
Acquisition of property, plant and equipment (32,764,509) (41,152,399)
Changes in notes receivable (975,634) 272,313
Investments 3,956,318 (1,591,953)
Other 734,755 327,127
-------------------------------
Net cash used in investing activities (24,507,303) (40,929,527)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of notes payable (113,347,307) (53,024,800)
Long-term debt borrowings 359,077,740
Principal payments on long-term debt (9,876,230) (317,219,868)
Principal payments under capital lease obligations (4,874,956) (8,970)
Redemptions of equity (2,152,613) (4,441,782)
-------------------------------
Net cash used in financing
activities (130,251,106) (15,617,680)
-------------------------------
(DECREASE) INCREASE IN CASH (28,720,602) 35,745,124
CASH, BEGINNING OF PERIOD 53,946,930 76,740,575
-------------------------------
CASH, END OF PERIOD $ 25,226,328 $ 112,485,699
===============================
See notes to consolidated financial statements (unaudited)
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited consolidated statements of earnings for the three-month period
ended August 31, 1998 and 1997, reflect, in the opinion of management of Cenex
Harvest States Cooperatives (the Company), all normal, recurring adjustments
necessary for a fair statement of the results of operations for the interim
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. The consolidated balance sheet data as
of May 31, 1998 was derived from audited consolidated financial statements but
does not include all disclosures required by generally accepted accounting
principles.
The unaudited consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Reclassifications have been made to the prior year's financial statements to
conform to the current year presentation.
NOTE 2. RECEIVABLES
May 31, August 31, August 31,
1998 1997 1998
------------- -------------------------------
Trade ................................ $ 540,215,491 $ 513,481,922 $ 436,869,609
Elevator accounts .................... 23,478,016 45,072,095 36,390,250
Other ................................ 15,691,171 10,219,285 3,614,191
------------- -------------------------------
579,384,678 568,773,302 476,874,050
Less allowance for losses .......... (24,187,136) (25,081,289) (23,314,558)
------------- -------------------------------
$ 555,197,542 $ 543,692,013 $ 453,559,492
============= ===============================
NOTE 3. INVENTORIES
May 31, August 31, August 31,
1998 1997 1998
------------- -------------------------------
Petroleum products ................... $ 208,055,542 $ 223,637,957 $ 178,792,039
Grain and oilseed .................... 148,381,119 134,345,410 152,874,078
Agronomy ............................. 82,167,871 69,422,844 80,029,854
Processed grain and oilseed products . 37,543,688 22,147,222 37,463,894
Feed and Farm supplies ............... 46,871,339 27,966,432 29,837,845
------------- -------------------------------
$ 523,019,559 $ 477,519,865 $ 478,997,710
============= ===============================
NOTE 4. COMPREHENSIVE INCOME
As of June 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting of Comprehensive Income" (SFAS 130). SFAS 130
establishes new rules for the reporting of comprehensive income and its
components. The adoption of SFAS 130 had no impact on the Company's net income.
SFAS 130 requires unrealized gains and losses on the Company's
available-for-sale securities as well as the Company's charge to equity related
to its pension liability to be included as components of other comprehensive
income.
During the three months ended August 31, 1998 and 1997, total comprehensive
income amounted to $14,641,974 and $35,211,218, respectively. Accumulated other
comprehensive income (loss) at August 31, 1998 and 1997 and May 31, 1998 was
$(99,465), $1,281,207 and $1,194,935, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives combined
through merger on June 1, 1998 (the Combination) with Harvest States the
surviving corporation. In accordance with the Plan of Combination, the Articles
of Incorporation and bylaws of Harvest States Cooperatives were restated and the
name Harvest States Cooperatives was changed to "Cenex Harvest States
Cooperatives" (the Company).
As a result of the Combination, the Company has changed its fiscal year to
August 31, and is filing this Form 10-Q Transition Report under Rule 15
(d)(10)(c) for the three-month period ended August 31, 1998.
As a result of the Combination, each holder of common stock of Cenex became
a member of Cenex Harvest States Cooperatives, to the extent eligible for
membership, and all equity interests of Cenex were determined and exchanged for
equal equity interests in Cenex Harvest States Cooperatives at its stated dollar
amount on a dollar for dollar basis as more thoroughly set forth in the Plan of
Combination, a copy of which was filed as part of the Company's Form 8-K dated
June 10, 1998.
This Combination has been accounted for as a pooling of interest and as a
result all comparative financial information has been restated to include the
financial statements of Cenex and Harvest States.
Effective June 1, 1998 the Company adopted Statement of Financial Accounting
Standards (SFAS) 130, which establishes standards for reporting and display of
comprehensive income and its components in a full set of general financial
statements. See notes to the consolidated financial statements for disclosures
relative to this Standard.
In June, 1997, the Financial Accounting Standards Board (FASB) issued SFAS
131, Disclosures about Segments of an Enterprise and Related Information, which
relates to financial reporting of operating or business segments of a company.
The new standard is effective for fiscal years beginning after December 15,
1997. Disclosures relative to SFAS 131 are not required for interim periods in
the initial year of application. Management is currently evaluating this new
standard and has not yet determined its applicability or impact on the
presentation of the Company's financial statements.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which relates to the accounting for
derivative transactions and hedging activities. This new standard is effective
for years beginning after June 15, 1999. While management does not believe this
standard will materially impact financial results of the Company, it is
currently evaluating the reporting requirements under this new standard.
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 as the year 2000. 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. Furthermore, should other companies or entities with whom
the Company has a supplier or a customer relationship encounter business
disruption because of the year 2000 issue, the Company in turn could experience
disruption of normal business processes and as a result incur additional costs
or loss of revenue.
In preparation for the Year 2000, the Company has reviewed the primary
internally-developed software programs used within the divisions and defined
business units comprising the Company before the June 1, 1998 merger with Cenex.
Appropriate changes were made to that software to accommodate the Year 2000. In
addition, the Company has engaged an information technology consulting firm for
the purpose of appraising the Company's Year 2000 readiness, identifying
critical software applications which are not Year 2000 compliant, remediating
such applications, testing corrections to software, developing contingency plans
in the event that all software problems are not corrected by the year 2000, and
assisting with certifications of key supplier's Year 2000 readiness. This Year
2000 plan and action program encompasses all areas of the Company. The Company
will also assess, to the extent practical, embedded technology in its processing
equipment. It is expected that the assessment phase of the project will be
completed by December 31, 1998, and that the remedial portion of the project
will be completed by June 30, 1999. Management believes that the total cost to
the Company to review and correct its own computer systems will not exceed $1
million, of which approximately $300,000 was expended through August 31, 1998.
Based on its assessment, the Company's management presently believes that
problems related to the Year 2000 computer issue will not have a material effect
on operations and 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 Company
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.
Furthermore, a contingency plan has not been completed as of this time, and will
be
developed after the Company, through its Year 2000 project, identifies the
software applications requiring remediation.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
The Company's consolidated net earnings for the three months ended August
31, 1998 and 1997 were $16,000,000 and $35,200,000, respectively, which
represents a $19,200,000 (55%) decrease for the period ended in 1998. Relatively
low commodity prices had a direct impact on volume at the Company's country
elevator and grain exporting facilities, and influenced demand for crop
protection and plant food products. With reduced volumes in most of the
Company's business operations, gross margins were eroded considerably by fixed
costs.
Consolidated net sales of $1,518,000,000 decreased $323,000,000 (18%) during
the three-month period ended August 31, 1998 compared to the same period in
1997. Grain volume of approximately 230,000,000 bushels during the three months
ended August 31, 1998 declined 27,000,000 bushels compared to 1997. In addition
to decreased volumes, the average weighted sales price for all grains and
oilseeds marketed by the Company declined by 41 cents a bushel. Total grain and
oilseed sales decreased approximately $220,000,000 as a result of these two
factors.
While the gallon sales of refined fuels increased slightly during the
three-month period ended August 31, 1998 compared with the same period in 1997,
a reduced average sales price of 18 cents a gallon resulted in a decline in
sales of approximately $71,000,000 for petroleum products during the 1998 period
compared with 1997.
Wholesale agronomy product sales declined approximately $48,000,000 during
the three months ended August 31, 1998 compared to the same period in 1997, the
result of a 12% decrease in fertilizer volumes, and 10% decrease in the average
per ton sales price of such product.
Processed grain and oilseed sales increased approximately $15,000,000 during
the three months ended August 31, 1998 compared to the same period in 1997. This
change is primarily attributable to increased volume within the Company's
Oilseed Processing and Refining Defined Business Unit, where soymeal sales
volume increased from approximately 105,000 tons during the three months ended
August 31, 1997 to approximately 215,000 tons in 1998. During the three months
ended August 31, 1997, the crushing plant was closed for 41 days to allow for
the installation of new equipment. During the 1998 period, the crushing plant
operated at its normal capacity.
Retail feed and farm supply sales remained essentially unchanged between the
two periods, although sales during the 1998 period represented a decline in
sales relationship to actual retail capacity due to the addition of several
retail locations since the end of the 1997 period.
Cost of goods sold of $1,485,000,000 decreased approximately
$295,000,000 (17%) during the three months ended August 31, 1998 compared to the
same period in 1997. Reduced volumes and raw material costs in most of the
Company's business activities, as discussed in the sales section of this
analysis, produced most of this reduction in costs. Although the commodity and
other raw material costs which are a component of costs of goods sold changed in
relative proportion to sales dollars, fixed operating costs remain constant
regardless of volume and price activity. This factor contributed to an erosion
in total gross margin of approximately $28,000,000 (46%) during the three months
ended August 31, 1998 compared with the same period in 1997.
Patronage dividends increased approximately $6,600,000 (89%) during the
three months ended August 31, 1998 compared to the same period in 1997 resulting
from higher patronage earnings distributed by cooperative customers and
suppliers.
Other revenue of $18,500,000 decreased $500,000 (3%) for the three months
ended August 31, 1998 compared to the same period in 1997. Earnings from the
Company's nonconsolidated consumer products packaging joint venture decreased
approximately $1,100,000 for the three months ended August 31, 1998 compared to
the same period in 1997. Earnings from the Company's share of a grain exporting
joint venture declined approximately $900,000 during the 1998 period compared to
1997. In addition, the Company experienced a decline in service income at its
export terminals due to reduced bushel volume activity at these locations. These
reductions in other revenues were partially offset by a $2,900,000 increase in
interest income. Because of the relatively low cost of grain during the period
ended August 31, 1998, the Company had no short term borrowing requirements. In
addition, the Company's refinancing program in anticipation of long term capital
requirements, completed in June of 1998, produced temporary cash available for
short term investment.
Marketing, general, and administrative expenses of $31,100,000 for the three
months ended August 31, 1998 increased $1,500,000 (5%) compared to the same
three months ended in 1997. Costs related to the relocation of staff and
consolidation of the business units, and a warranty claim for the re-roofing of
a building which had been part of the Company's capital contribution to the
consumer products packaging joint venture comprised the majority of this
increase.
Interest expense of $12,300,000 for the three months ended August 31, 1998
represents a increase of $4,100,000 (50%) compared to the same period in 1997.
Long-term borrowing to finance the acquisition of property, plant and equipment
generated most of this additional expense. Long-term debt proceeds not yet
expended for fixed assets generated interest income as discussed in the Other
Revenue discussion above, and should be considered as an offset to a portion of
the increase in interest expense.
Minority interest in operations for the three-month periods ended August 31,
1998 and 1997 were $3,250,000 and $5,450,000, respectively. Substantially all of
the minority interest is in National Cooperative
Refinery Association (NCRA), which operates a refinery near McPherson, Kansas.
The Company owns approximately 75% of that operation.
Income tax expense of $2,900,000 and $8,900,000 for the three-month periods
ended August 31, 1998 and 1997, respectively, resulted in effective tax rates of
15.4% and 20.1%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $92,300,000 and
$126,000,000 for the three months ended August 31, 1998 and 1997,
respectively. Net cash from operating activities during both periods is
primarily attributable to earnings and the reduction of working capital
requirements. Working capital requirements decreased $57,100,00 and $83,300,000
for the three months ended August 31, 1998 and 1997, respectively, thereby
contributing to cash provided by operating activities.
CASH FLOWS FROM INVESTING
Investing activities of the Company used net cash of $40,900,000 during the
three-month period ended August 31, 1998. Expenditures for the acquisition of
property, plant and equipment of $41,200,000 and additional investments in joint
ventures of $1,600,000 were partially offset by proceeds from the disposition of
property, plant and equipment and the redemption of prior investments. Capital
expenditures for the fiscal year beginning on September 1, 1998 are projected to
be approximately $196,000,000.
During the three months ended August 31, 1997, the Company used net cash of
$24,500,000 in its investing activities. Cash used for the acquisition of
property, plant and equipment of $32,800,000 was partially offset by proceeds
received for the disposition of fixed assets of $2,400,000, and cash from
cooperative and joint venture investments of approximately $6,100,000.
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. In June, 1998 the
Company established a 364-day credit facility of $400,000,000 and a five-year
revolving facility of $200,000,000, all of which is committed. In addition to
these credit lines, the Company has a 364-day credit facility dedicated to NCRA,
with the St. Paul Bank for Cooperatives in the amount of $52,000,000, all of
which is committed, and a 364-day credit facility dedicated to Swiss Valley
Cooperative, a subsidiary of which the Company owns 60%, with CoBank in the
amount of $750,000, all of which is committed. On August 31, 1998 the Company
had total short-term indebtedness on these various facilities totaling $475,000.
On May 31, 1998, the Company had $53,500,000
outstanding on its short-term lines of credit. This decrease in short-term
borrowing is primarily attributable to a decrease in grain volume and prices, as
well as to the seasonality of petroleum and agronomy activity.
The Company has in the past financed its long-term capital needs, primarily
for the acquisition of property, plant, and equipment, with long-term loan
agreements through the banks for cooperatives. On May 31, 1998, the Company had
total indebtedness related to these long-term lines of credit of $373,800,000,
of which approximately $36,000,000 represented long-term borrowings by NCRA. In
June, 1998, the Company established a new long-term credit agreement through the
banks for cooperatives whereby the Company repaid $280,200,000 of the loan
balance, and borrowed $134,000,000 on the new long-term facility with the banks
for cooperatives. This new facility commits $200,000,000 of long-term borrowing
capacity to the Company, with repayments through the year 2009. The amount
outstanding on this credit agreement on August 31, 1998 was $134,000,000 with
$66,000,000 remaining available. Regarding the $94,200,000 of long-term
indebtedness not included as part of the refinancing, $36,200,000 was repaid
during the three months ended August 31, 1998, leaving an outstanding balance on
separate facilities of $58,000,000, with payments due through the year 2008.
Also in June 1998, as part of the refinancing program for the merged
operations, the Company issued a private placement with several insurance
companies for long-term debt in the amount of $225,000,000. Repayments will be
made in equal installments of $37,500,000 each in the years 2008 through 2013.
In addition, the Company had long-term indebtedness on May 31, 1998 and
August 31, 1998 of $40,600,000 and $39,500,000, respectively, in the form of
Industrial Revenue Bonds, capitalized leases, and miscellaneous notes payable.
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. In September,
1998, the Company distributed patronage dividends to patrons based upon the
operating results of the former Harvest States portion of the business for its
year ended May 31, 1998. The cash portion of this distribution, deemed by the
Board of Directors to be 80% for Equity Participation Units and 30% for regular
patronage was approximately $15,100,000. The patronage earnings of the former
Cenex portion of the business for the period ended May 31, 1998, and the
patronage earnings resulting from the combined operations for the three months
ended August 31, 1998 will be distributed in early calendar year 1999, and is
expected to be approximately $29,000,000. The cash portion of that distribution,
as authorized by the Board of Directors, will be 80% for Equity Participation
Units and 30% for regular patronage.
Beginning June 1, 1998, inactive direct members and patrons and active
direct members and patrons age 61 and older on that date continue to be eligible
for patronage certificate redemptions at the age of 72 or death. For active
direct members and patrons who were age 60 or younger on June 1, 1998, and
member cooperatives, equities will be redeemed annually based on a prorata
formula where the numerator is dollars available for such purpose as determined
by the Board of Directors, and the denominator is the sum of the patronage
certificates held by such eligible members and patrons. Total equity
redemptions, related to the May 31, 1998 fiscal year end of the former Harvest
States operating units, the eight-month reporting period of the former Cenex
operating units ended on May 31, 1998, and the three-month period ended August
31, 1998 for the combined operations of Cenex Harvest States Cooperatives, is
expected to be approximately $24,000,000, of which approximately $4,400,000 was
redeemed during the three months ended August 31, 1998. Total equity redemptions
during the three months ended August 31, 1997 were approximately $2,200,000.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
ITEM 1. FINANCIAL STATEMENTS
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
ASSETS
MAY 31, AUGUST 31, AUGUST 31,
1998 1997 1998
----------- --------------------------
(Unaudited) (Unaudited)
CURRENT ASSETS:
Receivables $32,585,292 $27,236,349 $28,703,118
Inventories 23,758,625 8,597,711 18,569,191
Prepaid expenses and deposits 185,399 2,689,345
----------- --------------------------
Total current assets 56,529,316 38,523,405 47,272,309
PROPERTY, PLANT AND EQUIPMENT 34,952,626 40,840,799 35,596,082
----------- --------------------------
$91,481,942 $79,364,204 $82,868,391
=========== =========== ===========
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives $22,890,878 $15,315,742 $15,071,383
Accounts payable and accrued expenses 10,527,468 10,657,464 9,319,963
----------- --------------------------
Total current liabilities $33,418,346 $25,973,206 $24,391,346
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY 58,063,596 53,390,998 58,477,045
----------- --------------------------
$91,481,942 $79,364,204 $82,868,391
=========== ==========================
See notes to financial statements (unaudited)
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
----------
1997 1998
---- ----
REVENUES:
Processed oilseed sales $ 86,349,147 $ 98,919,540
Other revenue 1,204,155 979,807
---------------------------
87,553,302 99,899,347
COSTS AND EXPENSES:
Cost of goods sold 82,461,185 95,169,378
Marketing, general and administrative 1,247,279 1,256,805
Interest 9,451 250,776
---------------------------
83,717,915 96,676,959
---------------------------
EARNINGS BEFORE INCOME TAXES 3,835,387 3,222,388
INCOME TAXES 675,000 525,000
---------------------------
NET EARNINGS $ 3,160,387 $ 2,697,388
===========================
See notes to financial statements (unaudited)
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
----------
1997 1998
----- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 3,160,387 $ 2,697,388
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 471,819 551,360
Gain on disposal of property,
plant and equipment (456,102)
Changes in operating assets and liabilities:
Receivables 6,933,327 3,882,174
Inventories 14,252,988 5,189,434
Prepaid expenses and deposits (379,182) 185,399
Accounts payable and accrued
expenses (2,783,458) (1,207,505)
--------------------------------
Total adjustments 18,039,392 8,600,862
Net cash provided by --------------------------------
operating activities 21,199,779 11,298,250
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property,
plant and equipment 456,102
Acquisition of property, plant and
equipment (8,227,058) (1,194,816)
--------------------------------
Net cash used in investing activities (7,770,956) (1,194,816)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from Cenex Harvest
States Cooperatives (10,268,436) (7,819,495)
Defined business unit equity distributed (3,160,387) (2,283,939)
Net cash used in --------------------------------
financing activities (13,428,823) (10,103,434)
--------------------------------
INCREASE (DECREASE) IN CASH -- --
CASH, BEGINNING OF PERIOD -- --
--------------------------------
CASH, END OF PERIOD -- --
================================
See notes to financial statements (unaudited)
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited statements of earnings for the three-month period ended August 31,
1998 and 1997, reflect, in the opinion of management of Cenex Harvest States
Cooperatives (the Company), all normal, recurring adjustments necessary for a
fair statement of the results of operations for the interim periods. The results
of operations for any interim period are not necessarily indicative of results
for the full year. The balance sheet data as of May 31, 1998 was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles.
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, 1998 which is included in the Cenex Harvest States
Cooperatives' Report on Form 10-K dated August 27, 1998, previously filed with
the Commission.
NOTE 2. INVENTORIES
May 31, August 31, August 31,
1998 1997 1998
----------- ---------------------------
(unaudited) (unaudited)
Oilseed .................... $ 6,925,703 $ 1,682,570 $ 712,466
Processed Oilseed Products . 16,832,922 6,915,141 17,856,725
----------- ---------------------------
$23,758,625 $ 8,597,711 $18,569,191
=========== ===========================
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pursuant to a Plan of Combination dated May 29,1998 (the Plan of
Combination), CENEX, Inc. and Harvest States Cooperatives combined through
merger on June 1, 1998 (the Combination) with Harvest States the surviving
corporation. In accordance with the Plan of Combination, the Articles of
Incorporation and bylaws of Harvest States Cooperatives were restated and the
name of Harvest States Cooperatives was changed to "Cenex Harvest States
Cooperatives" (the Company).
As a result of the Combination, the Company has changed its fiscal year to
August 31, and is filing this Form 10-Q Transition Report under Rule 15
(d)(10)(c) for the three-month period ended August 31, 1998.
RESULTS OF OPERATIONS
Patronage refunds to the Oilseed Processing and Refining Defined Business
Unit holders are 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
AUGUST 31,
----------------------------
1997 1998
----- ----
Pretax Earnings $ 3,835,387 $ 3,222,388
Earnings from purchased oil (1,928,819) (57,794)
Nonpatronage joint venture income (737,836) (975,957)
Book to tax differences (121,409)
----------------------------
Tax basis earnings $ 1,168,732 $ 2,067,228
============================
Bushels Processed 4,607,366 9,467,186
Earnings per Bushel $ 0.254 $ 0.218
============================
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
AUGUST 31,
---------------------
1997 1998
----- ----
Gross Margin percentage 4.50% 3.79%
Marketing, General and Administrative 1.44% 1.27%
Interest 0.01% 0.25%
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
The Oilseed Processing and Refining Defined Business Unit's net earnings of
$2,700,000 for the three months ended August 31, 1998 represents a $500,000
decrease (15%) compared to the same period in 1997. This decrease is primarily
attributable to lower gross margins for refined oil. The average gross margin
per pound on refined oil generated by the Oilseed Processing and Refining
Defined Business Unit during the three months ended August 31, 1998 declined 33%
compared to that margin for the same three-month period of a year ago. The
impact of that reduction in profitability was partially offset by increased
sales volume of soymeal, at an average gross margin per ton 40% higher than that
of a year ago.
Net sales of $98,900,000 for the three-month period ended August 31, 1998
increased by $12,600,000 (15%) compared to the same period in 1997. During the
three months ended August 31, 1997, the crushing portion of the
plant was shutdown for 41 days to allow for the installation of new equipment.
As a result, soymeal and soyflour sales activity was reduced to approximately
110,000 tons during the 1997 period, compared with almost 230,000 tons during
the current three-month period. While increased processing volume increased
sales dollars, a significant decline of approximately $110 a ton in the sales
price partially offset the volume variance. Together, these factors increased
sales approximately $6,000,000. For the refined oil portion of the business,
volumes were approximately the same in each of the three-month periods, while an
increase in the per pound price of refined soybean oil increased sales
approximately $6,600,000.
Other revenues of $980,000 during the three months ended August 31, 1998
decreased approximately $225,000 (19%) compared to the same period in 1997.
During the 1997 period, the Oilseed Processing and Refining Defined Business
Unit recognized gains on disposal of replaced equipment sold at salvage value of
approximately $450,000. Also included in other revenues for both of the
three-month periods is income from an oilseed joint venture. Income from this
source during the 1998 period exceeded that recognized in the 1997 period by
approximately $240,000.
Cost of goods sold of $95,200,000 for the three months ended August 31, 1998
increased $12,700,000 (15%) compared to the same period ended in 1997. This
change is primarily attributable to the increase in soymeal volume discussed
above in the sales analysis, partially offset by a decline of approximately $2
per bushel in cost of soybeans.
Marketing, general and administrative expenses of $1,250,000 for the three
months ended August 31, 1998 was essentially unchanged from the same period in
1997.
Interest expense for the three months ended August 31, 1998 was $250,000,
compared with $10,000 of a year ago. This $240,000 increase is primarily
attributable to increased average inventory levels during the current period.
During the 1997 period, soybean and processed product inventories were minimal
during the shutdown period discussed above, as were receivables related to the
sale of processed soybean products.
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
Operating activities for the three months ended August 31, 1998 and 1997,
respectively, provided net cash of $11,300,000 and $21,200,000 due to net
earnings of $2,700,000 and $3,200,000 and decreased working capital requirements
of $8,000,000 and $17,400,000, respectively.
CASH FLOWS FROM INVESTING
The Oilseed Processing and Refining Defined Business Unit used cash of
$1,200,000 and $8,200,000 during the three months ended August 31, 1998 and
1997, respectively, for the purchase of property, plant and equipment. During
the 1997 period, the Oilseed Processing and Refining Defined Business Unit
received cash of approximately $450,000 as proceeds for replaced equipment sold
at salvage value.
During the second quarter of the fiscal year ended May 31, 1998 the Oilseed
Processing and Refining Defined Business Unit received cash of approximately
$10,267,000 for the sale of soybean processing equipment. Most of the equipment
was purchased during the three months ended August 31, 1997, then entered into a
leaseback transaction.
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 is 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 Oilseed Processing and Refining Defined Business Unit had debt
outstanding to the Company of $15,100,000 on August 31, 1998 compared with
$22,900,000 on May 31, 1998. These interest bearing balances reflect working
capital and fixed asset financing requirements.
In July 1998 the Company announced its site selection for the construction
of a new soybean processing and refining plant in southwestern Minnesota. The
facility, to be constructed near the city of Fairmont, Minnesota, is expected to
cost between $60 million and $90 million. The precise configuration and size of
the facility has yet to be determined. The new facility may be financed with
debt, open membership equity, additional equity participation units, or a
combination of these financing alternatives.
As a result of the year end change (from May 31 to August 31) as noted at
the beginning of this discussion, the total net income from the Defined Business
Unit will be withdrawn by the Company from the Defined Business Unit except to
the extent that patronage dividends are not paid in cash and are retained in the
Business Unit as equity. Such dividends retained as equity from Equity
Participation Unit share of earnings are expected to be approximately $4,000 and
will be matched with equity on behalf of the Company's open membership in
proportion to Non-Equity Participation Unit bushels processed of approximately
$410,000.
WHEAT MILLING DEFINED BUSINESS UNIT
ITEM 1. FINANCIAL STATEMENTS
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
ASSETS
MAY 31, AUGUST 31, AUGUST 31,
1998 1997 1998
------------ ----------------------------
(Unaudited) (Unaudited)
CURRENT ASSETS:
Receivables $ 35,757,497 $ 38,279,324 $ 35,227,643
Due from Cenex Harvest States Cooperatives 8,838,871
Inventories 13,785,062 13,549,511 18,894,703
Prepaid expenses and deposits 393,085 303,555 429,771
------------ ----------------------------
Total current assets 49,935,644 60,971,261 54,552,117
OTHER ASSETS 10,747,876 11,547,885 10,481,206
PROPERTY, PLANT AND EQUIPMENT 85,627,365 70,472,298 97,428,174
------------ ----------------------------
$146,310,885 $142,991,444 $162,461,497
============ ============================
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives $ 16,738,969 $ 33,238,251
Accounts payable and accrued expenses 10,404,665 $ 17,868,851 12,669,809
Current portion of long-term debt 10,005,000 10,005,000 10,005,000
------------ ----------------------------
Total current liabilities 37,148,634 27,873,851 55,913,060
LONG-TERM DEBT 41,204,270 48,520,521 38,515,520
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY 67,957,981 66,597,072 68,032,917
------------ ----------------------------
$146,310,885 $142,991,444 $162,461,497
============ ============================
See notes to financial statements (unaudited)
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
----------
1997 1998
---- ----
REVENUES:
Processed grain sales $ 44,420,508 $ 46,914,301
Other income 286,767
-----------------------------
44,707,275 46,914,301
COSTS AND EXPENSES:
Cost of goods sold 40,570,296 43,738,152
Marketing, general and administrative 1,641,583 2,065,806
Interest 1,079,412 843,564
-----------------------------
43,291,291 46,647,522
-----------------------------
EARNINGS BEFORE INCOME TAXES 1,415,984 266,779
INCOME TAXES 125,000 25,000
-----------------------------
NET EARNINGS $ 1,290,984 $ 241,779
=============================
See notes to financial statements (unaudited)
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
----------
1997 1998
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 1,290,984 $ 241,779
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization 1,218,342 1,257,050
Changes in operating assets and liabilities:
Receivables (11,418,552) 529,854
Inventories (1,277,896) (5,109,641)
Prepaid expenses and deposits 537,175 (36,686)
Accounts payable and accrued
expenses 8,375,446 2,265,144
-----------------------------
Total adjustments (2,565,485) (1,094,279)
Net cash used in operating -----------------------------
activities (1,274,501) (852,500)
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment (2,293,449) (12,791,189)
-----------------------------
Net cash used in investing activities (2,293,449) (12,791,189)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments to) borrowings from
Cenex Harvest States Cooperatives (31,252,316) 16,499,282
Capital from Cenex Harvest States Cooperatives 38,800,000
Principal payments on long-term debt (2,688,750) (2,688,750)
Defined business unit equity distributed (1,290,984) (166,843)
Net cash provided by financing -----------------------------
activities 3,567,950 13,643,689
-----------------------------
INCREASE (DECREASE) IN CASH -- --
CASH, BEGINNING OF PERIOD -- --
-----------------------------
CASH, END OF PERIOD -- --
=============================
See notes to financial statements (unaudited)
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited statements of earnings for the three-month period ended August 31,
1998 and 1997, reflect, in the opinion of management of Cenex Harvest States
Cooperatives (the Company), all normal, recurring adjustments necessary for a
fair statement of the results of operations for the interim periods. The results
of operations for any interim period are not necessarily indicative of results
for the full year. The balance sheet data as of May 31, 1998 was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles.
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, 1998 which is included in the Cenex Harvest States
Cooperatives' Report on Form 10-K dated August 27, 1998, previously filed with
the Commission.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), CENEX, Inc. and Harvest States Cooperatives combined through
merger on June 1, 1998 (the Combination) with Harvest States the surviving
corporation. In accordance with the Plan of Combination, the Articles of
Incorporation and bylaws of Harvest States Cooperatives were restated and the
name of Harvest States Cooperatives was changed to "Cenex Harvest States
Cooperatives" (the Company).
As a result of the Combination, the Company has changed its fiscal year to
August 31, and is filing this Form 10-Q Transition Report under Rule 15
(d)(10)(c) for the three-month period ended August 31, 1998.
RESULTS OF OPERATIONS
Patronage refunds to the Wheat Milling Defined Business Unit holders are
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
AUGUST 31,
---------------------------
1997 1998
---- ----
Pretax Earnings $ 1,415,984 $ 266,779
Book to tax differences 103,694
---------------------------
Tax basis earnings $ 1,415,984 $ 370,473
===========================
Bushels Milled 7,099,685 8,156,304
Earnings per Bushel $ 0.199 $ 0.045
===========================
Certain operating information pertaining to the Wheat Milling Defined
Business Unit is set forth below, as a percentage of sales.
THREE MONTHS ENDED
AUGUST 31,
--------------------------
1997 1998
----- ----
Gross Margin percentage 8.67% 6.77%
Marketing and Administrative 3.70% 4.40%
Interest 2.43% 1.80%
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
The Wheat Milling Defined Business Unit's net earnings of $242,000 for the
three-month period ended August 31, 1998 decreased $1,049,000 (81%) compared to
the same period in 1997. Commencing in June and continuing throughout the
period, the Defined Business Unit began conversion of a semolina line at the
Huron mill to hard wheat bakery flour. This disruption of production resulted in
a 35% decline in volume, compared to the same period in 1997. While fixed costs
at the facility remained relatively constant with the prior period, revenues net
of raw material costs declined significantly. This situation caused operating
earnings to decline approximately $1,400,000. This decline in profit
contribution from the Huron mill was partially offset by increased
volume from the other mills. The Huron conversion project is anticipated to be
completed in late October 1998 and until then, will negatively impact
profitability.
Net sales for the three months ended August 31, 1998 of $46,900,000
increased $2,500,000 (6%) compared to the same period in 1997. Increased sales
volume for all products of approximately 600,000 hundred weights, offset by a 76
cent per hundred weight average reduction in sales price produced this increase
in sales dollars. The increased sales volume was primarily through the Houston
and Rush City mills, offset by a decline in production at the Huron mill. The
Houston mill was in its early startup period last year at this time, while the
Rush City mill was not operating in June and early July of last year due to a
shortage of business. The Huron mill operated at approximately 65% of its normal
volume during the three months ended August 31, 1998 as one of the Semolina
milling lines at that facility was in the process of being converted to hard
wheat bakery flour milling capacity.
Cost of goods sold of $43,700,000 for the three months ended August 31,
1998, increased $3,200,000 (8%) compared to the same period in 1997. The raw
material component of cost of goods sold increased $3,000,000 for the 1998
period compared with 1997. Increased volume contributed $5,400,000 to this
increase, partially offset by $2,400,000 in lower per bushel costs. Mill
expenses were essentially the same between the two periods.
Marketing, general and administrative expenses were $2,100,000 during the
three months ended August 31, 1998, an increase of $425,000 (26%) 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.
During the three months ended August 31, 1998, the Wheat Milling Defined
Business Unit incurred interest expense of $840,000. During the same period of a
year ago, the Wheat Milling Defined Business Unit generated interest income of
approximately $300,000 on its working capital account with Cenex Harvest States,
which is attributable to the capital contribution of $38,800,000 made by the
Company on June 1, 1997 for the purpose of constructing the Mt. Pocono,
Pennsylvania mill. During the three months ended August 31, 1997, the Wheat
Milling Defined Business Unit incurred interest expense on its long-term debt of
$1,100,000, for a net interest expense during the period of approximately
$800,000. While the working capital credit balance which generated last year's
interest income has been depleted as construction costs for Mt. Pocono mill were
paid, resulting interest costs have been capitalized as part of the new mill
fixed asset. Consequently, net interest expense for the two periods are
essentially unchanged.
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.
In September 1997, the Wheat Milling Defined Business Unit began
construction of a mill at Mt. Pocono, Pennsylvania. As discussed in the
registration statement for the original equity participation unit offering, this
mill is to be financed with equity from the Company. Anticipated cost is
$41,350,000, of which approximately $26,200,000 was expended through August 31,
1998. Projected completion of the mill is in the spring of 1999.
In June of 1998, the Wheat Milling Defined Business Unit began conversion of
a semolina line at the Huron Mill to hard wheat bakery flour production.
Anticipated cost of this project is $2,400,000, with completion anticipated
in late October of 1998.
The Cenex Harvest States Board of Directors has authorized the purchase of
land near Orlando, Florida as the site for a new mill. The Board has authorized
expenditures up to $1,755,000 for the cost of the land and an access road. Plans
for this mill are subject to due diligence, routine regulatory review and cost
verification. Anticipated costs for this mill are approximately $35,000,000, and
may be financed with debt, open member equity, additional equity participation
units, or a combination of these financing alternatives.
Commencement of operations at a particular facility involves increased
working capital to fund required inventories and receivables related to
increased sales. New facilities may not be immediately profitable, which would
then have a negative impact on cash flows and may require additional financing
as a result. In addition, increased carrying value of inventories and
receivables because of higher prices, increased receivables because of slow
collections or increased inventories above historical levels requires additional
financing.
CASH FLOWS FROM OPERATIONS
Operating activities for the three months ended August 31, 1998 and 1997,
respectively, used net cash of $850,000 and $1,300,000. For the three-month
period ended in 1998, net cash was provided by earnings of $240,000 and noncash
depreciation and amortization of $1,250,000 were offset by increased working
capital requirements of $2,400,000. For the same period ended in 1997, net cash
was provided by earnings of $1,300,000 and noncash depreciation and amortization
of $1,200,000, offset by increased working capital requirements of $3,800,000.
CASH FLOWS USED FOR INVESTING
Cash expended for the acquisition of property, plant and equipment during
the three-month periods ended August 31, 1998 and 1997 totaled $12,800,000 and
$2,300,000, respectively. The 1998 increase is related to the construction of
Mt. Pocono, Pennsylvania discussed above.
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.
Short term debt outstanding and payable to the Company on August 31, 1998
was $33,200,000 compared to $16,700,000 on May 31, 1998. This increase is
primarily due to payments for Mount Pocono capital expenditures, for which the
Company had contributed $38,800,000 of capital to this account on June 1, 1997.
On May 31, 1998 the Wheat Milling Defined Business Unit had long-term
debt of $51,200,000 which was incurred for the acquisition, expansion and
construction of its various plants since 1990. During the three months ended
August 31, 1998 and 1997, respectively, this balance was reduced by repayments
of $2,700,000.
As a result of the year end change (from May 31 to August 31) as noted at
the beginning of this discussion, the total net income from the Wheat Milling
Defined Business Unit will be withdrawn by the Company from the Wheat Milling
Defined Business Unit except to the extent that patronage dividends are not paid
in cash and are retained in the Business Unit as equity. Such dividends retained
as equity from Equity Participation Unit share of earnings are expected to be
approximately $2,300 and will be matched with equity on behalf of the Company's
open membership in proportion to Non-Equity Participation Unit bushels milled of
approximately $72,600.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
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10.20 Limited Liability Company Agreement of Country Energy, LLC
dated June 29, 1998 between Cenex Harvest States
Cooperatives and Farmland Industries, Inc.
10.21 Addendum to Limited Liability Company Agreement of Country
Energy, LLC dated July 23, 1998 by Cenex Harvest States
Cooperatives and Farmland Industries, Inc.
10.22 $225,000,000 Note Agreement (Private Placement Agreement)
dated as of June 19, 1998 among Cenex Harvest States
Cooperatives and each of the Purchasers of the Notes.
10.23 $400 Million 364-Day and $200 Million 5-Year Revolving Loan
Credit Agreement dated as of June 1, 1998 among Cenex
Harvest States Cooperatives, CoBank, ACB, St. Paul Bank for
Cooperatives, et al., including Exhibit 2.4 (form of 364-Day
Facility Note) and Exhibit 3.4 (form of 5-Year Note).
10.24 $200 Million Term Loan Credit Agreement dated as of June 1,
1998 among Cenex Harvest States Cooperatives, CoBank, ACB,
and St. Paul Bank for Cooperatives, including Exhibit 2.4
(form of $200 Million Promissory Note).
10.25 Employment Agreement dated June 1, 1998 between John D.
Johnson and Cenex Harvest States Cooperatives.
10.26 Employment Agreement dated June 1, 1998 between Noel K.
Estenson and Cenex Harvest States Cooperatives.
99 Cautionary Statement
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
Form 8-K filed June 10, 1998 regarding the merger of Harvest States
Cooperatives and Cenex, Inc.
Form 8-K/A filed August 13, 1998 to amend Item 7 of Form 8-K filed June 10,
1998. The filing includes financial information of Cenex, Inc. and
pro-forma financial information of Cenex Harvest States Cooperatives.
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.
CENEX HARVEST STATES COOPERATIVES
(Registrant)
October 14, 1998 /s/ T. F. Baker
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(Date) T. F. Baker
Executive Vice-President - Finance & Administration