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 November 30, 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
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 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
November 30, 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, August 31, 1998 and
November 30,1998 (unaudited)
Consolidated Statements of Operations for the three months ended
November 30, 1997 and 1998 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
November 30, 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, August 31, 1998 and November 30,
1998 (unaudited)
Statements of Operations for the three months ended November 30, 1997
and 1998 (unaudited)
Statements of Cash Flows for the three months ended November 30, 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, August 31, 1998 and November 30,
1998 (unaudited)
Statements of Operations for the three months ended November 30, 1997
and 1998 (unaudited)
Statements of Cash Flows for the three months ended November 30, 1997
and 1998 (unaudited)
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
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 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 may be 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 affect the demand for fertilizer, chemicals, and
petroleum products sold by the Company and used to produce crops. Demand may
also be affected by changes in eating habits, 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 Oilseed 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 March 1999 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 this Quarterly Report on Form 10-Q for the quarter ended November
30, 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, November 30,
1998 1998 1998
------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 83,531,702 $ 120,007,512 $ 58,401,934
Receivables 564,184,981 471,516,008 627,924,476
Inventories 523,019,559 479,733,645 514,391,984
Other current assets 36,996,360 37,707,348 29,499,780
------------------------------------------------------
Total current assets 1,207,732,602 1,108,964,513 1,230,218,174
OTHER ASSETS:
Investments 346,213,691 347,333,736 347,713,021
Other 96,484,985 97,033,824 113,362,667
------------------------------------------------------
Total other assets 442,698,676 444,367,560 461,075,688
PROPERTY PLANT AND EQUIPMENT 893,531,058 915,770,470 928,996,946
------------------------------------------------------
$2,543,962,336 $2,469,102,543 $2,620,290,808
======================================================
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable $ 53,500,000 $ 475,200 $ 30,000,000
Current portion of long-term debt 39,548,281 13,855,262 14,576,699
Patrons' credit balances 42,876,236 41,324,189 62,953,585
Patrons' advance payments 108,487,413 148,021,037 186,508,047
Drafts outstanding 33,568,876 26,366,742 23,645,763
Accounts payable 491,968,576 383,160,594 474,215,504
Book cash overdraft 49,314,034 28,375,131 42,194,614
Accrued expenses 100,497,352 119,372,451 98,099,102
Patronage dividends and equity retirements payable 60,019,000 63,562,331 46,886,792
------------------------------------------------------
Total current liabilities 979,779,768 824,512,937 979,080,106
LONG-TERM DEBT 375,199,523 442,985,378 437,671,623
OTHER LIABILITIES 72,113,175 75,800,972 78,332,745
MINORITY INTERESTS IN SUBSIDIARIES 58,603,489 59,926,302 57,322,780
COMMITMENTS AND CONTINGENCIES
EQUITIES 1,058,266,381 1,065,876,954 1,067,883,554
------------------------------------------------------
$2,543,962,336 $2,469,102,543 $2,620,290,808
======================================================
The accompanying notes are an integral part of the consolidated
financial statements (unaudited).
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
Three Months Ended
November 30,
--------------------------------------
1997 1998
REVENUES:
Net Sales:
Grain and oilseed $ 1,442,338,208 $ 1,057,871,031
Energy 471,335,899 329,867,814
Processed grain and oilseed 162,169,586 137,554,964
Feed and farm supplies 139,065,529 122,834,815
Agronomy 146,801,705 107,602,450
--------------------------------------
2,361,710,927 1,755,731,074
Patronage dividends 631,880 469,357
Other revenues 25,128,759 27,210,434
--------------------------------------
2,387,471,566 1,783,410,865
--------------------------------------
COSTS AND EXPENSES:
Cost of good sold 2,314,404,203 1,725,866,083
Marketing, general and administrative 36,107,228 39,081,058
Interest 8,687,118 9,549,782
Minority interests (861,575) (1,400,781)
--------------------------------------
2,358,336,974 1,773,096,142
--------------------------------------
INCOME BEFORE INCOME TAXES 29,134,592 10,314,723
INCOME TAXES 2,940,000 2,000,000
--------------------------------------
NET INCOME $ 26,194,592 $ 8,314,723
======================================
The accompanying notes are an integral part of the consolidated
financial statements (unaudited).
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the
Three Months Ended
November 30,
----------------------------------
1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,194,592 $ 8,314,723
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 18,460,537 19,975,365
Noncash net loss (income) from joint ventures 9,451,210 (4,668,652)
Noncash portion of patronage dividends received (11,454,941) (175,190)
Gain on sale of property, plant and
equipment (1,244,934) (797,237)
Adjustment of inventories to market value 11,765,947 10,742,134
Other 1,482,351
Changes in operating assets and liabilities:
Receivables (164,488,434) (159,199,197)
Inventories (73,681,250) (45,400,473)
Other current assets and other assets 3,681,011 (7,236,755)
Patrons' credit balances 23,629,368 21,629,396
Patrons' advance payments 111,184,357 38,487,010
Accounts payable and accrued expenses 20,250,197 69,781,561
Drafts outstanding and other liabilities (4,680,589) (189,205)
----------------------------------
Total adjustments (55,645,170) (57,051,243)
----------------------------------
Net cash used in operating
activities (29,450,578) (48,736,520)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (39,752,904) (33,814,814)
Proceeds from disposition of property, plant and
equipment 14,303,093 3,211,986
Investments (3,381,989) (2,217,110)
Investments redeemed 2,051,964 4,462,039
Changes in notes receivable 9,528,881 1,357,232
Other investing activities, net (1,130,514) (221,584)
----------------------------------
Net cash used in investing activities (18,381,469) (27,222,251)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable 80,857,253 29,524,800
Long-term debt borrowings 20,403,113 --
Principal payments on long-term debt (3,648,974) (4,628,252)
Changes in book cash overdraft 24,411,105 13,819,483
Retirements of equity (15,996,740) (9,271,026)
Cash patronage dividends paid (13,414,713) (15,091,812)
----------------------------------
Net cash provided by financing
activities 92,611,044 14,353,193
----------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 44,778,997 (61,605,578)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,003,524 120,007,512
----------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79,782,521 $ 58,401,934
==================================
The accompanying notes are an integral part of the consolidated
financial statements (unaudited).
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited consolidated statements of operations for the three-month period
ended November 30, 1997 and 1998, 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, NOVEMBER 30,
1998 1998 1998
------------- ------------- -------------
Trade .................................... $ 564,737,293 $ 474,454,204 $ 641,889,536
Other .................................... 23,634,824 20,376,362 9,096,550
------------- ------------- -------------
588,372,117 494,830,566 650,986,086
Less allowance for doubtful accounts .... (24,187,136) (23,314,558) (23,061,610)
------------- ------------- -------------
$ 564,184,981 $ 471,516,008 $ 627,924,476
============= ============= =============
NOTE 3. INVENTORIES
MAY 31, AUGUST 31, NOVEMBER 30,
1998 1998 1998
------------- ------------- -------------
Petroleum products ................... $ 208,055,542 $ 178,792,040 $ 171,861,863
Grain and oilseed .................... 148,381,119 153,384,301 158,404,149
Agronomy ............................. 82,167,871 80,029,854 76,842,755
Feed and farm supplies ............... 46,871,339 30,063,556 62,185,107
Processed grain and oilseed products . 37,543,688 37,463,894 45,098,110
------------- ------------- -------------
$ 523,019,559 $ 479,733,645 $ 514,391,984
============= ============= =============
NOTE 3. 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 November 30, 1997 and 1998, total comprehensive
income amounted to $0 and $1,400,731 respectively. Accumulated other
comprehensive income (loss) at May 31, 1998, August 31, 1998 and November 30,
1998 was $1,194,935, $(99,465) and $1,301,266, 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 (Harvest
States) 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).
This Combination has been accounted for as a pooling of interests and as a
result all comparative financial information has been restated to include the
financial statements of Cenex and Harvest States. In addition, the Company
changed its fiscal year to August 31, and is filing this Form 10-Q Report
representing the first quarter of the Company's new fiscal year.
Effective June 1, 1998 the Company adopted Statement of Accounting Standards
(SFAS) NO. 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 disclosure
relative to this Standard.
In June, 1997, the Financial Accounting Standards Board (FASB) issued SFAS
NO. 131, Disclosure 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 NO.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 NO. 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. The assessment phase of the project was completed shortly after
December 31, 1998, and it is anticipated 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 $2 million, of which approximately $500,000 was expended through November
30, 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.
On November 9, 1998, the Company and United Grain Corporation formed a
limited liability corporation (United Harvest, LLC) for the purpose of exporting
cereal grains off the west coast of the United States. Through the terms of the
limited liability corporation agreement, the Company will originate grain for
the limited liability corporation, and will lease its Kalama, Washington grain
terminal to United Harvest, LLC. United Grain Corporation shall lease its
Vancouver, Washington grain terminal to the limited liability corporation. The
Company has a 50% ownership interest in United Harvest, LLC.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
The Company's consolidated net income for the three months ended November 30,
1998 and 1997 were $8,300,000 and $26,200,000, respectively, which represents a
$17,900,000 (68%) decrease during the current three-month period. This decline
in profitability is primarily attributable to reduced gross margins in the
Energy Division and the Food Processing Defined Business Units of the Company.
In the Energy operations, gross margins on refined fuel decreased approximately
1.8 cents per gallon during the three months ended November 30, 1998, compared
with the same period of a year ago. Pretax operating results within the Energy
Division declined approximately $13,500,000 during the three months ended
November 30, 1998
compared with the same period in 1997. For the Wheat Milling Defined Business
Unit, gross margins declined 60 cents per hundred weight for all products, which
contributed to an overall decline in pretax operating income of approximately
$2,800,000. Within the Oilseed Processing and Refining Defined Business Unit,
gross margins for soymeal and other processed soybean products declined by $23
per ton, which was the primary factor in producing a decline of approximately
$6,100,000 in pretax operating results for that business unit, compared to the
same three-month period ended November 30, 1997. These diminished operating
results were partially offset by improved earnings within the grain operations
of the Company, where volumes were consistent with the prior year and at
slightly improved gross margins per bushel.
Consolidated net sales of $1,756,000,000 decreased $606,000,000 (26%) during
the three-month period ended November 30, 1998 compared to the same period ended
in 1997.
Grain volume of approximately 315 million bushels for the three-month period
ended November 30, 1998 was essentially unchanged compared to the same period in
1997. The average sales price for all grain and oilseeds marketed by the
Company, however, declined $1.28 per bushel, which was the primary factor in a
reduction in grain sales during the 1998 period of approximately $385,000,000
(27%).
Sales for energy products declined approximately $140,000,000 (30%) during
the three-month period ended November 30, 1998 compared with the same period in
1997. This was primarily the result of an 8% decline in refined fuel volume at
an average price that was 18 cents a gallon less than that of a year ago.
Wholesale agronomy product sales declined approximately $39,000,000 (27%)
during the three months ended November 30, 1998 compared to the same period in
1997, primarily the result of a 25% decrease in fertilizer volumes, and a 9%
decrease in the average per ton sales price of such product.
Processed grain and oilseed sales decreased approximately $24,600,000 (15%)
during the three months ended November 30, 1998 compared to the same period in
1997. This decrease is primarily attributable to a $91 per ton reduction in the
average sales price of soymeal, and a reduction of approximately $2.90 per
hundred-weight for milled wheat products.
Retail feed and farm supply sales declined approximately $16,200,000 (12%)
during the three-month period ended November 30, 1998 compared to the same
period in 1997. This decrease is primarily attributable to a 48,000 ton decline
in fertilizer volume, as well as somewhat lower prices for both animal feed and
fertilizer.
Cost of goods sold of $1,726,000,000 decreased approximately $590,000,000
(25%) during the three months ended November 30, 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 $18,000,000
(38%) during the three months ended November 30, 1998 compared with the same
period in 1997.
Patronage dividends received decreased approximately $160,000 (26%) during
the three months ended November 30, 1998 compared to the same period in 1997,
resulting from reduced patronage earnings distributed by cooperative customers
and suppliers.
Other revenues of $27,200,000 increased $2,100,000 (8%) for the three months
ended November 30, 1998 compared to the same period in 1997. Most of this
increase in other revenues during the three months ended November 30, 1998
compared to the same period in 1997 was generated within the country elevator
and retail supply outlets through expanded operations. In addition to this
increase in service revenues, interest income increased approximately $600,000
during the current period compared with the three months ended November 30,
1997. The Company's refinancing program, completed in June of 1998 in
anticipation of long-term capital requirements, produced at different times
during the current period temporary cash available for short-term investment.
Marketing, general, and administrative expenses of $39,100,000 for the three
months ended November 30, 1998 increased $3,000,000 (8%) compared to the same
three months ended in 1997. Approximately $1,900,000 of this increase is
one-time costs related to the consolidation of the business units pursuant to
the merger of Cenex and Harvest States Cooperatives. Approximately $1,500,000 of
the change are credits to expenses produced as a result of the divestiture of a
petroleum exploration project during the period ended November 30, 1997.
Interest expense of $9,500,000 increased $900,000 (10%) for the three months
ended November 30, 1998 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 mentioned 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 period ended November 30,
1998 decreased approximately $500,000 (63%) compared to the same period in 1997.
Substantially all of the minority interests is related to National Cooperative
Refinery Association (NCRA), which operates a refinery near McPherson, Kansas.
The Company owns approximately 75% of that operation. This change in minority
interest during the current period is reflective of less profitable operations
within the partially owned subsidiaries.
Income tax expense of $2,000,000 and $2,940,000 for the three-month periods
ended November 30, 1998 and 1997, respectively, resulted in effective tax rates
of 19.4% and 10.1%. This increase in the effective tax rate is the result of
proportionately greater earnings in the nonpatronage operations of the Company
in relationship to patronage sourced earnings.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $48.7 million and $29.5
million for the three months ended November 30, 1998 and 1997, respectively. For
the period ended in 1998, net income of $8.3 million and net non-cash income and
expenses of approximately $25.1 million were offset by increased working capital
requirements of approximately $82.1 million. For the three-month period ending
November 30, 1997, net income of $26.2 million and net non-cash income and
expenses of approximately $28.5 million were offset by increased working capital
requirements of approximately $84.1 million.
CASH FLOWS FROM INVESTING
Investing activities of the Company used net cash of $27.2 million during the
three-month period ended November 30, 1998. Expenditures for the acquisition of
property, plant and equipment of $33.8 million and additional investments in
joint ventures of $2.2 million were partially offset by proceeds from the
disposition of property, plant and equipment, proceeds from the redemption of
prior investments and collections on various notes receivable. The Company
projects total expenditures for the acquisition of property, plant and equipment
for the fiscal year ending August 31, 1999 to be approximately $196 million.
Investing activities of the Company used net cash of $18.4 million during the
three-month period ended November 30, 1997. Expenditures for the acquisition of
property, plant and equipment of $39.8 million and additional investments of
$3.4 million were partially offset by proceeds from the disposition of property,
plant and equipment, and proceeds from the redemption of prior investments and
notes receivable. The largest single source of cash partially offsetting capital
expenditures and investments was the proceeds of approximately $10.3 million
received as part of a sale-leaseback transaction for equipment within the
Oilseed Processing and Refining Defined Business Unit.
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 million and a five-year
revolving facility of $200 million, all of which is committed. In addition to
these credit lines, the Company has a 364-day credit facility dedicated to NCRA,
a subsidiary of which the Company owns 75%, with the St. Paul Bank for
Cooperatives in the amount of $52 million 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 November 30, 1998 the Company had total short-term indebtedness
on these various facilities totaling $30,000,000. On August 31, 1998 and May 31,
1998, respectively, the Company had $475,200 and $53,500,000 outstanding on
its short-term lines of credit. This increase in short-term borrowing is
primarily attributable to the seasonality of the grain harvest.
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 $373.8 million,
of which approximately $36 million 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 $279.6 million of the loan
balance, and borrowed $134 million on the new long-term facility with the banks
for cooperatives. This new facility commits $200 million of long-term borrowing
capacity to the Company, with repayments through the year 2009. The amount
outstanding on this credit agreement was $134 million with $66 million remaining
available on both August 31, 1998 and November 30, 1998. Regarding the $94.2
million of long-term indebtedness not included as part of the refinancing, $36.2
million was repaid during the three months ended August 31, 1998, and
approximately $1.7 million was repaid during the three months ended November 30,
1998 leaving an outstanding balance on separate facilities of $56.3 million,
with payments due through the year 2008.
Also in June 1998, as part of the refinancing program for the merged
operations, the Company entered into a private placement with several insurance
companies for long-term debt in the amount of $225 million. Repayments will be
made in equal installments of $37.5 million each in the years 2008 through 2013.
In addition, the Company had long-term indebtedness on May 31, 1998 and
August 31, 1998 and November 30, 1998, of $40.6 million and $39.5 million, and
$36.9 million, 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 income 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. The cash
portion of that distribution, deemed by the Board of Directors to be 80% for
Equity Participation Units and 30% for regular patronage is expected to be
approximately $29,000,000.
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 million, of which approximately $4.5 million was redeemed during the three
months ended August 31, 1998 and approximately $9.3 million was redeemed during
the three months ended November 30, 1998.
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, NOVEMBER 30,
1998 1998 1998
------------- ------------- -------------
(Audited) (Unaudited) (Unaudited)
CURRENT ASSETS:
Receivables $ 32,585,292 $ 28,703,118 $ 31,930,090
Inventories 23,758,625 18,569,191 23,783,906
Other current assets 185,399 240,110
------------- ------------- -------------
Total current assets 56,529,316 47,272,309 55,954,106
PROPERTY, PLANT AND EQUIPMENT 34,952,626 35,596,082 36,557,903
------------- ------------- -------------
$ 91,481,942 $ 82,868,391 $ 92,512,009
============= ============= =============
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives $ 22,890,878 $ 15,071,383 $ 24,110,693
Accounts payable 8,867,609 7,546,958 6,146,526
Accrued expenses 1,659,859 1,773,005 3,777,745
------------- ------------- -------------
Total current liabilities 33,418,346 24,391,346 34,034,964
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY 58,063,596 58,477,045 58,477,045
------------- ------------- -------------
$ 91,481,942 $ 82,868,391 $ 92,512,009
============= ============= =============
The accompanying notes are an integral part of the
financial statements (unaudited)
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
Three Months Ended
November 30,
------------
1997 1998
---- ----
REVENUES:
Processed oilseed sales $ 108,181,066 $ 95,461,986
Other revenues 212,119 4,301
---------------------------------
108,393,185 95,466,287
COSTS AND EXPENSES:
Cost of goods sold 95,871,302 88,972,834
Marketing, general and administrative 1,343,052 1,309,707
Interest 154,829 302,617
---------------------------------
97,369,183 90,585,158
---------------------------------
INCOME BEFORE INCOME TAXES 11,024,002 4,881,129
INCOME TAXES 125,000 80,000
---------------------------------
NET INCOME $ 10,899,002 $ 4,801,129
=================================
The accompanying notes are an integral part of the
financial statements (unaudited)
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the
Three Months Ended
November 30,
------------
1997 1998
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 10,899,002 $ 4,801,129
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 466,349 546,799
Gain on sale of property,
plant, and equipment (202,188)
Changes in operating assets and liabilities:
Receivables (8,474,711) (3,226,972)
Inventories (10,539,185) (5,214,715)
Other current assets 858,034 (240,110)
Accounts payable and accrued
expenses (2,018,324) 604,308
----------------------------------
Total adjustments (19,910,025) (7,530,690)
Net cash used in
operating activities (9,011,023) (2,729,561)
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property,
plant and equipment 10,266,854
Acquisition of property, plant and
equipment (3,241,903) (1,508,620)
----------------------------------
Net cash provided by (used in) investing activities 7,024,951 (1,508,620)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to Cenex Harvest
States Cooperatives 12,885,074 9,039,310
Defined business unit equity distributed (10,899,002) (4,801,129)
Net cash provided by
financing activities 1,986,072 4,238,181
----------------------------------
INCREASE (DECREASE) IN CASH -- --
CASH AT BEGINNING OF PERIOD -- --
----------------------------------
CASH AT END OF PERIOD -- --
==================================
The accompanying notes are an integral part of the
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 operations for the three-month period ended November
30, 1997 and 1998, 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, November 30,
1998 1998 1998
------------- ------------- -------------
Oilseed ..................... $ 6,925,703 $ 712,466 $ 11,779,896
Processed Oilseed Products .. 16,832,922 17,856,725 12,004,010
------------- ------------- -------------
$ 23,758,625 $ 18,569,191 $ 23,783,906
============= ============= =============
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 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 Report representing the first quarter of
the Company's new fiscal year.
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
NOVEMBER 30,
---------------------------------
1997 1998
---- ----
Pretax Income $ 11,024,002 $ 4,881,129
Earnings from purchased oil 113,344 (753,201)
Nonpatronage joint venture income
Book to tax differences
---------------------------------
Tax basis income $ 11,137,346 $ 4,127,928
=================================
Bushels Processed 9,253,464 8,065,367
Income per Bushel $ 1.204 $ 0.512
=================================
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
NOVEMBER 30,
---------------------------------
1997 1998
---- ----
Gross Margin percentage 11.38% 6.80%
Marketing, General and Administrative 1.24% 1.37%
Interest 0.14% 0.32%
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
The Oilseed Processing and Refining Defined Business Unit's net income of
$4,800,000 for the three months ended November 30, 1998 represents a $6,100,000
decrease (56%) compared to the same period in 1997. This decrease is primarily
attributable to lower gross margins for soymeal and other processed soybean
products. The average gross margin for such product declined approximately $23
per ton during the three months ended November 30, 1998 compared to the same
three-month period of a year ago.
Net sales of $95,500,000 for the three-month period ended November 30, 1998
decreased by $12,700,000 (12%) compared to the same period in 1997. A decline in
processing volume of approximately 27,800 tons, and a reduced sales price of
approximately $91 a ton for such products reduced sales by almost $24,000,000.
This decrease was partially offset by an increase of approximately 4.4 cents per
pound for refined oil products. Refining volume increased slightly in the 1998
period compared with 1997.
Other revenues declined $208,000 (98%) during the three months ended
November 30, 1998 compared to the same period in 1997. During the 1997 period,
the Defined Business Unit recognized gains on disposal of replaced equipment
sold at salvage value of approximately $200,000.
Cost of goods sold of $89,000,000 for the three months ended November 30,
1998 decreased $6,900,000 (7%) compared to the same period ended in 1997. During
the 1998 period, a decline in soybeans processed of approximately 1.2 million
bushels reduced such costs almost $8,000,000. A reduced cost per bushel for
soybeans of $1.33 per bushel during the three months ended November 30, 1998
compared to the same period in 1997 reduced cost of goods sold almost
$10,800,000. These reductions related to soybeans were partially offset by an
increase in the cost of crude soybean oil, as well as slightly increased
refining volumes.
Marketing, general and administrative expenses of $1,350,000 for the three
months ended November 30, 1998 was essentially unchanged from the same period in
1997.
Interest expense for the three months ended November 30, 1998 was $300,000,
compared with $150,000 of a year ago. This $150,000 increase is primarily
attributable to capital expenditures made since the 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The Oilseed Processing and Refining Defined Business Unit's cash requirements
result from capital improvements and the 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 November 30, 1998 used net
cash of $2,700,000. Net income of $4,800,000 and non-cash expenses of
approximately $500,000 were offset by increased working capital requirements of
$8,000,000 during this three-month period.
Operating activities for the three months ended November 30, 1997 used net
cash of $9,000,000. Net income of $10,900,000 and non-cash expenses and income
of approximately $300,000 were offset by increased working capital requirements
of $20,200,000 during this three-month period.
CASH FLOWS FROM INVESTING
The Oilseed Processing and Refining Defined Business Unit used cash of
$1,500,000 during the three months ended November 30, 1998 for the purchase of
property, plant and equipment.
During the three months ended November 30, 1997 the Oilseed Processing and
Refining Defined Business Unit received cash of approximately $10,267,000 for
the sale of soybean processing equipment and entered into a leaseback
transaction for that equipment. During that same period, the Defined Business
Unit expended approximately $3,200,000 for the purchase 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
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 $24,100,000 on November 30, 1998 compared
with $22,900,000 on May 31, 1998 and $15,100,000 on August 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.
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, NOVEMBER 30,
1998 1998 1998
------------- ------------- -------------
(Audited) (Unaudited) (Unaudited)
CURRENT ASSETS:
Receivables $ 35,757,497 $ 35,227,642 $ 31,661,558
Inventories 13,785,062 18,894,703 21,314,204
Other current assets 393,085 429,772 164,698
------------- ------------- -------------
Total current assets 49,935,644 54,552,117 53,140,460
INTANGIBLE ASSETS 10,747,876 10,481,216 10,214,536
PROPERTY, PLANT AND EQUIPMENT 85,627,365 97,428,175 106,157,196
------------- ------------- -------------
$ 146,310,885 $ 162,461,508 $ 169,512,192
============= ============= =============
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives $ 16,738,969 $ 33,238,263 $ 42,092,821
Accounts payable 8,836,220 11,003,048 11,202,844
Accrued expenses 1,568,445 1,666,761 2,101,841
Current portion of long-term debt 10,005,000 10,005,000 10,005,000
------------- ------------- -------------
Total current liabilities 37,148,634 55,913,072 65,402,506
LONG-TERM DEBT 41,204,270 38,515,520 36,076,770
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY 67,957,981 68,032,916 68,032,916
------------- ------------- -------------
$ 146,310,885 $ 162,461,508 $ 169,512,192
============= ============= =============
The accompanying notes are an integral part of the
financial statements (unaudited)
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
Three Months Ended
November 30,
------------
1997 1998
---- ----
REVENUES:
Processed grain sales $ 53,988,519 $ 42,092,978
Other revenues 83,527
---------------------------------
54,072,046 42,092,978
COSTS AND EXPENSES:
Cost of goods sold 49,211,588 40,030,589
Marketing, general and administrative 2,185,212 2,238,787
Interest 959,686 943,427
---------------------------------
52,356,486 43,212,803
---------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 1,715,560 (1,119,825)
INCOME TAXES 150,000 (100,000)
---------------------------------
NET INCOME (LOSS) $ 1,565,560 ($ 1,019,825)
=================================
The accompanying notes are an integral part of the
financial statements (unaudited)
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the
Three Months Ended
November 30,
------------
1997 1998
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 1,565,560 ($ 1,019,825)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization 919,792 1,265,298
Changes in operating assets and liabilities:
Receivables (5,347,514) 3,566,085
Inventories (3,960,608) (2,419,501)
Other current assets (188,150) 265,073
Accounts payable and accrued
expenses (1,380,158) 634,876
----------------------------------
Total adjustments (9,956,638) 3,311,831
----------------------------------
Net cash (used in) provided by operating
activities (8,390,078) 2,292,006
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment (4,214,677) (9,727,651)
----------------------------------
Net cash used in investing activities (4,214,677) (9,727,651)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to
Cenex Harvest States Cooperatives 16,610,065 8,854,570
Principal payments on long-term debt (2,438,750) (2,438,750)
Defined business unit equity distributed (1,566,560) 1,019,825
----------------------------------
Net cash provided by financing
activities 12,604,755 7,435,645
----------------------------------
INCREASE (DECREASE) IN CASH 0 0
CASH AT BEGINNING OF PERIOD -- --
----------------------------------
CASH AT END OF PERIOD -- --
==================================
The accompanying notes are an integral part of the
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 operations for the three-month period ended November
30, 1997 and 1998, 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. (Cenex) and Harvest States Cooperatives (Harvest
States) 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 end
to August 31, and is filing this Form 10-Q Report representing the first quarter
of the Company's new fiscal year.
Mr. Garry A. Pistoria, who has served as a group vice president responsible
for the operations of the Wheat Milling Defined Business Unit, retired as of
December 31, 1998. Mr. James Tibbetts, who had previously served as group vice
president of the Oilseed Processing and Refining Defined Business Unit, has
assumed responsibility for the Wheat Milling Defined Business Unit as part of
his current responsibilities for the Foods Group.
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
November 30,
------------
1997 1998
---- ----
Pretax Income (Loss) 1,716,560 (1,119,825)
Book to tax differences
---------- ----------
Tax basis income (loss) 1,716,560 (1,119,825)
Bushels Processed 7,924,825 8,304,327
Income (Loss) per bushel $ 0.22 ($ 0.13)
---------- ----------
Certain operating information pertaining to the Wheat Milling Defined
Business Unit is set forth below, as a percentage of sales.
Three Months Ended
November 30,
------------
1997 1998
---- ----
Gross Margin percentage 8.85% 4.90%
Marketing and Administrative 4.05% 5.32%
Interest 1.78% 2.24%
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
The Wheat Milling Defined Business Unit produced a net loss of $1,020,000 for
the three months ended November 30, 1998 compared to net income of $1,566,000
for the same period in 1997, for a decrease in net income of $2,600,000.
Approximately $1,000,000 of this decrease was created by a reduction in
production at the Huron mill, where the conversion of a semolina line to a hard
wheat bakery flour reduced volume 35% compared to the same period in 1997, with
essentially the same fixed costs applying against lower volume. While the
decrease in Huron volume was offset by increased production at the other mills,
a general deterioration in gross margins of approximately 60 cents per hundred
weight on all products produced the balance of the change in net income. The
Huron conversion estimated completion date is February 15, 1999.
Net sales for the three-month period ended November 30, 1998 of $42,100,000
decreased $11,900,000 (22%) compared to the same period in 1997. A reduced sales
price of $2.90 per hundred weight, partially offset by a 250,000 hundred weight
volume increase produced this decline in sales revenue.
Cost of goods sold of $40,000,000 for the three months ended November 30,
1998 decreased $9,200,000 (19%) compared to the same period in 1997. This
decrease was created primarily by a $1.60 per bushel decline in the cost of raw
material during the three months ended November 30, 1998, compared to that same
period in 1997. This price variance was partially offset by an increase in
volume of approximately 500,000 bushels, and by a $600,000 increase in plant
expense, $500,000 of which was incurred at the Houston mill. The Houston mill
was operating in a startup phase during this period in 1997.
Marketing, general and administrative expenses of $2,200,000 for the three
months ended November 30, 1998 were essentially unchanged compared to the same
period in 1997.
Interest expense of $950,000 during the three months ended November 30, 1998
was consistent with the same expense incurred during the three-month period
ended November 30, 1997.
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 costs and levels.
In September 1997, the Wheat Milling Defined Business Unit began construction
of a mill at Mount Pocono, Pennsylvania. As committed 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 $33,175,000 was expended through November 30, 1998. Projected completion
is for March 1999, although some phases are or will be in operation in January
and February 1999.
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. Construction is
projected to begin sometime during the year 2002.
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 November 30, 1998 provided
net cash of $2,300,000. Noncash expenses of $1,270,000 and a reduction in
working capital requirements of $2,050,000 offset the net operating loss of
$1,020,000.
For the three months ended November 30, 1997, operating activities used net
cash of $8,400,000. Net earnings of $1,570,000 and noncash expenses of $920,000
were offset by increased working capital requirements totaling approximately
$10,900,000.
CASH FLOWS FROM INVESTING
Cash expended for the acquisition of property, plant and equipment during the
three-month periods ended November 30, 1998 and 1997, respectively, totaled
approximately $9,700,000 and $4,200,000.
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 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 and cash requirements of all other Company operations.
Working capital requirements for each division of the Company are reviewed on
a periodic basis, and could potentially be restricted based upon availability of
funds.
Short-term debt outstanding and payable to the Company on November 30, 1998
was $42,100,000 compared to $33,300,000 and $16,700,000 on August 31, 1998 and
May 31, 1998, respectively. 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 November 30, 1998 the Wheat Milling Defined Business Unit had long-term
debt of $46,100,000 which was incurred for the acquisition, expansion and
construction of its various plants since 1990. The balance of such long-term
debt was $48,500,000 and $51,200,000 on August 31, 1998 and May 31, 1998
respectively. Approximately $10,000,000 of the current balance is payable within
the next twelve months.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
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10.27 Limited Liability Company Agreement of United Harvest, LLC
dated November 9, 1998 between United Grain Corporation and
Cenex Harvest States Cooperatives
99 Cautionary Statement
27.1 Financial Data Schedule (EDGAR filing only)
27.2 Restated Financial Data Schedule due to the merger of Harvest
States Cooperatives and Cenex Inc. accounted for as a pooling
of interests (EDGAR filing only)
(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.
CENEX HARVEST STATES COOPERATIVES
(Registrant)
/s/ T. F. Baker
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(Date) T. F. Baker
Executive Vice-President - Finance & Administration