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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 1999.
[ ] 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
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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
incorporation or organization) Identification Number)
5500 CENEX DRIVE, (651) 451-5151
INVER GROVE HEIGHTS, MN 55077 (Registrant's telephone number including
(Address of principal executive offices area code)
and zip code)
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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
May 31, 1999)
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INDEX
PAGE
NO.
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PART I. FINANCIAL INFORMATION
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of August 31, 1998 and May 31, 1998 and 1999 .......... 2
Consolidated Statements of Operations for the three and nine months ended May 31, 1998
and 1999 ............................................................................. 3
Consolidated Statements of Cash Flows for the three and nine months ended May 31, 1998
and 1999 ............................................................................. 4
Notes to Consolidated Financial Statements ........................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................................ 6
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of August 31, 1998, May 31, 1998 and May 31, 1999 (unaudited) ...... 14
Statements of Operations for the three and nine months ended May 31, 1998 and
1999 (unaudited) ..................................................................... 15
Statements of Cash Flows for the three and nine months ended May 31, 1998 and
1999 (unaudited) ..................................................................... 16
Notes to Financial Statements (unaudited) ............................................ 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................................ 18
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of August 31, 1998, May 31, 1998 and May 31, 1999 (unaudited) ...... 22
Statements of Operations for the three and nine months ended May 31, 1998 and
1999 (unaudited) ..................................................................... 23
Statements of Cash Flows for the three and nine months ended May 31, 1998 and
1999 (unaudited) ..................................................................... 24
Notes to Financial Statements (unaudited) ............................................ 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................................ 26
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable or answers
are negative ......................................................................... 30
Item 6. Exhibits and Reports on Form 8-K ............................................. 30
SIGNATURE PAGE ........................................................................ 31
i
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 the following:
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 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.
OILSEED PROCESSING AND REFINING BUSINESS COMPETITION. This 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 conversion
was operational in February 1999, and until the Wheat Milling Defined Business
Unit increases its share of the bakery flour market, profits will be negatively
impacted.
YEAR 2000. Although the Company's management believes that the Company has
in place an effective program to address the Year 2000 issue in a timely manner,
it also recognizes that failure to sufficiently resolve all aspects of the Year
2000 issue in a timely fashion presents substantial risks for the Company,
including disruption of normal business processes and additional costs or loss
of revenue. Considerable work remains to be accomplished and unforeseen
difficulties could arise which might adversely affect the Company's ability to
complete its program on schedule. Furthermore, there is no guarantee that the
systems of other companies on which this Company relies will be remediated in a
timely fashion to avoid having a material adverse affect on the Company's
operations or its financial results.
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 May 31, 1999.
1
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 120,008 $ 83,532 $ 44,760
Receivables ................................................ 471,516 564,185 678,963
Inventories ................................................ 479,734 523,019 513,815
Other current assets ....................................... 37,707 36,996 86,231
---------- ---------- ----------
Total current assets ...................................... 1,108,965 1,207,732 1,323,769
OTHER ASSETS:
Investments ................................................ 347,334 346,214 367,369
Other ...................................................... 97,034 96,485 114,423
---------- ---------- ----------
Total other assets ........................................ 444,368 442,699 481,792
PROPERTY, PLANT AND EQUIPMENT ............................... 915,770 893,531 956,068
---------- ---------- ----------
$2,469,103 $2,543,962 $2,761,629
========== ========== ==========
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .............................................. $ 475 $ 53,500 $ 170,000
Current portion of long-term debt .......................... 13,855 39,548 19,627
Patrons' credit balances ................................... 41,324 42,876 37,514
Patrons' advance payments .................................. 148,021 108,488 115,680
Drafts outstanding ......................................... 26,367 33,569 19,314
Accounts payable ........................................... 383,161 494,049 501,341
Book cash overdraft ........................................ 28,375 49,314 50,917
Accrued expenses ........................................... 119,373 98,417 103,226
Patronage dividends and equity retirements payable ......... 63,562 60,019 16,894
---------- ---------- ----------
Total current liabilities ................................. 824,513 979,780 1,034,513
LONG-TERM DEBT .............................................. 442,986 375,200 466,281
OTHER LIABILITIES ........................................... 75,801 72,113 80,326
MINORITY INTERESTS IN SUBSIDIARIES .......................... 59,926 58,603 62,256
COMMITMENTS AND CONTINGENCIES ...............................
EQUITIES .................................................... 1,065,877 1,058,266 1,118,253
---------- ---------- ----------
$2,469,103 $2,543,962 $2,761,629
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
2
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------------------------ --------------------------
1998 1999 1998 1999
--------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
REVENUES:
Net sales:
Grain and oilseed ............................ $ 824,878 $ 625,002 $3,617,773 $2,656,966
Energy ....................................... 336,905 323,590 1,151,196 908,224
Processed grain and oilseed .................. 157,619 137,548 484,279 409,358
Feed and farm supplies ....................... 202,340 176,145 414,330 383,679
Agronomy ..................................... 332,834 254,260 607,724 481,547
--------- --------- ---------- ----------
1,854,576 1,516,545 6,275,302 4,839,774
Patronage dividends ........................... 3,851 4,108 39,494 8,010
Other revenues ................................ 20,290 29,177 78,476 82,165
--------- --------- ---------- ----------
1,878,717 1,549,830 6,393,272 4,929,949
--------- --------- ---------- ----------
COSTS AND EXPENSES:
Cost of goods sold ............................ 1,763,633 1,447,824 6,127,149 4,714,477
Marketing, general and administrative ......... 43,329 43,111 109,182 119,381
Interest ...................................... 10,361 11,509 28,499 31,481
Minority interests ............................ 3,322 4,411 143 3,655
--------- --------- ---------- ----------
1,820,645 1,506,855 6,264,973 4,868,994
--------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES ..................... 58,072 42,975 128,299 60,955
INCOME TAX EXPENSE ............................. 5,840 4,340 13,865 5,375
--------- --------- ---------- ----------
NET INCOME ..................................... $ 52,232 $ 38,635 $ 114,434 $ 55,580
========= ========= ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
3
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
----------------------- ------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 52,232 $ 38,635 $ 114,434 $ 55,580
---------- ---------- ---------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ....................... 18,360 20,377 55,052 60,523
Noncash income from joint ventures .................. (12,716) (15,728) (6,670) (16,995)
Noncash portion of patronage dividends received ..... (1,681) (3,356) (32,830) (6,822)
Gain on sale of property, plant and equipment ....... (1,293) (314) (2,609) (1,635)
Adjustment of inventories to market value ........... 1,236 (14,946) 20,845 (10,117)
Other ............................................... (227) 3,593 (3,193) 2,603
Changes in operating assets and liabilities:
Receivables ........................................ 10,225 (136,791) (16,027) (207,880)
Inventories ........................................ (54,938) 7,450 (66,344) (23,964)
Other current assets and other assets .............. 103,029 38,265 17,457 (70,572)
Patrons' credit balances ........................... (78,755) (15,557) (2,313) (3,810)
Patrons' advance payments .......................... (77,027) (45,828) (45,520) (32,341)
Accounts payable and accrued expenses .............. 156,592 179,236 58,874 102,033
Drafts outstanding and other liabilities ........... 12,232 (719) 9,239 (2,517)
---------- ---------- ---------- ----------
Total adjustments ................................ 75,037 15,682 (14,039) (211,494)
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities ...................................... 127,269 54,317 100,395 (155,914)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment .......... (42,917) (23,782) (101,104) (94,725)
Proceeds from disposition of property, plant and
equipment ............................................ 3,061 1,496 19,559 6,348
Investments ........................................... 2,482 6,702 (5,746) (4,510)
Investments redeemed .................................. 11,367 3,707 15,335 9,131
Changes in notes receivable ........................... (7,102) (176) 1,802 2,475
Other investing activities, net ....................... (3,053) 18 (2,067) (47)
---------- ---------- ---------- ----------
Net cash used in investing activities ............ (36,162) (12,035) (72,221) (81,328)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable .............................. (110,020) (77,000) 24,731 169,525
Long-term debt borrowings ............................. 44,993 30,000 68,583 40,565
Principal payments on long-term debt .................. (7,029) (4,514) (20,080) (11,771)
Changes in book cash overdraft ........................ 38,818 14,923 28,783 22,542
Retirements of equity ................................. (20,144) (4,518) (39,158) (15,117)
Cash patronage dividends paid ......................... (29,117) (67) (42,505) (43,750)
---------- ---------- ---------- ----------
Net cash (used in) provided by financing
activities ...................................... (82,499) (41,176) 20,354 161,994
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ...................................... 8,608 1,106 48,528 (75,248)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ................................... 74,924 43,654 35,004 120,008
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD ............................................. $ 83,532 $ 44,760 $ 83,532 $ 44,760
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
4
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. ACCOUNTING POLICIES
The unaudited consolidated statements of operations and cash flows for the
three and nine months ended May 31, 1998 and 1999, 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 and cash flows for the interim periods. The results of operations and
cash flows for any interim period are not necessarily indicative of results for
the full year. The consolidated balance sheet data as of May 31, 1998 and August
31, 1998 were 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
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- ---------- ----------
Trade ........................................ $474,454 $564,737 $689,535
Other ........................................ 20,376 23,635 12,672
-------- -------- --------
494,830 588,372 702,207
Less allowance for doubtful accounts ......... 23,314 24,187 23,244
-------- -------- --------
$471,516 $564,185 $678,963
======== ======== ========
NOTE 3. INVENTORIES
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- ---------- ----------
Energy products .............................. $178,792 $208,055 $202,322
Grain and oilseed ............................ 171,099 166,925 135,463
Agronomy ..................................... 80,030 82,168 85,626
Feed and farm supplies ....................... 30,064 46,871 75,594
Processed grain and oilseed products ......... 19,749 19,000 14,810
-------- -------- --------
$479,734 $523,019 $513,815
======== ======== ========
NOTE 4. COMPREHENSIVE INCOME
As of June 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting of Comprehensive Income". 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 May 31, 1998 and 1999, total comprehensive
income amounted to $52,146 and $37,549 respectively. Total comprehensive income
was $114,348 and $55,810 for the nine months ended May 31, 1998 and 1999,
respectively. Accumulated other comprehensive (loss) income at August 31, 1998,
May 31, 1998 and May 31, 1999 was $(99), $1,195 and $130, respectively.
5
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 Harvest States and Cenex. In addition, the Company
changed its fiscal year to August 31, and is filing this Quarterly Report on
Form 10-Q representing the first nine months and third quarter of the Company's
new fiscal year.
In February 1999, the Company announced that it had entered into
discussions with Farmland Industries, Inc., a farm supply, grain marketing and
food processing cooperative headquartered in Kansas City, Missouri for the
purpose of exploring potential joint ventures in petroleum refining and grain
marketing. In May 1999, the Company and Farmland Industries, Inc. announced the
intention to work towards a merger of the two companies. This transaction is
subject to due diligence, development of a definitive merger agreement and a
favorable vote by the memberships of both companies.
In June 1999, the Cenex/Land O'Lakes Agronomy Company, of which the Company
owns 50%, purchased approximately 310 retail agronomy facilities from Terra
International, Inc. at a price of approximately $350 million. The Company
contributed capital of $55 million in cash to partially finance this
transaction. Financing arrangements for this business, to be managed by the
Cenex/Land O'Lakes Agronomy Company, are without recourse to the Company.
Thomas F. Baker, Executive Vice President of Finance and Administration and
Chief Financial Officer of the Company announced his retirement effective May
31, 1999. John Schmitz, previously Vice President, Finance has been appointed as
Senior Vice President and Chief Financial Officer effective June 1, 1999. Debra
Thornton, Senior Vice President and General Counsel, has assumed some additional
administrative duties effective June 1, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. In July 1999, the FASB issued SFAS No.
137 which defers the effective date of SFAS No. 133 to all fiscal quarters of
all fiscal years beginning after June 15, 2000. While management does not
believe this standard will materially impact the financial position and results
of operations of the Company, it is currently evaluating the reporting
requirements under this new standard.
YEAR 2000
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
6
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 reviewed the primary
internally-developed software programs used within the divisions and defined
business units comprising Harvest States 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 Company has completed the assessment
phase of the project, and has identified software deemed mission critical which
must be remediated or replaced. In addition to this corrective activity,
software previously remediated is currently under testing for Year 2000
compliance. The Company has also identified mission critical operations of the
Company which may depend upon embedded technology and has collected or is in the
process of collecting certification of Year 2000 compliance from equipment
manufacturers. It is anticipated that the remediation phase of the project for
mission critical systems will be substantially completed by August 31, 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 $1.3
million was expended through May 31, 1999.
The Company's management believes that the Company has in place an
effective program to address the Year 2000 issue in a timely manner and that it
is taking the steps reasonably necessary to resolve this issue with respect to
matters within its control. However, it also recognizes that failure to
sufficiently resolve all aspects of the Year 2000 issue in a timely fashion
presents substantial risks to the Company. Considerable work remains to be
accomplished and unforeseen difficulties could arise which might adversely
affect the Company's ability to complete its program on schedule. Furthermore,
while the Company has taken, and will continue to take, steps to determine the
extent of remediation efforts being undertaken by key customers and suppliers,
there is no guarantee that the systems of other companies on which this Company
relies will be remediated in a timely fashion to avoid having a material adverse
effect on the Company's operations or its financial results. Contingency plans
are being discussed, but have not been completed as of this time. Such plans
will be developed as the Company fully identifies those systems requiring
remediation and works toward completion of its remediation efforts.
RESULTS OF OPERATIONS
During the last 18 months there has been a decline in U.S. exports due to
the Asian monetary crisis which has resulted in lower grain prices. This in
turn, has affected the farmer producers' ability and willingness to purchase
crop inputs such as fertilizer, chemicals and petroleum products. In addition,
the increased production capacity of nitrogen fertilizer, flour and processed
oilseed products has depressed prices and gross margins for those products.
COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998
The Company's consolidated net income for the three months ended May 31,
1999 and 1998 was $38.6 million and $52.2 million, respectively, which
represents a $13.6 million (26%) decrease during the current three-month period.
This decrease for the quarter is related to the decline in income from wholesale
agronomy and food processing operations and an investment impairment, offset by
a patronage dividend received by the farm supply operations and increases in
income from grain operations and the Company's consumer products packaging joint
venture.
In wholesale agronomy operations timing differences resulted in the
recognition of chemical rebates for the three-month period in 1998 that were not
recognized in the current three-month period, resulting in a decrease in income
of $7.7 million. In addition, the gross margin for plant food declined $1.30 per
ton for the current quarter ended May 31, 1999 compared to the same period a
year ago.
Within the Wheat Milling Defined Business Unit reduced volume at the Huron
mill produced a $2.0 million dollar decrease in income for the three months
ended May 31, 1999. In addition, bad debt
7
expense of $1.1 million was recognized during the current quarter due to the
notification of bankruptcy received from two customers of which recovery is
unlikely. The balance of the decline in income for the quarter ended May 31,
1999 is primarily attributable to a decline in average gross margins of
approximately 33 cents per hundred-weight for all products. Within the Oilseed
Processing and Refining Defined Business Unit, the decrease in income is
primarily attributable to lower gross margins for soymeal and other processed
soybean products. The average gross margin for such products declined
approximately $12 per ton during the three months ended May 31, 1999 compared to
the same three-month period of a year ago.
During the three months ended May 31, 1999 the Company recorded an
impairment to its St. Paul Bank for Cooperatives investment in the amount of
$3.1 million due to losses incurred by the bank.
Income for the current three-month period included a patronage dividend
received by farm supply operations in the amount of $3.2 million dollars. In the
prior three-month period the patronage dividend was not received until the
following quarter.
Included in income from grain operations for the three months ended May 31,
1999 was a harbor maintenance tax refund of approximately $1.0 million which was
the result of a Supreme Court ruling that the tax was unconstitutional.
The Company's share of income from its consumer products packaging joint
venture increased approximately $6.5 million during the current three-month
period compared to the same period ended in 1998.
Net operating results produced by the Company's energy operations for the
three months ended May 31, 1999 were not significantly different in total from
the results produced during the same period ended a year ago.
Consolidated net sales of $1.5 billion decreased approximately $338 million
(18%) during the three-month period ended May 31, 1999 compared to the same
period ended in 1998.
The average sales price for all grain and oilseeds marketed by the Company
declined $.83 per bushel, which was the primary factor in a reduction in grain
sales during the 1999 period of approximately $200 million (24%). Grain volume
of approximately 231 million bushels for the three-month period ended May 31,
1999 was essentially unchanged compared to the same period in 1998.
Sales of energy products declined approximately $13 million (4%) during the
three-month period ended May 31, 1999 compared with the same period in 1998.
Although the average price for refined fuels was 8 cents per gallon higher
during the current three-month period than that of a year ago, the primary
reason for the decline was a 6% reduction in refined fuel volume.
Processed grain and oilseed sales decreased approximately $20 million (13%)
during the three months ended May 31, 1999 compared to the same period in 1998.
This decrease is primarily attributable to a $19 per ton reduction in the
average sales price of soymeal, a decline of approximately 6 cents per pound for
refined oil partially offset by a 12% increase in refining volume and a
reduction of approximately $2.85 per hundred-weight for milled wheat products
partially offset by an 829 thousand hundred-weight volume increase.
Sales of feed and farm supplies decreased approximately $26 million (13%)
for the three-month period ended May 31, 1999, and is primarily attributable to
a decline in volume of approximately 10% due to wet weather conditions during
the current quarter.
Wholesale agronomy product sales decreased $78.6 million (24%) during the
current three-month period ended May 31, 1999. This was primarily the result of
a 19% decline in plant food volume at an average price of approximately $22 per
ton less than that of a year ago.
Patronage dividends received increased $.3 million (7%) during the three
months ended May 31, 1999 compared to the same period in 1998. A patronage
dividend in the amount of $3.2 million was received during the current
three-month period, but a year ago it was received in the following quarter.
8
Offsetting this was a patronage dividend received from the St. Paul Bank for
Cooperatives in the three-month period ended May 31, 1998, but not in the
current three-month period due to the bank's losses.
Other revenues of $29.2 million increased $8.9 million (44%) for the three
months ended May 31, 1999 compared to the same period in 1998. While there were
some changes in revenue volumes among the recurring categories of divisional
service income, the primary reason for the change was an increase in the
Company's share of income from its consumer products packaging joint venture and
grain marketing joint ventures of approximately $6.5 million and $1.7 million,
respectively, during the current three-month period.
Cost of goods sold of $1.4 billion decreased approximately $316 million
(18%) during the three months ended May 31, 1999 compared to the same period in
1998. During the three months ended May 31, 1999, the average cost per bushel
for all grains and oilseeds procured by the Company through its grain marketing
and country elevator system decreased $1.12 compared to the same period ended in
1998. The average cost per gallon for refined fuels increased 1/2 a cent during
the three-month period ended May 31, 1999 compared to 1998. Within the Company's
food processing operations, the average cost for wheat declined $1.51 per
bushel, and the average cost for soybeans declined $1.50 per bushel, both
compared to purchases made during the same three-month period ended in the
previous year.
Marketing, general and administrative expenses of $43.1 million for the
three months ended May 31, 1999 decreased $0.2 million (1%) compared to the same
three months ended in 1998. During the three-month period ended in 1999, the
Company expended approximately $0.7 million as part of its Year 2000 computer
compliance program.
Interest expense of $11.5 million increased $1.1 million (11%) for the
three months ended May 31, 1999 compared to the same period in 1998. Long-term
borrowings since May 31, 1998 to finance the acquisition of property, plant and
equipment generated most of this additional expense.
Minority interests in operations for the three-month period ended May 31,
1999 increased approximately $1.1 million compared to the same period in 1998.
Substantially all of the minority interest is related to National Cooperative
Refinery Association (NCRA), which operates a refinery near McPherson, Kansas.
The Company owns approximately 75% of NCRA. This change in minority interests
during the current three-month period is reflective of more profitable
operations within the partially owned subsidiaries compared to the same period a
year ago.
Income tax expense of $4.3 million and $5.8 million for the three months
ended May 31, 1999 and 1998, respectively, resulted in an effective tax rate of
10.1% for both periods. Non-patronage income as a percentage of total income was
approximately the same for both periods.
COMPARISON OF NINE MONTHS ENDED MAY 31, 1999 AND 1998
The Company's consolidated net income for the nine months ended May 31,
1999 and 1998 was $55.6 million and $114.4 million, respectively, which
represents a $58.8 million (51%) decrease during the current nine-month period.
This decline in profitability is primarily attributable to the absence of an
agronomy product patronage refund of approximately $32.9 million which the
Company had received during the previous year's nine-month period, and depressed
gross margins in the Company's food processing and energy operations.
During the nine-month period ended May 31, 1998, the Company received a
patronage dividend of approximately $32.9 million on plant food purchases from
its primary supplier of such products. During the current nine-month period, the
Company did not receive a patronage dividend due to depressed earnings in that
particular industry.
Grain volume of approximately 830 million bushels was essentially unchanged
during the nine months ended May 31, 1999 when compared with the same period in
1998. The average sales price for all grain and oilseeds marketed by the
Company, however, declined $1.12 per bushel, which was the primary factor in a
reduction in grain and oilseed sales during the 1999 period of approximately
$961 million (27%).
9
Sales of energy products declined approximately $243 million (21%) during
the nine-month period ended May 31, 1999 compared with the same period in 1998.
This was primarily the result of an 8% decline in refined fuel volume at an
average price 10 cents per gallon less than that of a year ago.
Processed grain and oilseed sales decreased approximately $75 million (15%)
during the nine months ended May 31, 1999 compared to the same period in 1998.
This decrease is primarily attributable to a decline in processing volume of 43
thousand tons and a $63 per ton reduction in the average sales price of soymeal
in addition to a reduction of approximately $2.79 per hundred-weight for milled
wheat products partially offset by a 1.2 million hundred-weight volume increase.
Feed and farm supply sales of approximately $384 million decreased
approximately $31 million (7%) during the nine months ended May 31, 1999
compared to the same period in 1998. The decrease in the current nine-month
period is primarily attributable to a 10% decline in volume due to wet weather
conditions.
Wholesale agronomy product sales declined approximately $126 million (21%)
during the nine months ended May 31, 1999 compared to the same period in 1998.
This was primarily the result of a 15% decline in plant food volume at an
average price of $16 per ton less than that of a year ago.
Patronage dividends received decreased approximately $31.5 million (80%)
during the nine months ended May 31, 1999 compared to the same period in 1998.
This decline in patronage dividends was the primarily the result of reduced
earnings generated by the Company's primary fertilizer supplier.
Other revenues of $82.2 million increased $3.7 million (5%) for the nine
months ended May 31, 1999 compared to the same period in 1998. Increases in the
Company's share of income from its consumer products packaging joint venture and
grain marketing joint ventures of approximately $1.1 million and $2.0 million,
respectively, during the current nine-month period were the most significant
factors affecting this change.
Cost of goods sold of approximately $4.7 billion decreased approximately
$1.4 billion (23%) during the nine months ended May 31, 1999 compared to the
same period in 1998. During the nine months ended May 31, 1999, the average cost
per bushel for all grains and oilseed procured by the Company though it's grain
marketing and country elevator system decreased $1.12 compared to the same
period ended in 1998. The average cost per gallon for refined fuels decreased 9
cents during the nine-month period ended May 31, 1999 compared to 1998, in
addition to an 8% decline in volume for refined fuels. Fertilizer costs declined
an average of approximately $16 per ton, and volume for that product line
declined 15% compared to activity during the nine months ended May 31, 1998. In
the Company's food processing operations, the average cost of wheat and soybeans
declined $1.47 and $1.50 per bushel, respectively.
Marketing, general, and administrative expenses of $119.4 million increased
$10.2 million (9%) for the nine months ended May 31, 1999 compared to the same
period in 1998. Approximately $1.8 million of the increase is within the Wheat
Milling Defined Business Unit operations from the recognition of $1.1 million of
uncollectable accounts receivable and also increased costs at the new mill at
Mount Pocono. Within the energy operations approximately $3.0 million of this
increase is due to commission expense related to Country Energy, LLC, a 50/50
joint venture with Farmland Industries, Inc. that started operations in
September 1998. This commission expense includes marketing programs and expenses
which had previously been included in cost of goods sold. Approximately $1.5
million of the change is from credits to expenses produced as a result of the
divestiture of a petroleum exploration project during the nine-month period
ended May 31, 1998. During the nine-month period ended May 31, 1999, the Company
has recorded one-time costs related to the consolidation of the business units
pursuant to the merger of Cenex, Inc. and Harvest States Cooperatives of
approximately $1.9 million. In addition, the Company has expended approximately
$1.3 million during the nine-month period ended May 31, 1999 for the purpose of
assessing and remediating issues related to Year 2000 computer compliance.
Interest expense of $31.5 million increased $3.0 million (10%) during the
nine months ended May 31, 1999 compared to the same period in 1998. Long-term
borrowings since May 31, 1998 to finance the acquisition of property, plant and
equipment generated most of this additional expense.
10
Minority interests in operations for the nine-month period ended May 31,
1999 increased approximately $3.5 million compared to the same period in 1998.
Substantially all of the minority interest is in NCRA, which operates a refinery
near McPherson, Kansas. The Company owns approximately 75% of NCRA. This change
in minority interests during the current nine-month period is reflective of more
profitable operations within the partially owned subsidiaries compared to the
same period of a year ago.
Income tax expense of $5.4 million and $13.9 million for the nine months
ended May 31, 1999 and 1998, respectively, resulted in effective tax rates of
8.8% and 10.8%. The reduced 1999 effective tax rate is reflective of reduced
nonpatronage earnings in several operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company provided net cash of $54.3 million and
$127.3 million for the three months ended May 31, 1999 and 1998, respectively.
For the period ended in 1999, net income of $38.6 million and decreased working
capital requirements of approximately $26.1 million were offset by net non-cash
income and expenses of approximately $10.4 million. For the three-month period
ending May 31, 1998, net cash provided by operating activities comprised of net
income of $52.2 million, net non-cash income and expenses of approximately $3.7
million and decreased working capital requirements of approximately $71.4
million.
Operating activities of the Company used net cash of $155.9 million and
provided net cash of $100.4 million for the nine months ended May 31, 1999 and
1998, respectively. For the period ended in 1999, net income of $55.6 million
and net non-cash income and expenses of approximately $27.6 million were offset
by increased working capital requirements of approximately $239.1 million. For
the nine-month period ended May 31, 1998, net income of $114.4 million and net
non-cash income and expenses of $30.6 million were offset by increased working
capital requirements of approximately $44.6 million.
CASH FLOWS FROM INVESTING
Investing activities of the Company used net cash of $12.0 million during
the three-month period ended May 31, 1999. Expenditures for the acquisition of
property, plant and equipment of $23.8 million and the net changes in notes
receivable were partially offset by proceeds from the disposition of property,
plant and equipment, the net change in investments of $6.7 million and proceeds
from the redemption of prior investments. 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 $36.2 million during
the three-month period ended May 31, 1998. Expenditures for the acquisition of
property, plant and equipment of $42.9 million, and $7.1 million net changes in
notes receivable were partially offset by proceeds from the disposition of
property, plant and equipment, the net change in investments and proceeds from
the redemption of prior investments of $11.4 million.
Investing activities of the Company used net cash of $81.3 million during
the nine-month period ended May 31, 1999. Expenditures for the acquisition of
property, plant and equipment of $94.7 million and additional investments of
$4.5 million were partially offset by proceeds from the disposition of property,
plant and equipment of $6.3 million, proceeds from the redemption of prior
investments of $9.1 million and net changes of notes receivable.
Investing activities of the Company used net cash of $72.2 million during
the nine-month period ended May 31, 1998. Expenditures for the acquisition of
property, plant and equipment of $101.1 million and additional investments of
$5.7 million, were partially offset by proceeds from the disposition of
property, plant and equipment of $19.6 million, proceeds from the redemption of
prior investments of $15.3 million and net changes of notes receivable. The
single largest source of cash partially offsetting capital expenditures and
investments was the proceeds 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
11
of $400 million and a five-year revolving facility of $200 million, all of which
is committed. This facility was renewed as of May 31, 1999. 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 $0.75 million, all of
which is committed. On May 31, 1999 the Company had total short-term
indebtedness on these various facilities totaling $170 million. On August 31,
1998 and May 31, 1998, respectively, the Company had $0.5 million and $53.5
million outstanding on its short-term lines of credit. The increase in
short-term borrowings in the nine-month period ended May 31, 1999 is primarily
attributable to the cash grain activity and the payment of deferred grain
contracts after the beginning of the new tax year starting January 1999, and
also receivables related to crop inputs during the spring season.
The Company has financed its long-term capital needs in the past, 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 $36.0 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 facility committed $200 million of long-term borrowing
capacity to the Company, with repayments through the year 2009. On May 28, 1999,
the company borrowed an additional $30 million on this facility, which expired
on May 31, 1999. The amount outstanding on this credit agreement was $134
million on August 31, 1998 and $164 million on May 31, 1999.
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 August 31, 1998, May
31, 1998 and May 31, 1999, of $39.8 million, $41.0 million and $32.2 million,
respectively, in the form of Industrial Revenue Bonds, capitalized leases and
other notes and contracts.
The Company incurred additional long-term debt of $30.0 million during the
three months ended May 31, 1999. During that same period, the Company repaid
long-term debt totaling approximately $4.5 million. During the three months
ended May 31, 1998 the Company incurred additional long-term debt of $45.0
million, and repaid $7.0 million of long-term debt.
During the nine-month periods ended May 31, 1999 and 1998, the Company
incurred additional long-term debt of $40.6 million and $68.6 million,
respectively. Repayments of long-term debt totaled $11.8 million and $20.1
million during the nine months ended May 31, 1999 and 1998, respectively.
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 $15.1 million. In January 1999, the Company
distributed the patronage income generated by the former Cenex portion of the
business for the period ended May 31, 1998, and the patronage income resulting
from the combined operations of the Company for the three months ended August
31, 1998. The cash portion of that distribution, deemed by the Board of
Directors to be 80% for Equity Participation Units and 30% for regular
patronage, was approximately $28.6 million.
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
12
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 $24.3 million, of which approximately $4.5 million
was redeemed during the three months ended August 31, 1998. Redemptions made
during the three months ended May 31, 1999 and 1998 were approximately $4.5
million and $20.1 million, respectively. During the nine months ended May 31,
1999 and 1998, respectively, the Company redeemed approximately $15.1 million
and $39.2 million of equity.
EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS
The Company believes that inflation and foreign currency fluctuations have
not had a significant effect on its operations.
13
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
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- --------- ---------
(DOLLARS IN THOUSANDS) (UNAUDITED)
CURRENT ASSETS:
Receivables ...................................... $28,703 $32,585 $28,915
Inventories ...................................... 18,569 23,759 17,221
Other current assets ............................. 185
------- ------- -------
Total current assets ............................ 47,272 56,529 46,136
PROPERTY, PLANT AND EQUIPMENT ..................... 35,596 34,953 38,345
------- ------- -------
$82,868 $91,482 $84,481
======= ======= =======
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $15,071 $22,890 $17,270
Accounts payable ................................. 7,547 8,868 4,478
Accrued expenses ................................. 1,773 1,660 4,256
------- ------- -------
Total current liabilities ....................... 24,391 33,418 26,004
COMMITMENTS AND CONTINGENCIES .....................
DEFINED BUSINESS UNIT EQUITY ...................... 58,477 58,064 58,477
------- ------- -------
$82,868 $91,482 $84,481
======= ======= =======
The accompanying notes are an integral part of the financial statements
(unaudited)
14
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
--------------------- ----------------------
1998 1999 1998 1999
-------- ------- -------- --------
(DOLLARS IN THOUSANDS)
REVENUES:
Processed oilseed sales ....................... $105,412 $93,021 $324,037 $279,794
Other revenues ................................ 41 160 542 232
-------- ------- -------- --------
105,453 93,181 324,579 280,026
-------- ------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 98,544 88,801 296,811 265,688
Marketing, general and administrative ......... 848 1,435 3,482 4,084
Interest ...................................... 70 100 371 694
-------- ------- -------- --------
99,462 90,336 300,664 270,466
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES ..................... 5,991 2,845 23,915 9,560
INCOME TAX EXPENSE ............................. 925 50 1,150 325
-------- ------- -------- --------
NET INCOME ..................................... $ 5,066 $ 2,795 $ 22,765 $ 9,235
======== ======= ======== ========
The accompanying notes are an integral part of the financial statements
(unaudited)
15
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
---------------------- -----------------------
1998 1999 1998 1999
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 5,066 $ 2,795 $ 22,765 $ 9,235
--------- -------- --------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .............................................. 616 388 1,549 1,500
Gain on disposal of property, plant and equipment ......... (202)
Changes in operating assets and liabilities:
Receivables .............................................. (1,258) 318 (5,349) (212)
Inventories .............................................. 6,626 9,210 (15,161) 1,348
Other current assets ..................................... 373 2,504
Accounts payable and accrued expenses .................... 1,363 (4,947) (130) (586)
--------- -------- --------- --------
Total adjustments ...................................... 7,720 4,969 (16,789) 2,050
--------- -------- --------- --------
Net cash provided by operating activities .............. 12,786 7,764 5,976 11,285
--------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ................ (1,255) (752) (5,726) (4,252)
Proceeds from disposition of property, plant and
equipment .................................................. 10,267 3
--------- -------- --------- --------
Net cash (used in) provided by
investing activities .................................. (1,255) (752) 4,541 (4,249)
--------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to Cenex Harvest States Cooperatives .......... (11,138) (4,217) 7,575 2,199
Defined business unit equity distributed .................... (393) (2,795) (18,092) (9,235)
--------- -------- --------- --------
Net cash used in financing activities .................. (11,531) (7,012) (10,517) (7,036)
--------- -------- --------- --------
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)
16
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 and cash flows for the three and
nine months ended May 31, 1998 and 1999, 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 and cash
flows for the interim periods. The results of operations and cash flows for any
interim period are not necessarily indicative of results for the full year. The
balance sheet data as of May 31, 1998 and August 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 Oilseed Processing and Refining Defined
Business Unit financial statements for the year ended May 31, 1998, and for the
three months ended August 31, 1998, which are included in the Cenex Harvest
States Cooperatives Report on Form 10-K and Transition Report on Form 10-Q
previously filed with the Securities and Exchange Commission on August 27, 1998
and October 14, 1998, respectively.
NOTE 2. RECEIVABLES
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- --------- ---------
(DOLLARS IN THOUSANDS)
Trade ........................................ $29,098 $32,980 $29,310
Less allowance for doubtful accounts ......... 395 395 395
------- ------- -------
$28,703 $32,585 $28,915
======= ======= =======
NOTE 3. INVENTORIES
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- --------- ---------
(DOLLARS IN THOUSANDS)
Oilseed ...................................... $ 712 $ 6,926 $ 5,418
Processed oilseed products ................... 17,857 16,833 11,803
------- ------- -------
$18,569 $23,759 $17,221
======= ======= =======
17
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).
In addition, the Company changed its fiscal year end to August 31, and is
filing this Quarterly Report on Form 10-Q representing the first nine months and
third quarter of the Company's new fiscal year.
See management's discussion for the Company in regard to new accounting
pronouncements and also the Year 2000.
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 NINE MONTHS ENDED
MAY 31, MAY 31,
--------------------- -----------------------
1998 1999 1998 1999
--------- --------- ---------- ----------
(IN THOUSANDS EXCEPT PER BUSHEL INFORMATION)
Income before income taxes ............... $5,991 $2,845 $ 23,915 $ 9,560
Income from purchased oil ................ (583) (523) (1,336) (1,396)
Book to tax differences .................. (384) 1 (384) 5
------ ------ -------- --------
Taxable income ........................... $5,024 $2,323 $ 22,195 $ 8,169
------ ------ -------- --------
Bushels processed ........................ 8,917 9,166 28,019 26,784
Income per bushel ........................ $ 0.56 $ 0.25 $ 0.79 $ 0.30
------ ------ -------- --------
Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of processed
oilseed sales.
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
---------------------- ----------------------
1998 1999 1998 1999
---------- --------- ---------- ---------
Gross margin ............................. 6.52% 4.54% 8.40% 5.04%
Marketing, general and administrative .... 0.80% 1.54% 1.07% 1.46%
Interest ................................. 0.07% 0.11% 0.11% 0.25%
COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998
The Oilseed Processing and Refining Defined Business Unit net income of
$2.8 million for the three months ended May 31, 1999 represents a $2.3 million
decrease (45%) compared to the same period in 1998. This decrease is primarily
attributable to lower gross margins for soymeal and other processed soybean
products. The average gross margin for such products declined approximately $12
per ton during the three months ended May 31, 1999 compared to the same
three-month period of a year ago.
Processed oilseed sales of $93.0 million for the three-month period ended
May 31, 1999 decreased by $12.4 million (12%) compared to the same period in
1998. A reduction in the sale price for processed soybean products, primarily
soymeal, of approximately $19 per ton and a decline of about $.06 per pound for
refined oil, partially offset by a 12% increase in refining volume produced this
change in sales dollars.
Other revenues increased $0.1 million during the three months ended May 31,
1999 compared to the same period in 1998. During the 1999 period, the Defined
Business Unit received a patronage refund from a cooperative soymeal customer
totaling approximately $0.1 million, accounting for most of this increase.
18
Cost of goods sold of $88.8 million for the three months ended May 31, 1999
decreased $9.7 million (10%) compared to the same period in 1998. A reduced cost
for soybeans of $1.28 per bushel during the three months ended May 31, 1999
compared to the same period in 1998 reduced cost of goods sold by approximately
$11.8 million. This price variance was partially offset by a 3% increase in
crush volume compared to the same three months of a year ago, which had the
affect of increasing cost by approximately $1.6 million. A decline in the price
of crude soybean oil of approximately $.06 per pound was almost entirely offset
by an increase in volume refined during the three month period of 1999 compared
with the same three month period ended on May 31, 1998.
Marketing, general and administrative expenses of $1.4 million for the
three months ended May 31, 1999 increased approximately $0.6 million (69%)
compared to the same period ended in 1998. Most of this change is attributable
to adjustments to expense accruals during the 1998 period. Prior to the Harvest
States Cooperative's merger with Cenex, Inc. on June 1, 1998, the Defined
Business Unit operated on a May 31 fiscal year end. For year-end closing,
various expenses were adjusted from estimated accruals to accruals that were
calculated based upon actuarial or other more precise measurements.
Interest expense for the three months ended May 31, 1999 was $0.1 million,
compared with approximately $0.07 million for the same period of a year ago.
This increase is primarily attributable to capital expenditures made since the
1998 period.
Income tax expense of $0.05 million and $0.9 million for the three-month
periods ended May 31, 1999 and 1998, respectively, resulted in effective tax
rates of 1.8% and 15.4%. The significantly higher effective tax rate during the
1998 period recognized actual non patronage soybean purchases, as recorded for
the patronage distribution, exceeding the volume projected for the tax provision
of the prior quarters.
COMPARISON OF NINE MONTHS ENDED MAY 31, 1999 AND 1998
The Oilseed Processing and Refining Defined Business Unit's net income of
$9.2 million for the nine months ended May 31, 1999 represents a $13.5 million
decrease (59%) compared to the same period in 1998. This decrease is
attributable to reduced gross margins for both soymeal and other processed
soybean products. The average gross margin for such products declined
approximately $18 per ton during the nine months ended May 31, 1999 compared to
the same nine-month period of a year ago.
Processed oilseed sales of $279.8 million for the nine-month period ended
May 31, 1999 decreased $44.2 million (14%) compared to the same period in 1998.
A decline in processing volumes of approximately 43,000 tons, a reduction in
sales price of approximately $63 per ton for such products and a decrease in the
average sales price for refined oil of approximately $.01 per pound was
partially offset by a 6% increase in refining volumes.
Other revenues declined $0.3 million (57%) during the nine months ended May
31, 1999 compared to the same period in 1998. During the 1998 period, the
Oilseed Processing and Refining Defined Business Unit recognized gains on
disposal of replaced equipment sold at salvage value of approximately $0.2
million, and also received insurance proceeds related to a business interruption
claim of approximately $0.3 million. During the 1999 period the Oilseed
Processing and Refining Defined Business Unit received a patronage refund from a
cooperative soymeal customer totaling $0.1 million.
Cost of goods sold of $265.7 million for the nine months ended May 31, 1999
decreased $31.1 million (10%) compared to same period ended in 1998. During the
1999 period, a decline in soybeans processed of approximately 1.2 million
bushels reduced such costs almost $8.1 million. A reduced cost for soybeans of
$1.50 per bushel during the nine months ended May 31, 1999 compared to the same
period in 1998 resulted in a decline cost of goods sold by approximately $40.3
million. These reductions were partially offset by a 1.1 cent per pound increase
in the cost of crude soybean oil, as well as by a 13% increase in crude soybean
oil purchases.
Marketing, general, and administrative expenses of $4.1 million for the
nine months ended May 31, 1999 increased approximately $0.6 million (17%) during
the nine months ended May 31, 1999 compared to the same period in 1998. Most of
this change is attributable to adjustments of expense accruals during the period
ended on May 31, 1998.
19
Interest expense for the nine months ended May 31, 1999 was $0.7 million
compared with $0.4 million for the same period of a year ago. This increase of
$0.3 million (87%) is primarily attributable to capital expenditures made since
the 1998 period.
Income tax expense of $0.3 million and $1.2 million for the nine-month
periods ended May 31, 1999 and 1998, respectively, resulted in effective tax
rates of 3.4% and 4.8%. The decrease in the effective tax rate in the 1999
period is the result of reduced non-patronage earnings as a percentage of total
earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Oilseed Processing and Refining Defined Business Unit's cash
requirements relate primarily to capital improvements and a need to finance
additional inventories and receivables based on increased raw material costs and
levels. These cash needs are expected to be fulfilled by the Company.
CASH FLOWS FROM OPERATIONS
Operating activities for the three months ended May 31, 1999 provided net
cash of $7.8 million. Net income of $2.8 million, non-cash expenses of $0.4
million and a reduction in working capital requirements of $4.6 million
generated this net cash. For the same three-month period of a year ago, net
income of $5.1 million, non-cash expenses of approximately $0.6 million and
decreased working capital requirements of approximately $7.1 million provided
net cash of approximately $12.8 million.
Operating activities for the nine months ended May 31, 1999 provided net
cash of $11.3 million. Net income of $9.2 million, non-cash expenses of $1.5
million and decreased working capital requirements of approximately $0.6 million
generated this net cash from operating activities. For the same nine-month
period a year ago, net income of $22.8 million and non-cash expenses and income
of approximately $1.3 million were offset by increased working capital
requirements totaling approximately $18.1 million, thereby providing net cash
from operating activities of $6.0 million.
CASH FLOWS FROM INVESTING
The Oilseed Processing and Refining Defined Business Unit used cash of
approximately $0.8 million and $1.3 million during the three-month periods ended
May 31, 1999 and 1998, respectively, for the acquisition of property, plant and
equipment.
During the nine-month period ended May 31, 1999, the Oilseed Processing and
Refining Defined Business Unit used approximately $4.3 million for the
acquisition of property, plant and equipment. During the nine-months ended May
31, 1998, the Oilseed Processing and Refining Defined Business Unit received
cash of approximately $10.3 million from the sale of soybean processing
equipment and entered into a sale / leaseback transaction for such equipment.
During the same period, the Oilseed Processing and Refining Defined Business
Unit expended approximately $5.7 million for the purchase of property, plant and
equipment.
Total expenditures for the acquisition of property, plant and equipment for
the fiscal year ending August 31, 1999 are projected to be approximately $6.3
million.
CASH FLOWS FROM FINANCING
The Oilseed Processing and Refining 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
Oilseed Processing and Refining 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 $17.3 million as of May 31, 1999 compared with
$15.1 million as of August 31, 1998 and $22.9 million as of May 31, 1998. These
interest bearing balances reflect working capital and fixed asset financing
requirements.
20
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 $60.0 million and $90.0 million. The precise configuration and size
of the facility has yet to be determined. Since that announcement, the Company
has acquired the plant site at a cost of approximately $1.3 million with
construction tentatively scheduled to begin in the year 2001. The new facility
may be financed with debt, open membership equity, additional equity
participation units, or a combination of these financing alternatives.
21
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
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- ---------- ---------
(DOLLARS IN THOUSANDS) (UNAUDITED)
CURRENT ASSETS:
Receivables ...................................... $ 35,228 $ 35,757 $ 32,579
Inventories ...................................... 18,895 13,785 15,910
Other current assets ............................. 430 394 93
-------- -------- --------
Total current assets ............................ 54,553 49,936 48,582
INTANGIBLE ASSETS ................................. 10,481 10,748 9,681
PROPERTY, PLANT AND EQUIPMENT ..................... 97,428 85,627 111,254
-------- -------- --------
$162,462 $146,311 $169,517
======== ======== ========
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $ 33,238 $ 16,739 $ 45,597
Accounts payable ................................. 11,003 8,836 12,236
Accrued expenses ................................. 1,667 1,569 2,447
Current portion of long-term debt ................ 10,005 10,005 10,005
-------- -------- --------
Total current liabilities ....................... 55,913 37,149 70,285
LONG-TERM DEBT .................................... 38,516 41,204 31,199
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY ...................... 68,033 67,958 68,033
-------- -------- --------
$162,462 $146,311 $169,517
======== ======== ========
The accompanying notes are an integral part of the financial statements
(unaudited)
22
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------------------------ ------------------------
1998 1999 1998 1999
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
REVENUES:
Processed grain sales ......................... $52,825 $44,528 $160,861 $129,565
Other revenues ................................ 1,451 1,533
------- ------- -------- --------
54,276 44,528 162,394 129,565
------- ------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 50,079 43,356 149,044 125,193
Marketing, general and administrative ......... 2,042 3,580 6,430 8,259
Interest ...................................... 225 1,522 2,043 3,601
Other ......................................... 162 162
------- ------- -------- --------
52,508 48,458 157,679 137,053
------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES ......................................... 1,768 (3,930) 4,715 (7,488)
INCOME TAX EXPENSE (BENEFIT) ................... 100 (325) 350 (600)
------- ------- -------- --------
NET INCOME (LOSS) .............................. $ 1,668 ($ 3,605) $ 4,365 ($ 6,888)
======= ======= ======== ========
The accompanying notes are an integral part of the financial statements
(unaudited)
23
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
-------------------------- -------------------------
1998 1999 1998 1999
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 1,668 ($ 3,605) $ 4,365 ($ 6,888)
-------- ------- --------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................ 1,056 1,528 3,499 4,146
Loss on impairment ....................................... 162 162
Changes in operating assets and liabilities:
Receivables ............................................. (1,271) 186 2,522 2,649
Inventories ............................................. 1,698 7,227 (235) 2,985
Other current assets .................................... (61) 72 (89) 337
Accounts payable and accrued expenses ................... (938) (842) (7,464) 2,013
-------- ------- --------- --------
Total adjustments ..................................... 646 8,171 (1,605) 12,130
-------- ------- --------- --------
Net cash provided by operating activities ............. 2,314 4,566 2,760 5,242
-------- ------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ............... (9,107) (1,937) (18,017) (17,172)
-------- ------- --------- --------
Net cash used in investing activities ................. (9,107) (1,937) (18,017) (17,172)
-------- ------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to Cenex Harvest States Cooperatives ......... 9,540 (3,795) 25,578 12,359
Principal payments on long-term debt ....................... (2,439) (2,439) (7,316) (7,317)
Defined business unit equity distributed ................... (308) 3,605 (3,005) 6,888
-------- ------- --------- --------
Net cash provided by (used in)
financing activities ................................. 6,793 (2,629) 15,257 11,930
-------- ------- --------- --------
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)
24
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 and cash flows for the three and
nine months ended May 31, 1998 and 1999, 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 and cash
flows for the interim periods. The results of operations and cash flows for any
interim period are not necessarily indicative of results for the full year. The
balance sheet data as of May 31, 1998 and August 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 Wheat Milling Defined Business Unit
financial statements for the year ended May 31, 1998, and for the three months
ended August 31, 1998, which are included in the Cenex Harvest States
Cooperatives Report on Form 10-K and Transition Report on Form 10-Q previously
filed with the Securities and Exchange Commission on August 27, 1998 and October
14, 1998, respectively.
NOTE 2. RECEIVABLES
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- --------- ---------
(DOLLARS IN THOUSANDS)
Trade ........................................ $34,825 $35,703 $33,471
Other ........................................ 1,074 738 1,088
------- ------- -------
35,899 36,441 34,559
Less allowance for doubtful accounts ......... 671 684 1,980
------- ------- -------
$35,228 $35,757 $32,579
======= ======= =======
NOTE 3. INVENTORIES
AUGUST 31, MAY 31, MAY 31,
1998 1998 1999
---------- --------- ---------
(DOLLARS IN THOUSANDS)
Grain ........................................ $17,003 $11,618 $12,903
Processed grain products ..................... 1,270 1,395 2,114
Other ........................................ 622 772 893
------- ------- -------
$18,895 $13,785 $15,910
======= ======= =======
25
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).
In addition, the Company changed its fiscal year end to August 31, and is
filing this Quarterly Report on Form 10-Q representing the first nine months and
third quarter of the Company's new fiscal year.
See management's discussion for the Company in regard to new accounting
pronouncements and also the Year 2000.
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.
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
-------------------------- -------------------------
1998 1999 1998 1999
----------- ----------- ---------- -----------
(IN THOUSANDS EXCEPT PER BUSHEL INFORMATION)
Income (loss) before income taxes ............. $ 1,768 $ (3,930) $ 4,715 $ (7,488)
Book to tax differences ....................... 689 96 689 289
------- -------- -------- --------
Taxable income (loss) ......................... $ 2,457 $ (3,834) $ 5,404 $ (7,199)
======= ======== ======== ========
Bushels processed ............................. 8,446 9,719 24,264 26,278
Income (loss) per bushel ...................... $ 0.29 $ (0.39) $ 0.22 $ (0.27)
======= ======== ======== ========
Certain operating information pertaining to the Wheat Milling Defined
Business Unit is set forth below, as a percentage of processed grain sales.
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
Gross margin .................................. 5.20% 2.63% 7.35% 3.37%
Marketing, general and administrative ......... 3.87% 8.04% 4.00% 6.37%
Interest ...................................... 0.43% 3.42% 1.27% 2.78%
COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998
The Wheat Milling Defined Business Unit incurred a net loss of $3.6 million
for the three months ended May 31, 1999 compared to net income of $1.7 million
for the same period in 1998, for a decrease of $5.3 million. Approximately $2.0
million of this decrease was due to a volume reduction at the Huron mill. In
June 1998, the Wheat Milling Defined Business Unit began a conversion at the
Huron mill of a semolina flour line to hard wheat bakery flour. During February
1999, production of bakery flour commenced at Huron and the Wheat Milling
Defined Business Unit has attempted to grow its share of the bakery flour market
in that region. Despite those efforts, volume from the Huron mill during the
three months ended May 31, 1999 declined 25% compared to the same period of a
year ago, with essentially the same fixed costs applied against the lower
volume. In addition, during the three-month period ended May 31, 1999, the Wheat
Milling Defined Business Unit received notification that two customers, with
outstanding accounts receivable balances totaling approximately $1.1 million,
had filed for bankruptcy. It is management's assessment that any recovery of
this amount is unlikely, and therefore recognized a bad debt expense for the
full amount due during the quarter ended May 31, 1999. The
26
balance of the decline in income is primarily attributable to a decline in
average gross margins of approximately $0.33 per hundred-weight for all
products, and increased marketing, administrative and interest expense.
Processed grain sales for the three-month period ended May 31, 1999 of
$44.5 million decreased $8.3 million (16%) compared to the same period in 1998.
A reduction in the average sales price of $2.85 per hundred weight, partially
offset by a 829,000 hundred weight volume increase resulted in the decline in
sales revenue.
Cost of goods sold of $43.4 million for the three months ended May 31, 1999
decreased $6.7 million (13%) compared to the same period in 1998. This decrease
was due primarily to a $1.51 per bushel decline in the cost of raw material
during the three months ended May 31, 1999, compared to that same period in
1998. This price variance was partially offset by an increase in volume of
approximately 1.2 million bushels. The mill expense component of cost of goods
sold increased approximately $1.6 million, of which approximately $1.0 million
was incurred at the Mount Pocono mill, which commenced operations in January
1999.
Marketing, general and administrative expenses of $3.6 million for the
three months ended May 31, 1999 increased approximately $1.5 million (75%)
compared to the same period in 1998. $1.1 million of this increase is
attributable to the loss recognized on uncollectable accounts receivable.
Interest expense of $1.5 million during the three months ended May 31, 1999
increased $1.3 million compared to the same period in 1998. During the
three-month period ended May 31, 1998, the Wheat Milling Defined Business Unit
received credit for cooperative bank patronage refunds received by Cenex Harvest
States attributable to the Wheat Milling Defined Business Unit's borrowing which
totaled approximately $0.6 million. The comparable amount received during the
three months ended May 31, 1999 was $0.1 million. On June 1, 1997, the Company
contributed $38.8 million of additional capital to the Wheat Milling Defined
Business Unit for the purpose of constructing the Mount Pocono mill. Throughout
the construction phase of this project, the unexpended balance of this cash
contribution reduced borrowing requirements to finance inventories and
receivables, and consequently reduced interest expense. As cash has been
expended for Mount Pocono construction, additional borrowings have been required
to finance working capital. The balance of the increase in interest expense
during the three-month period ended May 31, 1999 compared to the same period
ended in 1998 is primarily attributable to this activity.
Other expenses of $0.2 million during the period ended on May 31, 1998
represents the recognition of a loss on certain equipment.
An income tax benefit of $0.3 million for the three months ended May 31,
1999 is based upon an effective tax rate of 8.3% applied to the pretax operating
loss of $3.9 million for the period. For the three months ended May 31, 1998,
income tax expense of $0.1 million resulted in an effective tax rate of 5.7%.
COMPARISON OF NINE MONTHS ENDED MAY 31, 1999 AND 1998
The Wheat Milling Defined Business Unit incurred a net loss of $6.9 million
for the nine months ended May 31, 1999 compared to net income of $4.4 million
for the same period in 1998, for a decrease of $11.3 million. Approximately $4.5
million of this decrease was due to a reduction in production at the Huron mill,
where the conversion of a semolina flour line to a hard wheat bakery flour line
reduced volumes by 30% compared to the same period in 1998, with essentially the
same fixed costs applied against the lower volumes. The Huron conversion was
operational in February 1999 and the Wheat Milling Defined Business Unit is
currently attempting to grow its share of the bakery flour market from this
mill's production. A general deterioration in gross margins of approximately
$0.52 per hundred-weight for all products, along with increased marketing,
administrative and interest expenses of $3.4 million caused the remaining
decline in income.
Processed grain sales for the nine-month period ended May 31, 1999 of
$129.6 million decreased $31.3 million (19%) compared to the same period in
1998. A reduction in the average sales price of $2.79 per hundred weight,
partially offset by a 1.2 million hundred weight volume increase resulted in the
decline in sales revenue.
27
Cost of goods sold of $125.2 million for the nine months ended May 31, 1999
decreased by $23.9 million (16%) compared to the same period in 1998. This
decrease was due primarily to a $1.47 per bushel decline in the cost of raw
material during the nine months ended May 31, 1999, compared to the same period
in 1998. This price variance was partially offset by an increase in volume of
approximately 2,000,000 bushels and a $3.5 million increase in plant expenses,
primarily attributable to the Mount Pocono mill which commenced operations in
January 1999, the Houston mill, which was operating in a startup phase during
much of the 1998 period, and Rush City, where 1999 volume exceeded 1998 volume
by 23%.
Marketing, general and administrative expenses of $8.3 million for the nine
months ended May 31, 1999 increased approximately $1.8 million (28%) compared to
the same period in 1998. $1.1 million of this increased expense is attributable
to the recognition of uncollectable accounts receivable during the current
three-month period. The balance of the increase is primarily related to
additional administrative costs incurred at the new mill at Mount Pocono.
Interest expense of $3.6 million during the nine months ended May 31, 1999
increased $1.6 million (76%) compared to the same period in 1998. During the
nine-month period ended May 31, 1998, the Wheat Milling Defined Business Unit
received credit for cooperative bank patronage refunds received by Cenex Harvest
States attributable to the Wheat Milling Defined Business Unit's borrowing
totaling approximately $0.6 million. The comparable amount received during the
nine months ended May 31, 1999 was $0.1 million. On June 1, 1997, the Company
contributed $38.8 million of additional capital to the Wheat Milling Defined
Business Unit for the purpose of constructing the Mount Pocono mill. Throughout
the construction phase of this project, the unexpended balance of this cash
contribution reduced borrowing requirements to finance inventories and
receivables, and consequently reduced interest expense. As cash has been
expended for Mount Pocono construction, additional borrowings have been required
to finance working capital. The balance of the increase in interest expense
during the nine-month period ended May 31, 1999 compared to the same period
ended in 1998 is primarily attributable to this activity.
Other expenses of $0.2 million during the period ended on May 31, 1998
represents the recognition of loss on certain equipment.
An income tax benefit of $0.6 million for the nine months ended May 31,
1999 is based upon an effective tax rate of 8.0% applied to the pretax operating
loss of $7.5 million for the period. For the nine months ended May 31, 1998,
income tax expense of $0.4 million resulted in an effective tax rate of 7.4%.
LIQUIDITY AND CAPITAL RESOURCES
The Wheat Milling Defined Business Unit's cash requirements relate
primarily to capital improvements and 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. The total anticipated cost
of construction is $41.4 million, of which $37.7 million has been expended
through May 31, 1999. This mill began partial operations during the second
quarter of the current fiscal year.
The Cenex Harvest States Cooperatives 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 $1.8 million for the cost of the land and an
access road. The land was purchased during the second quarter of 1999 at a cost
of approximately $1.2 million. Plans for this mill are subject to due diligence,
routine regulatory review and cost verification. The total anticipated costs for
this mill are approximately $35.0 million, and may be financed with debt, open
member equity, additional equity participation units, or a combination of these
financing alternatives. No determination has been made at this time as to when
construction will commence.
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, as a result, may require
28
additional financing. In addition, increased carrying value of inventories and
receivables due to higher prices, increased receivables due to slow collections
or increased inventories above historical levels require additional financing.
CASH FLOWS FROM OPERATIONS
Operating activities for the three months ended May 31, 1999 provided net
cash of approximately $4.5 million. Non-cash expenses of $1.5 million and
reduced working capital requirements of approximately $6.6 million offset the
net loss of $3.6 million. For the same three-month period ended a year ago, net
income of $1.7 million and non-cash expenses of $1.2 million were partially
offset by increased working capital requirements of approximately $0.6 million,
thereby providing cash from operating activities totaling approximately $2.3
million.
Operating activities for the nine months ended May 31, 1999 provided net
cash of approximately $5.2 million. Non-cash expenses of $4.1 million and
reduced working capital requirements of approximately $8.0 million offset the
net loss of $6.9 million for that period. For the same nine-month period ending
in 1998, net income of $4.4 million and non-cash expenses of $3.7 million were
partially offset by increased working capital requirements of $5.3 million,
thereby providing net cash from operating activities of approximately $2.8
million.
CASH FLOWS FROM INVESTING
Cash expended for the acquisition of property, plant and equipment during
the three-month periods ended May 31, 1999 and 1998, totaled approximately $1.9
million and $9.1 million, respectively.
During the nine month periods ended May 31, 1999 and 1998, the Wheat
Milling Defined Business Unit expended approximately $17.2 million and $18.0
million, respectively, for the acquisition of property, plant and equipment.
Total expenditures for the acquisition of property, plant and equipment for
the fiscal year ending August 31, 1999 are projected to be approximately $21.9
million, most of which is related to the construction of the Mount Pocono mill.
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 prevailing business conditions
and availability of funds.
Short-term debt outstanding and payable to the Company on May 31, 1999 was
$45.6 million compared to $33.2 million and $16.7 million as of 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 $38.8
million of capital to this account on June 1, 1997.
On May 31, 1999 the Wheat Milling Defined Business Unit had long-term debt
of $41.2 million which was incurred for the acquisition, expansion and
construction of its various plants since 1990. The balance of such long-term
debt was $48.5 million and $51.2 million as of August 31, 1998 and May 31, 1998
respectively. Approximately $10.0 million of the amount outstanding as of May
31, 1999 is payable within the next twelve months.
29
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
- ------- ---------------------------------------------------------------------
10.28 Employment Agreement between Cenex Harvest States and Noel Estenson
10.29 Employment Agreement between Cenex Harvest States and John D. Johnson
10.30 First Amendment to Credit Agreement (Term Loan), effective as of May
31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB, and
St. Paul Bank for Cooperatives
10.31 First Amendment to Credit Agreement (Revolving Loan), effective as of
May 31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB,
NationsBank, N.A. and St. Paul Bank for Cooperatives
10.32 Benefit Plan dated June 9, 1999
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, and also the change in fiscal year end from May 31 to
August 31 (EDGAR filing only)
(b) Reports on Form 8-K
Form 8-K filed May 7, 1999 referencing the press release issued to the
public on May 6, 1999 relating to the discussions between Cenex Harvest
States Cooperatives and Farmland Industries, Inc. for establishing a
timetable and framework for the combination of the respective assets and
business operations of each entity into a single entity.
30
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)
NAME TITLE DATE
---- ----- ----
/S/ JOHN SCHMITZ Senior Vice-President--Chief Financial Officer July 13, 1999
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John Schmitz
31