UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
SF SERVICES, INC.
(Exact name of registrant as specified in its Charter)
AMENDMENT NO. 2
This Form 10-K/A is being filed to amend previously filed MD&A
and financial information. Accordingly, Registrant hereby
amends Items 7 and 8 of its Annual Report on Form 10-K, and
Items 7 and 8, as amended, appear below in their entirety.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The primary products sold by SF Services, Inc., include
processed catfish, farm supply products, animal and fish
feeds, agricultural fertilizers, seeds and chemicals, and
petroleum products. These products are sold primarily to
125 local cooperative retail stores serving the individual
farmer producer, and other non-member customers. Weather,
federal farm programs, and commodity prices impact the
unit demand for the products sold by SF Services, Inc.
Primarily the seed, fertilizer, chemical and animal feed
divisions may be impacted by seasonal changes, as well
as variations in ingredient prices which create changes
in the dollar volume of sales. SF Services, Inc.'s
business cycle is highly seasonal and can be advanced
or delayed by wet, dry, hot, or cold weather conditions.
Total 1996 sales increased approximately 11.2% over the
previous year. Increased sales were realized in Feed,
Fertilizer, Seed, and Petroleum, while decreases in sales
were realized in Animal Health, Farm and Ranch, Chemicals,
TBA, and Catfish Processing. Further analysis of
departmental sales is included under the comparative
analysis between fiscal years which follows.
Cost of sales were 94.2% of sales in 1996 compared to 94.3%
in the previous year. Further analysis of cost of sales
by department is included under the comparative analysis
between fiscal years which follows.
As a result of the factors described in the two preceding
paragraphs, gross profit for the year ended October 31,
1996 increased approximately $4.4 million (14%). Further
analysis of gross profit is included under the comparative
analysis between fiscal years which follows.
Other operating revenue increased approximately 260% over
the previous year. This increase was due to additional
service income generated by the retail locations due to
increased business activities, additional revenue generated
by the finance subsidiary, and increased revenue generated
by moving more product through the Company's facilities.
Net savings decreased $631,102 (23%). This decrease was
due primarily to increased operating expenses and increased
income tax expense, offset by the gain on sales of MCC stock.
During 1996, the Company initiated a Company-wide review
of accounts receivable at the direction of the new Chief
Executive Officer. As a result of the review and the
Company's current marketing emphasis, the Company revised
its approach to estimating losses from uncollectible
accounts and made additional write-offs and increased the
reserve for losses.
On August 22, 1994, Mississippi Chemical Corporation ("MCC"),
formerly a Cooperative, became a public entity and the
Company's investment in common stock and allocated equities
of MCC were converted to common stock in the new entity.
Effective July 1, 1994, the Company ceased to receive
patronage refunds from MCC on business done with MCC
subsequent to July 1, 1994.
During 1996, the Company sold 1,525,720 shares of MCC stock.
The sales resulted in a gain of $17,863,024 on proceeds of
$34,027,573.
Subsequent Events
On December 31, 1996, the Company purchased the assets of
Matthews of Monette, Inc., a wholesale and retail fuel
business located in Arkansas, for approximately $9.4
million. This acquisition is expected to add approximately
$45 million in annual sales to the Company. The new
operation will be operated under the name "Northeast
Arkansas Oil Company, LLC", a newly formed, wholly-owned
subsidiary.
Comparative Analysis of the Fiscal Year Ended October 31, 1996
to the Fiscal Year Ended October 31, 1995
Net sales for the fiscal year ended October 31, 1996
increased approximately 11.2% over the prior year. This
increase was attributable to the following factors:
Farm and Ranch sales decreased approximately 8% due to the
severe decline in the price of beef cattle, which caused
producers to reduce their purchases. Gross margin
increased to 9.4% of sales compared to 9.1% in the prior
year. This increase was mainly due to better purchasing
and product positioning.
Feed sales increased approximately 27% over the previous year
due primarily to increased feed prices caused by the higher
cost of ingredients. Total tons sold increased approximately
25,000 tons (5.6%) due to a gain in market share. Gross
margin decreased approximately $926,000 due to higher
ingredient costs which were not passed on to the customer.
Animal Health sales decreased approximately 4% due to
the lower livestock prices, which caused producers to reduce
their purchases. The lower live stock prices also caused
significant liquidation of cow/calf units in the trade area.
Gross margin as a percent of sales decreased to 10.25% from
10.5% in the previous year. This decrease was due to
competitive pressure for the fewer livestock units in the
market.
TBA sales decreased approximately 3% due to the late passing
of the Farm Bill which caused producers to reduce purchases.
The decrease was also caused by some loss of market share due
to strong competitive pricing from tire manufacturers. Gross
margin as a percent of sales remained approximately the same
as experienced in the previous year.
Petroleum sales increased approximately 86%. This increase
was due to a gain in market share which was lost in previous
years because of competitive pricing and a lack of sufficient
transportation. Also, sales of diesel fuel used in irrigation
wells realized a strong increase due to the dry summer
weather. Total gallons sold increased approximately 65% to
115 million gallons. Gross margin as a percent of sales
decreased to 2.0% from 2.7% in the previous year. This
decrease was due to changes in suppliers' volume rebate
purchase programs.
Fertilizer sales increased approximately 7% due to a gain
in market share. Total tons sold increased approximately
104,000 tons (13%). Gross margin as a percent of sales was
5.1% compared to 2.6% in the previous year. This increase was
due to more favorable market conditions than were experienced
in the previous year. Also, more product was sold through
the Company's facilities, which generates more margin.
Chemical sales decreased approximately 11% due to changes in
cropping patterns in the trade area. More corn acres were
planted at the expense of cotton, which requires more
chemical applications. Gross margin as a percent of sales
increased to 6.3% from 5.9% in the previous year. This
increase was due to an effort to increase margins to offset
the decline in sales volume.
Seed sales increased approximately 21% because of cotton being
replaced by corn, which has a higher unit value than cotton.
Also, sales of soybean and wheat seed increased. Gross margin
as a percent of sales increased to 10.0% from 9.1% in the
previous year. This increase was due to increased
proprietary seed sales, which carry a higher margin than
public variety products. The introduction of biotechnology
seed products also provided the opportunity to increase
margins.
Processed catfish sales decreased approximately 3% due to
lower processing levels caused by a lack of quality fish
available for processing. Gross margin decreased
approximately $2.1 million due to higher live fish cost
caused by the inadequate supply of quality fish, and a
higher per unit processing cost caused by the inefficiency
of lower processing levels.
Operating expenses increased approximately 49.2% over the
previous year. This increase was due to the following
factors.
* $826,000 of increased expenses due to the addition of
two new locations, including $370,000 of additional
payroll and related costs, $129,000 of additional rent
expenses, $81,000 of additional maintenance costs,
$36,000 of additional vehicle costs, and $44,000 in
additional depreciation.
* $1.5 million of increases at existing retail locations
including $391,000 of additional payroll and related
costs, $221,000 of additional rent expenses, $85,000
of additional maintenance costs, and $344,000 of
increased bad debt expense.
* $1.1 million of increased expenses associated with the
implementation of a new computer system, including
$320,000 of additional payroll and related costs for
additional analysts, $90,000 of additional rent expense,
$70,000 of additional employee training costs, $100,000
of additional telecommunications costs, and $310,000 for
a computer maintenance and operating contract with an
outside firm.
* $1.1 million associated with new fertilizer terminal
operations, including $300,000 of additional payroll and
related costs, $284,000 of additional demurrage and
storage costs, $20,000 of additional rent expense, $64,000
of additional maintenance costs, and additional utilities of
$50,000, and $25,000 of additional insurance expense.
* $487,000 of increased costs due to additional petroleum
transportation operations which added six units, including
$220,000 of payroll and related costs, $80,000 of fuel costs,
and $56,000 in rent costs.
* $273,000 of increased costs due to the addition of a new
office building, including $98,000 of additional
maintenance costs, and $100,000 in additional utilities.
* $5.5 million of increased costs due to asset impairment
adjustments as more fully described in Note 19 to the
Financial Statements.
During 1996, the Company recognized expenses of approximately
$5.0 million to reduce the carrying value of the Eudora,
Arkansas catfish processing plant and the Greenville,
Mississippi feed mill, the values of which have been impaired
due to continued losses resulting from excessive operating
costs. Also, during 1996 the Company recognized expenses of
approximately $516,000 to reduce the carrying value of various
abandoned properties. The amount of the impairments were
estimated based on appraisals performed during the year and
expected future cash flows. These estimates could change
materially in the future.
Comparative Analysis of the Fiscal Year Ended October 31, 1995
to the Fiscal Year Ended October 31, 1994
Net sales for the fiscal year ended October 31, 1995
increased approximately 20.9% over the prior year. This
increase was attributable to the following factors:
Farm and Ranch sales increased approximately 13% due to
gaining additional business with existing accounts and the
establishment of new accounts in the Texas, Oklahoma, and
Kansas regions. Gross margins increased due to economies
gained from more business in certain groups, primarily
fencing and livestock feeding and handling equipment.
Feed sales increased approximately 2.4% over the previous
year due primarily to an increase in catfish feed usage.
Feed sales increased by approximately 30,000 tons over the
previous year. Gross margin increased approximately 6.4% due
to favorable price positions for ingredients purchased.
Animal Health sales increased approximately 3% due to
aggressive sales programs by manufacturer's and the Company's
sales force. Gross margins increased due to meeting
manufacturer's rebate goals resulting in lower product cost.
TBA sales increased approximately 24% because of the DPF
merger and an increase in market share due to advanced
forecasting programs. Gross margins increased approximately
26% due to achieving higher rebate levels with most suppliers.
Petroleum sales increased approximately 3% due to the DPF
merger and a strong sales program which helped the Company
gain market share. Total petroleum sales increased
approximately 764,000 gallons. Gross margin increased due to
higher volume rebate programs from refinery suppliers.
Fertilizer sales increased 34% due to the DPF merger and
increased sales to non-member accounts. Fertilizer sales
increased approximately 183,000 tons over the previous year.
Gross margin decreased due to the loss of MCC patronage
rebates and losses on fertilizer sales due to unfavorable
market prices following an anticipated shortage of nitrogen
products.
Chemical sales increased approximately 36% due to the DPF
merger and gaining additional business with established
accounts. Gross margins increased due to higher dealer
commissions received based on higher volume.
Seed sales increased approximately 8% due mainly to the
DPF merger. Gross margin as a percent of sales decreased
because of fewer acres planted in corn, a higher gross
margin product compared to cotton, rice, and soybeans.
Processed catfish sales increased approximately 24% due to
a higher demand for processed catfish combined with a higher
price per pound. Gross margin decreased due to the higher
cost of live fish.
Operating expenses increased approximately 22% over the
previous year. This increase was due to the following
factors: (1) additional costs associated with the DPF
merger ($2,500,000), (2) increased expenses of the retail
group due to increased business activity ($677,000), (3)
higher expenses at the catfish processing facilities due
to higher production levels ($156,000), and (4) a combination
of miscellaneous other costs necessary to service the rapid
growth in sales ($2,150,000).
Interest expense increased 50.4% over the previous year.
Increases in sales, inventories, accounts receivable, and
capital expenditures resulted in the need for higher
seasonal borrowing on the Company's loan with CoBank, ACB
("CoBank").
Liquidity and Capital Resources
Cash used in operating activities was approximately $27.1
million in 1996 compared to approximately $22.4 million
used in the previous year. This increase was due primarily
to lower operating profits and increased inventories, primarily
fertilizer. Cash provided by investing activities was
approximately $23 million in 1996 compared to approximately
$7.7 million in the prior year. This increase was due
to the sale of the investment in MCC, partially offset
by the purchase of additional property and equipment.
Cash provided by financing activities was approximately
$6.6 million in 1996 compared to approximately $14.2
million in the previous year. This decrease was due to a
lower increase in debt than was required in the previous year.
During 1996, the Company sold 1,525,720 shares of MCC stock
resulting in a gain of $17,863,024 on proceeds of
$34,027,573. Proceeds from the stock sales were used to
pay down the seasonal and term debt.
On January 31, 1996 the Company purchased substantially all
of the assets of Farmers Service (AAL), Sumner, Mississippi,
a member cooperative, for approximately $1.3 million. During
1995, Farmers Service had purchases of approximately $3.6
million from the Company.
The allowance for doubtful accounts increased to $950,000
from $294,814. Analysis of the current accounts and a
review of collection history does not indicate that losses
would be expected to exceed the current reserve balance.
During 1996, the Company invested approximately $10.4 million
in additional fixed assets, including $4.4 million at the
Greenville, Mississippi and Memphis, Tennessee fertilizer
terminals, and $2.7 million for a new computer system and
operating software. In 1997, the Company expects to invest
an additional $2.1 million in the fertilizer terminals,
and an additional $1.2 million for the computer system.
Approximately $2.5 million of capital expenditures for the
replacement of depreciated assets are expected to be made
in the 1997 fiscal year.
The Company has recorded a deferred tax asset of $1,980,582
at the 1996 fiscal year end. The deferred tax asset is
recognized for the tax effects of differences between the
financial statement and tax basis of assets and liabilities
related to non-patronage income. The deferred tax asset
includes a $693,000 valuation allowance. A valuation
allowance is established to reduce the deferred tax asset
if it is more likely than not that a deferred tax asset will
be realized. In setting the valuation allowance for
realization of deferred tax assets, management uses a tax
planning strategy that recognizes the benefits of
impairment losses deductible in the future based on
available refunds of previously paid tax.
Historically, most of SF Services, Inc.'s financing has been
with CoBank. CoBank has provided the Company with an $80
million seasonal line of credit , of which approximately $65.6
million was used at October 31, 1996. The Company also
has $22,677,750 in term loans with CoBank with annual payments
of $2,557,250. During 1996, the Company obtained a formal
waiver from CoBank with respect to covenant violations
concerning the current ratio. The Company is currently
negotiating with CoBank to provide an additional $9.4 million
in term loans to finance the acquisition of Matthews of
Monette, Inc. and the Company's other capital projects. With
the addition of the Matthews of Monette, Inc. acquisition,
the Company has completed its expansion plans and will concentrate
on the profitability of existing operations. Management believes
that the current line of credit will provide sufficient liquidity
for current and future operating levels.
Trends and Operating Outlook
Management recognizes that operating margins have been low in
four areas: Feed and Animal Health, Fertilizer, Retail
Operations, and Catfish Processing and Marketing. Management
is focusing attention toward reversing the recent trends in
these areas.
FEED AND ANIMAL HEALTH. Feed manufacturing personnel are
being reduced to bring labor cost per ton in line with
acceptable industry standards. Studies are being conducted on
utility consumption and demand charges in order to better
control energy costs. Transportation efficiencies have been
gained through increased use of contractual relationships with
independent carriers. The Company expects substantial savings to
be generated by the changes in the transportation procedures.
FERTILIZER. Two new fertilizer port facilities are being
constructed in order to allow for better storage and distribution
and increase margins which were lost when MCC ceased operating
as a cooperative. In addition to improving storage and
distribution for the Company's membership, the Company will be
able to handle and store product for non-member customers,
which should add to profitability in the future. Those
significant projects have had a negative impact on operating
profits during the 1996 fiscal year. Since these projects
are not expected to be completed until the second quarter
of the 1997 fiscal year, the Company will not be able to
realize the full benefit of these projects until the 1998
fiscal year.
RETAIL OPERATIONS. The Company is currently evaluating the
operating performance of the retail locations. Up to nine
retail locations which have not been meeting performance goals
may be closed during the 1997 fiscal year. The cost to close
the retail facilities and any impairment is not expected to
be significant.
CATFISH PROCESSING AND MARKETING. The Company's catfish
processing and marketing segment has had a negative impact on
overall profitability since entering this business segment.
During the second half of the 1996 fiscal year, the Company
closed the Wisner, Louisiana processing plant (a leased
facility). This allowed the processing level to be raised
at the Eudora, Arkansas plant, which has increased processing
efficiency. Although this segment has not yet reached
profitability, significant improvements are being made in
operating performance.
ITEM 8: FINANCIAL STATEMENTS
Independent Accountants' Report
Board of Directors
SF Services, Inc.
North Little Rock, Arkansas
We have audited the accompanying consolidated balance sheets
of SF SERVICES, INC. as of October 31, 1996 and 1995, and the
related consolidated statements of income, changes in members'
equity and cash flows for each of the three years in the
period ended October 31, 1996 and the financial statement
schedule included in Item 14(a)(2). These financial statements
and schedule are the responsibility of the Cooperative's
management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of SF SERVICES, INC. as of October 31,
1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended October
31, 1996, in conformity with generally accepted accounting
principles. Also, In our opinion, the financial statement
schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, present
fairly, in all material respects, the information required
to be included therein.
As discussed in Note 19 to the consolidated financial
statements, in 1996 the Cooperative adopted the provisions
of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of ". The Cooperative, in
1994, adopted the provision of Statement of Financial
Accounting Standards No. 115 in accounting for its
marketable securities.
/s/ Baird, Kurtz, & Dobson
Little Rock, Arkansas
December 20, 1996, except for Note 23 as to
which the date is February 5, 1997
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
ASSETS
1996 1995
------------ ------------
CURRENT ASSETS
Cash $ 3,214,419 $ 645,379
Marketable securities 34,176,546
Accounts receivable, less
allowance for doubtful
accounts; October 31, 1996 -
$950,000, October 31, 1995 -
$294,814 40,268,809 44,183,592
Accounts receivable - other 6,287,292 2,556,446
Note receivable - current portion 2,184,287 929,016
Inventories 84,215,934 67,277,893
Patronage distributions receivable 168,147 118,407
Deferred income taxes - current 834,738
Other 1,253,263 991,159
------------ ------------
Total Current Assets 138,426,889 150,878,438
------------ ------------
INVESTMENTS AND LONG-TERM
RECEIVABLES
Notes receivable 3,154,281 2,977,192
Investments in other cooperatives 12,974,801 11,662,378
Deferred income taxes - long term 1,145,844
------------ ------------
17,274,926 14,639,570
------------ ------------
PROPERTY AND EQUIPMENT, At Cost
Land and improvements 3,594,565 4,179,756
Buildings 19,236,628 22,573,718
Machinery and equipment 20,438,434 24,110,260
Automobiles and trucks 1,478,513 1,313,104
Furniture and fixtures 4,636,169 1,307,315
Construction in progress 8,269,079
------------ ------------
57,653,388 53,484,153
Less accumulated depreciation 21,996,709 20,007,598
------------ ------------
35,656,679 33,476,555
------------ ------------
OTHER ASSETS 763,565 667,326
------------ ------------
$192,122,059 $199,661,889
============ ============
LIABILITIES AND MEMBERS' EQUITY
1996 1995
------------ ------------
CURRENT LIABILITIES
Note payable $ 65,582,931 $ 65,432,437
Interest payable 222,015 110,235
Debentures 1,342,009 1,383,209
Current maturities of
long-term debt 3,013,819 2,820,453
Accounts payable 29,094,690 23,261,092
Patronage distributions and
capital stock retirements
to be paid in cash 4,000,000
Deferred income taxes 8,368,554
Patrons' deposits 14,175,462 9,701,825
Accrued expenses 4,287,813 2,851,057
Income taxes payable 739,683 781,958
------------ ------------
Total Current Liabilities 118,458,422 118,710,820
------------ ------------
LONG-TERM DEBT 22,309,220 19,842,812
------------ ------------
OTHER LIABILITIES 168,200 229,406
------------ ------------
MEMBERS' EQUITY
Capital stock
Class "A" preferred 2,079,600 2,139,400
Class "B" convertible preferred 676,400 676,400
Common stock 125,000 127,000
Capital certificates 157,399 157,399
Unrealized gain on securities
reported at fair value, net
of tax of $6,956,151 in 1995 11,055,632
Retained earnings (deficit) 309,478 (1,631,647)
Allocated equities 47,838,340 48,354,667
------------ ------------
51,186,217 60,878,851
------------ ------------
$192,122,059 $199,661,889
============ ============
See Notes to Consolidated Financial Statements
SF SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
NET SALES $590,480,357 $530,820,976 $439,171,314
COST OF GOODS SOLD 556,030,450 500,731,715 410,099,611
------------ ------------ ------------
GROSS PROFIT 34,449,907 30,089,261 29,071,703
OTHER OPERATING REVENUE 1,957,519 542,926 432,671
------------ ------------ ------------
GROSS MARGIN AND OTHER
OPERATING REVENUE 36,407,426 30,632,187 29,504,374
OPERATING EXPENSES 44,958,673 30,131,789 24,648,408
------------ ------------ ------------
INCOME (LOSS) FROM
OPERATIONS (8,551,247) 500,398 4,855,966
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 1,592,666 1,526,514 1,054,460
Interest expense (5,939,801) (6,396,350) (4,252,638)
Dividend income 123,154 530,037
Miscellaneous 662,240 146,070 257,603
Gain on sale of MCC stock 17,863,024 8,590,955 2,038,728
------------ ------------ ------------
14,301,283 4,397,226 (901,847)
------------ ------------ ------------
SAVINGS BEFORE INCOME TAXES 5,750,036 4,897,624 3,954,119
PROVISION FOR INCOME TAXES 3,677,875 2,194,361
------------ ------------ ------------
NET SAVINGS $ 2,072,161 $ 2,703,263 $ 3,954,119
============ ============ ============
NET SAVINGS APPLIED TO:
Allocated equities
Capital equity credits $ $ $ 4,215,923
Cash 1,699,111 1,870,253
------------ ------------ ------------
1,699,111 6,086,176
Retained earnings 2,072,161 1,004,152 (2,132,057)
------------ ------------ -------------
$ 2,072,161 $ 2,703,263 $ 3,954,119
============ ============ ============
See Notes to Consolidated Financial Statements
SF SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
Convertible
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
Class "A" Class "B" Class "C" Class "D"
---------- ---------- ----------- -----------
BALANCE,
OCTOBER 31, 1993 $ 2,189,300 $ 676,400 $ 1,780,861 $ 1,736,200
ISSUANCE OF STOCK
NET SAVINGS
CAPITAL EQUITY
CREDITS ISSUED
AS PATRONAGE
DISTRIBUTIONS
CAPITAL EQUITY
CREDITS PAID
RETIREMENT OF
COMMON STOCK
PREFERRED STOCK
DIVIDENDS
RETIREMENT OF
PREFERRED STOCK (1,780,861) (173,620)
OFFSET AGAINST
ACCOUNTS
RECEIVABLE
CHANGE IN
UNREALIZED
GAIN OR LOSSES
----------- ---------- ------------ -----------
BALANCE,
OCTOBER 31, 1994 2,189,300 676,400 -0- 1,562,580
----------- ---------- ----------- -----------
ISSUANCE OF STOCK
NET SAVINGS
CAPITAL EQUITY
CREDITS ISSUED
AS PATRONAGE
DISTRIBUTIONS
MERGER WITH
DELTA
PURCHASING
FEDERATION (AAL)
CAPITAL EQUITY
CREDITS PAID
RETIREMENT OF
COMMON STOCK
PREFERRED STOCK
DIVIDENDS
RETIREMENT OF
PREFERRED STOCK (49,900) (1,562,580)
RETIREMENT OF
ALLOCATED
EQUITIES
CHANGE IN
UNREALIZED
GAIN OR LOSSES
----------- ----------- ---------- ----------
BALANCE,
OCTOBER 31, 1995 $ 2,139,400 $ 676,400 $ -0- $ -0-
----------- ----------- ---------- ----------
ISSUANCE OF STOCK
NET SAVINGS
RETIREMENT OF
COMMON STOCK
PREFERRED STOCK
DIVIDENDS
RETIREMENT OF
PREFERRED STOCK (59,800)
RETIREMENT OF
ALLOCATED
EQUITIES
OFFSET AGAINST
ACCOUNTS
RECEIVABLE
CHANGE IN
UNREALIZED
GAIN OR LOSSES
BALANCE, ----------- ---------- ------------ ----------
OCTOBER 31, 1996 $ 2,079,600 $ 676,400 $ -0- $ -0-
=========== ========== ============ ==========
See Notes to Consolidated Financial Statements
SF SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (Continued)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
RETAINED
CAPITAL COMMON EARNINGS
CERTIFICATES STOCK (DEFICIT)
------------ ------------ ------------
BALANCE,
OCTOBER 31, 1993 $ 157,399 $ 127,000 $ (233,200)
ISSUANCE OF STOCK 2,000
NET SAVINGS 3,954,119
CAPITAL EQUITY
CREDITS ISSUED
AS PATRONAGE
DISTRIBUTIONS (6,086,176)
CAPITAL EQUITY
CREDITS PAID
RETIREMENT OF
COMMON STOCK (6,000)
PREFERRED STOCK
DIVIDENDS (136,521)
RETIREMENT OF
PREFERRED STOCK
OFFSET AGAINST
ACCOUNTS
RECEIVABLE
CHANGE IN
UNREALIZED
GAIN OR LOSSES
------------ ------------ ------------
BALANCE,
OCTOBER 31, 1994 $ 157,399 $ 123,000 $ (2,501,778)
------------ ------------ ------------
ISSUANCE OF STOCK 7,000
NET SAVINGS 2,703,263
CAPITAL EQUITY
CREDITS ISSUED
AS PATRONAGE
DISTRIBUTIONS (1,699,111)
MERGER WITH
DELTA
PURCHASING
FEDERATION (AAL)
CAPITAL EQUITY
CREDITS PAID
RETIREMENT OF
COMMON STOCK (3,000)
PREFERRED STOCK
DIVIDENDS (134,021)
RETIREMENT OF
PREFERRED STOCK
RETIREMENT OF
ALLOCATED
EQUITIES
CHANGE IN
UNREALIZED
GAIN OR LOSSES
------------ ------------ ------------
BALANCE,
OCTOBER 31, 1995 $ 157,399 $ 127,000 $ (1,631,647)
------------ ------------ ------------
ISSUANCE OF STOCK 2,000
NET SAVINGS 2,072,161
RETIREMENT OF
COMMON STOCK (4,000)
PREFERRED STOCK
DIVIDENDS (131,036)
RETIREMENT OF
PREFERRED STOCK
RETIREMENT OF
ALLOCATED
EQUITIES
OFFSET AGAINST
ACCOUNTS
RECEIVABLE
CHANGE IN
UNREALIZED
GAIN OR LOSSES
------------ ------------ ------------
BALANCE,
OCTOBER 31, 1996 $ 157,399 $ 125,000 $ 309,478
============ ============ ============
See Notes to Consolidated Financial Statements
SF SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (Continued)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
UNREALIZED
GAIN ON
SECURITIES
ALLOCATED REPORTED AT
EQUITIES FAIR VALUE TOTAL
------------ ------------ ------------
BALANCE,
OCTOBER 31, 1993 $ 41,277,575 $ -0- $ 47,711,535
ISSUANCE OF STOCK 2,000
NET SAVINGS 3,954,119
CAPITAL EQUITY
CREDITS ISSUED
AS PATRONAGE
DISTRIBUTIONS 6,086,176
CAPITAL EQUITY
CREDITS PAID (1,870,253) (1,870,253)
RETIREMENT OF
COMMON STOCK (6,000)
PREFERRED STOCK
DIVIDENDS (136,521)
RETIREMENT OF
PREFERRED STOCK (1,954,481)
OFFSET AGAINST
ACCOUNTS
RECEIVABLE (447,286) (447,286)
CHANGE IN
UNREALIZED
GAIN OR LOSSES 8,936,166 8,936,166
BALANCE, ------------ ------------ ------------
OCTOBER 31, 1994 $ 45,046,212 $ 8,936,166 $ 56,189,279
------------ ------------ ------------
ISSUANCE OF STOCK 7,000
NET SAVINGS 2,703,263
CAPITAL EQUITY
CREDITS ISSUED
AS PATRONAGE
DISTRIBUTIONS 1,699,111
MERGER WITH
DELTA
PURCHASING
FEDERATION (AAL) 4,498,888 4,498,888
CAPITAL EQUITY
CREDITS PAID (1,699,111) (1,699,111)
RETIREMENT OF
COMMON STOCK (3,000)
PREFERRED STOCK
DIVIDENDS (134,021)
RETIREMENT OF
PREFERRED STOCK 1,110,456 (502,024)
RETIREMENT OF
ALLOCATED
EQUITIES (2,300,889) (2,300,889)
CHANGE IN
UNREALIZED
GAIN OR LOSSES 2,119,466 2,119,466
------------ ------------ ------------
BALANCE,
OCTOBER 31, 1995 $ 48,354,667 $ 11,055,632 $ 60,878,851
------------ ------------ ------------
ISSUANCE OF STOCK 2,000
NET SAVINGS 2,072,161
RETIREMENT OF
COMMON STOCK (4,000)
PREFERRED STOCK
DIVIDENDS (131,036)
RETIREMENT OF
PREFERRED STOCK (59,800)
RETIREMENT OF
ALLOCATED
EQUITIES (418,836) (418,836)
OFFSET AGAINST
ACCOUNTS
RECEIVABLE (97,491) (97,491)
CHANGE IN
UNREALIZED
GAIN OR LOSSES (11,055,632) (11,055,632)
------------ ------------ ------------
BALANCE,
OCTOBER 31, 1996 $ 47,838,340 $ -0- $ 51,186,217
============ ============ ============
See Notes to Consolidated Financial Statements
SF SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net savings $ 2,072,161 $ 2,703,263 $ 3,954,119
Items not requiring
(providing) cash:
Depreciation and
amortization 2,239,498 2,951,534 2,514,779
Non-cash portion of
patronage dividends
received from
cooperatives (1,614,598) (1,284,542) (1,981,154)
(Gain) loss on sale
of fixed assets (67,348) (202,182) 36,291
Gain on sale of
investment (17,863,024) (8,590,955) (2,038,728)
Deferred income taxes (3,392,985) 1,412,403
Writedown of fixed
assets for impairment 5,497,348
Changes in operating
assets and liabilities,
net of effects from
acquisition of Delta
Purchasing Federation
(AAL) assets:
Accounts payable 1,833,597 (2,580,816) 5,819,531
Accrued expenses 1,548,535 104,653 (1,085,774)
Accounts receivable 3,817,292 (6,979,362) (3,471,946)
Inventories (16,938,041) (11,918,494) (7,307,029)
Other current assets 570,208 1,329,734 124,780
Accounts receivable
- other (3,730,846) (903,365) 536,183
Due from broker 131,868 (57,028)
Patronage distributions
receivable (49,740) (11,349) (39,478)
Income taxes payable (42,275) 749,636
Other assets (928,551) 828,656 339,542
Other liabilities (61,206) (144,804) 397,159
------------ ------------ ------------
Net cash used in
operating activities (27,109,975) (22,404,122) (2,258,753)
------------ ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of stock in
other cooperatives (1,200,050)
Purchase of property
and equipment (10,449,820) (13,465,151) (2,533,957)
Proceeds from sale
of property and
equipment 600,198 2,578,737 2,602,251
Net cash received in
the acquisition of
Delta Purchasing
Federation (AAL)
assets 977,428
Proceeds from investment
redemption and sale 34,329,962 18,455,358 10,208,374
Advances on notes
receivable (2,502,060) (1,371,933) (799,553)
Collections on notes
receivable 1,069,700 510,904 689,844
------------ ------------ ------------
Net cash provided by
investing activities 23,047,980 7,685,343 8,966,909
------------ ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Issuance of common stock 2,000 7,000 2,000
Preferred stock
dividends (131,036) (134,021) (136,521)
Patronage dividends paid
and retirement of
preferred stock (59,800) (4,428,170) (691,401)
Repurchase of common
stock (4,000) (3,000) (6,000)
Retirement of allocated
equities (418,836)
Proceeds from
borrowings 191,317,056 197,981,565 135,244,378
Repayment of
borrowings (188,547,986) (176,528,060) (140,478,845)
Net change in
deposits 4,473,637 (2,714,022) (1,322)
------------ ------------ ------------
Net cash provided
by (used in) financing
activities 6,631,035 14,181,292 (6,067,711)
------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND
CASH EQUIVALENTS 2,569,040 (537,487) 640,445
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR 645,379 1,182,866 542,421
------------ ------------ ------------
CASH AND CASH
EQUIVALENTS,
END OF YEAR $ 3,214,419 $ 645,379 $ 1,182,866
============ ============ ============
See Notes to Consolidated Financial Statements
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Business
SF Services, Inc. and subsidiaries sell seed, feed, fertilizer,
chemicals, petroleum, lubricants, tires, batteries,
accessories, and farm supplies and provide related services
to members and patrons of the Cooperative and its subsidiaries.
One subsidiary processes and markets catfish purchased from
area producers.
The Cooperative and its subsidiaries sell to members, patrons
and wholesale entities in Alabama, Arkansas, Louisiana,
Kansas, Mississippi, Texas, Oklahoma and Missouri on an
unsecured credit basis.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Cooperative and its wholly-owned subsidiaries, AgGrow
Finance, Inc., SFA, Inc., SF Technical Services, Inc. and
Southern Farm Fish Processors, Inc. Included with SFA, Inc.,
are its wholly-owned subsidiaries SFA of Louisiana, Inc., and
SFA of Mississippi, Inc., which were formed on April 22, 1995
for retail operations in the respective states. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Inventories
Grains, seed and petroleum inventories are stated at the
lower of cost or market, weighted average method.
Realized and unrealized gains and losses on futures
contracts used to hedge these inventories are deferred until
the related inventories are sold, but are considered in the
lower of cost or market calculations. The Cooperative hedges
these particular inventories to the extent considered
practical for minimizing risk from market price fluctuations.
The remaining inventories are stated at the lower of cost or
market, weighted average method.
A summary of inventories follows:
1996 1995
------------ ------------
Purchased items held for resale $ 78,816,793 $ 60,443,652
Manufactured feed and
feed ingredients 3,174,337 2,859,315
Processed catfish 2,224,804 3,974,926
------------ ------------
$ 84,215,934 $ 67,277,893
============ ============
Property and Equipment
Depreciation is provided for primarily by the straight-line
method using the following estimated useful lives:
Useful Lives
------------
Buildings and improvements 5 - 33 years
Machinery and equipment 2 - 20 years
Automobiles and trucks 3 - 5 years
Furniture and fixtures 5 - 15 years
Patrons' Equities
In accordance with its bylaws, the Cooperative allocates
net savings to its patrons, based on income determined for
financial reporting purposes, in cash, and certificates of
equity in proportions determined by its Board of Directors.
New members are issued one share of common stock. At any
time a member ceases to be active, such shares are redeemed
at par value.
The Cooperative capitalizes interest costs as a component of
construction in progress, based on the weighted average rates
paid for long-term borrowings. Total interest incurred (net
of patronage refunds) each year was:
1996 1995 1994
----------- ------------ -----------
Interest costs capitalized $ 479,943 $ $
Interest costs charged
to expense 5,939,801 6,396,350 4,252,638
----------- ------------ -----------
Total interest incurred $ 6,419,744 $ 6,396,350 $ 4,252,638
=========== =========== ===========
Income Taxes
The Cooperative, as a non-exempt cooperative, is taxed on
non-patronage margins and any patronage margins not paid or
allocated to patrons. Consistent with industry practice,
deferred income taxes are not provided for temporary tax
differences associated with patronage earnings. The
Cooperative's subsidiaries are not required to pay or
allocate margins to patrons and, therefore, are taxed on
applicable margins and are able to retain all tax benefits
related to losses to the extent such benefits are recoverable
from prior taxes paid.
Deferred tax liabilities and assets are recognized for the
tax effects of differences between the financial statement and
tax basis of assets and liabilities related to non-patronage
margins and unrealized gain on marketable securities. A
valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax
asset will not be realized.
Temporary tax differences relate principally to non-qualified
patronage distributions received from other cooperatives,
inventories, depreciation on property and equipment, valuation
of property and equipment, accrued expenses, and market value
over tax basis of marketable securities.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE 2: ACCOUNTS RECEIVABLE - OTHER
Accounts receivable - other consisted of the following:
1996 1995
------------ ------------
Vendor rebates $ 2,322,396 $ 2,556,446
Other 1,855,896
Proceeds from new leases 2,109,000
------------ ------------
$ 6,287,292 $ 2,556,446
=========== ===========
NOTE 3: MARKETABLE SECURITIES
On August 22, 1994, Mississippi Chemical Corporation (MCC),
formerly a Cooperative, became a public entity and the
Cooperative's investment in common stock, and allocated
equities of MCC were converted to common stock in the new
entity (Note 13). The Cooperative sold its converted common
stock during the years ended October 31, 1996, 1995 and 1994
as follows:
1996 1995 1994
------------ ------------ ------------
Shares sold 1,525,720 875,000 598,000
============ ============ ============
Proceeds $ 34,027,573 $ 17,812,493 $ 8,340,990
============ ============ ============
Gain on sale $ 17,863,024 $ 8,590,955 $ 2,038,728
============ ============ ============
The average cost method was used to determine cost basis on
these sales.
The Company utilized the provisions of Statement of Financial
Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" in accounting
for its investment in MCC stock. These securities were
classified as available-for-sale and carried at estimated
market value at October 31, 1995. The unrealized gain, net
of tax, was reported as a separate component of members'
equity. The Cooperative's cost basis and estimated market
value of MCC stock at October 31, 1995 was as follows:
1995
------------
Estimated market value $ 34,176,548
Cost basis 16,164,765
------------
Unrealized gain $ 18,011,783
============
NOTE 4: ACCRUED EXPENSES
Accrued expenses consisted of the following at the
respective dates:
1996 1995
------------ ------------
Accrued taxes payable,
other than income taxes $ 1,368,468 $ 1,494,978
Accrued leave 1,365,115 1,089,809
Accrued payroll 757,222 177,693
Miscellaneous accruals 797,008 88,577
------------ ------------
$ 4,287,813 $ 2,851,057
============ ============
NOTE 5: INVESTMENTS IN OTHER COOPERATIVES
The Cooperative invests in other cooperatives with which
it does business. Investments in those other cooperatives,
as of the respective dates, were as follows:
1996 1995
------------ ------------
CoBank $ 7,705,494 $ 7,541,647
Farmland Industries, Inc. 2,491,005 1,516,005
Universal Cooperatives, Inc. 2,023,627 1,965,931
AG Processing 491,805 444,219
Other 262,870 194,576
------------ ------------
$ 12,974,801 $ 11,662,378
============ ============
These investments consist of common stock, at cost, and the
Cooperative's share of allocated equities. Allocated
equities are valued at face amount as determined by the
issuing entity and are redeemable by the entity at its
discretion at an amount determined annually. Patronage
refunds, which consist of cash and non-cash equity
allocations, are credited to cost of goods sold, with the
exception of patronage refunds from CoBank, which are
credited to interest expense.
Patronage distributions from Mississippi Chemical Corporation,
which was a cooperative prior to August 22, 1994, for the year
ended October 31, 1994, was $2,919,051. SF Services, Inc.,
will not receive patronage dividends on business with MCC in
future periods.
The amount of allocated equities previously allocated to SF
Services, Inc., to be retired during 1995 and 1996 has been
included in patronage distributions receivable at October 31,
1996 and 1995.
Patronage distributions received for the years ending October
31, 1996, 1995, and 1994 were as follows:
1996 1995 1994
Amount Credited
to Cost of Goods
Sold $1,482,570 $ 341,061 $3,090,995
Amount Credited
to Interest
Expense 677,675 707,538 703,607
---------- ---------- ----------
$2,160,245 $1,048,599 $3,794,602
========== ========== ==========
NOTE 6: NOTE PAYABLE
1996 1995 1994
------------ ------------ ------------
Note payable CoBank $ 65,582,931 $ 65,432,437 $ 26,538,962
Interest rate 7.19% 7.64% 6.92%
Average during
the period* $ 57,366,013 $ 48,570,883 $ 31,975,156
Average interest rate
during the period* 6.87% 7.96% 6.26%
Maximum amount of
notes payable at
any month-end
during the period $ 71,169,873 $ 65,432,347 $ 46,085,291
*Weighted average interest rate is computed by dividing the
average monthly face amount of notes payable into the
aggregate related interest expense.
The Cooperative had a committed line-of-credit with CoBank
totaling $80,000,000 for the years ended October 31, 1996
and 1995. The line-of-credit is secured by substantially all
assets of the Cooperative. This line-of-credit bears interest
at a fluctuating rate based on the cost of money to CoBank.
NOTE 7: LONG-TERM DEBT
1996 1995
------------ ------------
Notes payable - CoBank (A) $ 22,182,750 $ 19,650,000
Notes payable - CoBank (B) 495,000 585,000
Notes payable - Municipal (C) 500,000 500,000
Notes payable - Finance Corporation (D) 100,000 100,000
Notes payable - Industrial Revenue
Bonds (E) 1,375,000 1,555,000
Notes payable - certificates of
indebtedness (F) 210,414 221,314
Notes payable - Farmers Supply (G) 449,805
Notes payable - other 10,070 51,951
------------ ------------
25,323,039 22,663,265
Less current maturities 3,013,819 2,820,453
------------ ------------
$ 22,309,220 $ 19,842,812
============ ============
Aggregate annual maturities of long-term debt at October 31, 1996
are:
1997 3,013,819
1998 2,817,527
1999 2,822,230
2000 2,837,230
2001 2,852,230
Thereafter 10,980,003
------------
$ 25,323,039
============
(A) Due 1997 through 2004, with annual installments of
$2,467,250 plus interest at fluctuating rates based on
the cost of money to CoBank (average rate of 8.04% at
October 31, 1996); secured by substantially all assets
of the Cooperative. The agreement requires maintenance
of $20,000,000 working capital, a maximum ratio of CoBank
term debt to the value of Mississippi Chemical Stock
owned, plus the net book value of assets owned of not
more than 60%, a current ratio of 1.2% and requires
CoBank approval if distributions to members exceed 50%
of patronage based income or the Cooperative retires
greater than $60,000 of preferred stock in any fiscal
year. A formal waiver of the working capital and the
current ratio was obtained for 1996 and a formal waiver
was obtained during 1995 on payment of patronage
distributions, retirement of allocated equities and
retirement of preferred stock. The agreement requires
the Cooperative to invest in stock of CoBank in
amounts determined by the bank.
(B) Due 1996 through 2002 at $7,500 monthly plus interest at
8.25% at October 31, 1996, and 8.75% at October 31, 1995;
cross-collateralized with (A) above.
(C) Due at various times through 2002; interest at 7%;
maturities of principal are based on Southern Farm Fish
Processors, Inc., obtaining various equity and working
capital levels; secured by property and equipment.
(D) Due at various times through 2002; interest at 6%;
maturities of principal are based on Southern Farm
Processors, Inc., obtaining various equity and working
capital levels; secured by property and equipment.
(E) Due 1997 through 2002 with annual installments of
principal plus interest at rates of 6% to 6.5%; secured
by property and equipment.
(F) Due 1996 with annual installments of principal plus
interest at interest rates of 8% and 10%; unsecured.
(G) Due in annual installments of $44,980 including interest,
uncollateralized.
The Cooperative paid interest, net of patronage refunds and
interest capitalized, of $6,307,994 for the year ended October
31, 1996, $6,629,921 for the year ended October 31, 1995, and
$3,829,186 for the year ended October 31, 1994.
NOTE 8: DEBENTURES
The outstanding debentures have maturities ranging from 1996
through 1998. Interest rates vary from 7% to 12%.
1996 1995
------------ ------------
Debentures $ 1,348,409 $ 1,395,409
Less current maturities 1,342,009 1,383,209
------------ ------------
Included in other liabilities $ 6,400 $ 12,200
============ ============
Aggregate annual maturities of debentures at October 31, 1996
are:
1998 $ 6,400
============
NOTE 9: INCOME TAXES
The provision for income taxes includes these components:
1996 1995 1994
------------ ------------ ------------
Taxes currently payable $ 7,070,860 $ 781,958 $ -0-
Deferred income taxes (3,392,985) 1,412,403 -0-
------------ ------------ ------------
$ 3,677,875 $ 2,194,361 $ -0-
============ ============ ============
The tax effects of temporary differences related to deferred taxes
shown on the balance sheet at October 31, 1996 and 1995 were:
1996 1995
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 403,515 $ 26,477
Inventory capitalization 372,178 284,300
Accrued expenses not deductible until paid 295,722 201,231
Alternative minimum tax credit 425,330
Net operating loss carryforward 8,306
Writedown of fixed assets 1,971,917
------------ ------------
3,043,332 945,644
Deferred tax liabilities:
Estimated market value over tax
basis of marketable securities 9,260,235
Accumulated depreciation 370,150 53,963
------------ ------------
370,150 9,314,198
------------ ------------
Net deferred tax asset (liability)
before valuation allowance $ 2,673,182 (8,368,554)
============ ============
Valuation allowance:
(Increase) during the year (692,600)
------------ ------------
Ending balance (692,600) -0-
------------ ------------
Net deferred tax asset (liability) $ 1,980,582 $ (8,368,554)
============ ============
The above net deferred tax asset (liability) is presented on
the balance sheets as follows:
1996 1995
------------ ------------
Deferred tax asset - current $ 834,738
Deferred tax asset - long term 1,145,844
Deferred tax liability - current $ (8,368,554)
------------ ------------
$ 1,980,582 $ (8,368,554)
============ ============
A reconciliation of income tax expense at the statutory rate
to income tax expense at the Company's effective rate is shown
below:
1996 1995 1994
------------ ------------ ------------
Expected provision (34%) $ 1,955,012 $ 1,665,192 $ 1,344,400
Tax effect of net
savings (loss) applied
to allocated equities 355,086 (577,698) (2,069,300)
Excess of benefits of
allocated equity over
taxable income 446,535 724,900
State income taxes 675,177 660,332
Change in deferred tax
asset valuation allowance 692,600
------------ ------------ ------------
$ 3,677,875 $ 2,194,361 $ -0-
============ ============ ============
The Cooperative paid income taxes of $7,431,000 and $32,322
for the years ended October 31, 1996 and 1995, respectively.
For the year ended October 31, 1994, the Cooperative received
an income tax refund of $365,942.
As of October 31, 1996, the Cooperative had approximately
$200,000 of alternative minimum tax credits available to
offset future patronage based federal income taxes. The
Cooperative also has unused patronage operating loss
carryforwards of approximately $1,090,000 which will
expire 2011.
Deferred income taxes related to change in realized
appreciation or available-for-sale securities, shown in
members' equity, was $9,260,535 for 1995.
In setting the valuation allowance for realization of
deferred tax assets, management uses a tax planning
strategy that recognizes the benefits of impairment losses
deductible in the future based on available refunds of
previously paid tax.
NOTE 10: BENEFIT PLANS
The Cooperative adopted a combination salary deferral/profit-
sharing defined contribution plan effective August 1, 1989.
The plan covers substantially all full-time employees aged
twenty-one or older with at least one year of service.
Participants must contribute a minimum of 2% of their
compensation and may contribute up to the maximum
permitted by applicable regulations. The Cooperative will
match employee contributions up to a maximum of 4% of the
participants' compensation. The matching percentage and
additional profit-sharing contributions are determined on a
discretionary basis by the Board of Directors. Participant
interests in matching contributions are vested over a five-year
period. The Cooperative contributed $484,282, $ 683,158, and
$524,684 to the plan during the years ended October 31, 1996,
1995 and 1994, respectively.
The Cooperative and its member cooperatives adopted a
non-qualified defined contribution plan for managers of the
member cooperatives. The amount of annual contribution to the
plan for each participant is based on member cooperatives'
purchases and the profitability of SF Services, Inc. The
participants begin vesting after 14 years of service to the
member cooperative and are 100% vested after 19 years. The
Cooperative incurred expenses of $241,898 and $120,382 related
to this plan for the years ended October 31, 1996 and 1995,
respectively.
NOTE 11: RELATED PARTY TRANSACTIONS
The Cooperative owned 7% and 10% of the outstanding stock of
Mississippi Chemical Corporation (MCC) at October 31, 1995 and
1994 and the President of the Cooperative during those years
was a director of MCC. Following are the material transactions
with MCC for the respective periods:
1995 1994
------------ ------------
Fertilizer purchases $ 32,587,243 $ 34,713,124
============ ============
Patronage distributions $ -0- $ 2,919,051
============ ============
Distribution fee income $ -0- $ 781,228
============ ============
MCC paid the Cooperative dividends of $123,154 in 1996 and
$530,037 during 1995. Accounts payable to MCC for fertilizer
purchases were $1,495,936 at October 31, 1995.
During 1994, the Cooperative bought and sold 24,001 shares
of MCC Potash stock. No gain or loss was recognized on these
transactions.
On November 7, 1994, the Cooperative purchased a fertilizer
storage facility from MCC for $340,000.
NOTE 12: LEASES
Noncancellable operating leases for feed mill buildings and
equipment, other machinery and equipment and trucks expire
in various years through 2002. These leases generally
contain renewal options for periods ranging from one to five
years and require the Cooperative to pay all executory costs
(property taxes, maintenance and insurance).
Future minimum lease payments at October 31, 1996, were:
1997 $ 3,642,169
1998 3,296,173
1999 2,505,420
2000 1,070,126
2001 409,108
Later years 131,434
============
Future minimum lease payments $ 11,054,430
Rental expense for all operating leases amounted to
the following:
1996 1995 1994
------------ ------------ ------------
$ 4,574,356 $ 4,208,848 $ 4,120,475
============ ============ ============
NOTE 13: ACQUISITION
On December 1, 1994, the Cooperative acquired all the assets
of and assumed all liabilities of Delta Purchasing Federation
(AAL) ("DPF") as follows.
Current assets $ 14,421,424
Other assets 3,490,231
------------
17,911,655
============
Current liabilities 11,814,255
Other liabilities 1,598,512
------------
13,412,767
------------
Equities allocated $ 4,498,888
============
The total consideration delivered to DPF shareholders was
equity interest of $4,489,789, or $500,000 in addition to the
net assets received as carried by DPF before the transaction.
The acquisition has been accounted for as a purchase by
recording the assets and liabilities of DPF at estimated fair
value at the acquisition date. The consolidated operations
of the Cooperative include the operations of DPF from the
acquisition date. Unaudited proforma consolidated operations
assuming the purchase was made November 1, 1993 are shown below
for the year ended October 31, 1994.
Net Sales $484,600,030
============
Net Savings $ 5,113,126
============
NOTE 14: CAPITAL STOCK
Liquidation
and Shares
Authorized Redemption Issued and
Class of Stock Shares Par Value Preference Outstanding
-------------- ---------- --------- ------------ -----------
Class "A"
preferred (1) 150,000 $ 1 $ 100 10,796
Class "B"
convertible
preferred (2) 15,000 $ 1 $ 100 6,764
Common 500 $1,000 125
(1) Non-voting; non-cumulative dividends not to exceed 8 1/2% of
liquidation and redemption preference if earned and when
declared by the Board of Directors with preference over
any other dividend or distributions declared in any year.
(2) Non-voting; non-cumulative dividends not to exceed 4% of
liquidation and redemption preference if earned and when
declared by the Board of Directors with preference over
any other dividend, except Class A preferred stock, or
distributions declared in any year. At the discretion of
the Board of Directors, the Class B preferred stock shall
become convertible, at the option of the holder, at its
liquidation and redemption preference value into equity
certificates.
Capital certificates may be surrendered upon termination of
membership or expiration of ten years from the date of the
certificate, whichever event shall be last to occur, for
Class A Preferred Stock with a liquidation and redemption
preference equal to the stated amount of the capital
certificate. The certificates are subordinate to all debt
and have no voting rights.
NOTE 15: NOTES RECEIVABLE
The Cooperative has provided long-term financing to certain
members by transferring amounts owed by the members for
purchases to long-term notes receivable pursuant to agreements
with CoBank wherein CoBank provides seasonal financing directly
to such members.
NOTE 16: BUSINESS SEGMENTS
The Cooperative operates in two industries (1) distribution
of seed, feed, fertilizer, chemicals, petroleum, lubricants,
tires, batteries, accessories, farm supplies and related
services and (2) catfish processing and sales. Sales between
segments are not material. Net sales, operating income,
identifiable assets, capital expenditures, and depreciation
are as follows:
Distribution Catfish
October 31, 1996 Activities Processing Total
- ---------------- ------------ ------------ ------------
Net sales $553,856,134 $ 36,624,223 $590,480,357
Operating (loss) $ (2,768,125) $ (5,783,122) $ (8,551,247)
Identifiable assets $182,953,280 $ 9,168,779 $192,122,059
Capital expenditures $ 10,139,662 $ 310,158 $ 10,449,820
Depreciation $ 1,866,517 $ 372,981 $ 2,239,498
Distribution Catfish
October 31, 1995 Activities Processing Total
- ---------------- ------------ ------------- ------------
Net sales $492,989,054 $ 37,831,922 $530,820,976
Operating income (loss) $ 3,116,147 $ (2,615,749) $ 500,398
Identifiable assets $188,582,330 $ 11,079,559 $199,661,889
Capital expenditures $ 11,772,778 $ 1,692,373 $ 13,465,151
Depreciation $ 2,544,970 $ 406,564 $ 2,951,534
Distribution Catfish
October 31, 1994 Activities Processing Total
- ---------------- ------------ ------------ ------------
Net sales $408,599,234 $ 30,572,080 $439,171,314
Operating income (loss) $ 7,426,400 $ (2,570,434) $ 4,855,966
Identifiable assets $148,461,613 $ 11,065,418 $159,527,031
Capital expenditures $ 1,297,958 $ 1,235,999 $ 2,533,957
Depreciation $ 2,314,779 $ 200,000 $ 2,514,779
For purposes of business segment disclosure, all activities
related to other cooperatives are included solely in
distribution activities.
NOTE 17: ADDITIONAL CASH FLOW INFORMATION
1996 1995 1994
------------ ------------ ------------
Interest paid (net of
patronage dividends and
interest capitalization) $ 6,307,994 $ 6,629,921 $ 3,829,186
Income taxes paid (received) $ 7,431,000 $ 32,322 $ (365,942)
Noncash investing transactions:
1995
- ---------------------------------------
Acquisition of Delta Purchasing
Federation (AAL)
Fair value of assets received $ 16,938,948
Liabilities assumed (13,412,767)
Equities allocated (4,503,609)
------------
Cash received $ (977,428)
============
Accrued interest paid with advance
on seasonal line of credit $ 1,475,000
Class "D" stock redeemed with allocated
equities $ 1,109,456
Trade receivable transferred to
note receivable $ 200,000
1994
- ---------------------------------------
Disposition of Cross County Farmers Association
Asset sold $ 960,622
============
Liabilities assumed by buyer $ 960,622
============
NOTE 18: COMMITMENTS
Purchase Agreements
At October 31, 1996, SF Services, Inc. had commitments (open
contracts) to purchase 90,985 tons of feed ingredients for
$13,046,771 and to sell 100,600 tons of feed for $20,192,908.
The Company presells feed from March through October on an
annual basis. During this period, the Company attempts to
obtain commitments for as much as 100% ingredients for
presells. The Company does not overcommit on purchases of
ingredients. At October 31, 1996, the Company had commitments
to sell the cattle feed of 76,615 tons for $14,029,838 and
catfish feed of 23,985 tons for $6,163,070. The Cooperative
also had commitments to purchase cattle feed ingredients of
67,412 tons at a cost of $8,759,994 and catfish feed
ingredients of 23,573 tons at a cost of $4,286,777.
Loan Guarantees
The Cooperative has guaranteed $371,667 in loans to CoBank
for member cooperatives. The Cooperative has a second
mortgage related to these guarantees.
NOTE 19: IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Cooperative adopted the provisions of
Statements of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of." The Cooperative, as a
result of adopting the new standard, recognized expenses of
$4,981,398 to reduce the carrying value of the Southern Farm
Fish Processors, Inc. plant and the Greenville feed mill, the
values of which have been impaired due to continued losses
resulting from excessive operating costs. Also, during the
fourth quarter of fiscal 1996, the Cooperative recognized
expenses of $515,950 to reduce the carrying value of various
abandoned properties. The amount of the impairments were
estimated based on appraisals performed during the year and
expected future cash flows. These estimates could change
materially in the future. The amount of recognized expense
is included in operating expenses in the consolidated
statement of income.
NOTE 20: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Investments in Associated Enterprises
Investments in other cooperative's equities are carried at
cost, plus the Cooperative's share of allocated equities, less
patronage refunds and cash allocations. There is no market for
these investments since the securities are redeemable only
by the issuing cooperative at an established contract value.
Because of the lack of marketability, the Cooperative believes
it is not practicable to estimate the fair value of investments
in associated enterprises.
Long-Term Debt
Fair value is estimated based on the CoBank National Variable
Rate at October 31, 1996.
October 31, 1996
---------------------------
Carrying Fair
Amount Value
------------ ------------
CoBank - term 22,677,750 25,782,000
CoBank - seasonal 65,582,931 78,120,000
Other 2,645,289 4,230,000
------------ ------------
$ 90,905,970 $108,132,000
============ ============
NOTE 21: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure
of certain significant estimates and current vulnerabilities
due to certain concentrations. Those matters include the
following:
Major Lender
The Cooperative borrows most of its monies from CoBank.
Income Tax Assessment
During 1996, the Internal Revenue Service (IRS) completed
its examination of the Cooperative's federal income tax returns
for the years ended October 31, 1991, 1992 and 1993, and
has proposed certain adjustments which relate principally
to the Cooperative's method of computing patronage allocations
during those years. As a result, the IRS has proposed
additional taxes of $589,823 for 1991 and $447,961 for
1992, plus interest to date of payment. This issue
involves an Industry Coordinated Issue which the cooperative
industry, and the Company, are vigorously contesting. The
Cooperative has filed its protest with the Appellate Division
of the IRS. No accrual has been made for losses, if any, that
may result, pending the outcome of the Cooperative's appeal.
Contingent Liabilities
In the course of business, the Cooperative has become engaged
in various litigation matters. In the opinion of management,
based on the currently known facts, the litigation outstanding
will not materially impact future financial statements, however,
circumstances may change which would require reassessment and
revisions of the estimates of the risk of future litigation losses.
NOTE 22: SUBSEQUENT EVENTS
On December 31, 1996, the Cooperative purchased substantially
all of the assets of Matthews of Monette, Inc., a wholesale
and retail fuel business located in Arkansas, for $9,398,631.
This acquisition is expected to add approximately $45,000,000 in
annual sales. The new business will operate under the name
"Northeast Arkansas Oil Company, LLC", a newly formed, wholly-owned
subsidiary. The purchase will be financed as follows: $2,250,000
promissory notes issued by the Cooperative, $2,131,913 in capital
leases and other debt assumed from the seller, and the remainder
in borrowings from CoBank.
NOTE 23: RESTATEMENT OF 1996 OPERATING EXPENSES
The 1996 operating expenses and net income have been restated for
amounts which should not have been included in intercompany accounts.
The restatement increased operating expenses and decreased net
income by $500.000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
SF SERVICES, INC.
(Registrant)
/s/ John A. Gaston
--------------------
By: John A. Gaston, Senior Vice President
(Principal Financial Officer)
Date: August 12, 1997