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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
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 FEBRUARY 28, 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 area code)
offices and zip code)
-----------------
Include by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
NONE NONE
---- ----
(Class) (Number of shares outstanding at
February 28, 1999)
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
<S> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of May 31, 1998, August 31, 1998 and February 28, 1999 .. 2
Consolidated Statements of Operations for the three and six months ended
February 28, 1998 and 1999 ............................................................. 3
Consolidated Statements of Cash Flows for the three and six months ended
February 28, 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 May 31, 1998, August 31, 1998 and February 28, 1999 (unaudited) ... 13
Statements of Operations for the three and six months ended
February 28, 1998 and 1999 (unaudited) ................................................. 14
Statements of Cash Flows for the three and six months ended
February 28, 1998 and 1999 (unaudited) ................................................. 15
Notes to Financial Statements (unaudited) .............................................. 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 17
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of May 31, 1998, August 31, 1998 and February 28, 1999 (unaudited) .. 20
Statements of Operations for the three and six months ended
February 28, 1998 and 1999 (unaudited) ................................................ 21
Statements of Cash Flows for the three and six months ended
February 28, 1998 and 1999 (unaudited) ................................................ 22
Notes to Financial Statements (unaudited) ............................................. 23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 24
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable or
answers are negative.
Item 6. Exhibits and Reports on Form 8-K ............................................... 28
SIGNATURE PAGE .......................................................................... 29
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to 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 crises in Asia have impacted, and are 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 effect 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 February 28, 1999.
1
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
(DOLLARS IN THOUSANDS) ------------ ------------ -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 83,532 $ 120,008 $ 43,654
Receivables ................................................ 564,185 471,516 539,180
Inventories ................................................ 523,019 479,734 506,319
Other current assets ....................................... 36,996 37,707 124,185
---------- ---------- ----------
Total current assets ...................................... 1,207,732 1,108,965 1,213,338
OTHER ASSETS:
Investments ................................................ 346,214 347,334 357,955
Other ...................................................... 96,485 97,034 119,186
---------- ---------- ----------
Total other assets ........................................ 442,699 444,368 477,141
PROPERTY, PLANT AND EQUIPMENT ............................... 893,531 915,770 949,599
---------- ---------- ----------
$2,543,962 $2,469,103 $2,640,078
========== ========== ==========
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .............................................. $ 53,500 $ 475 $ 247,000
Current portion of long-term debt .......................... 39,548 13,855 17,650
Patrons' credit balances ................................... 42,876 41,324 53,071
Patrons' advance payments .................................. 108,488 148,021 161,508
Drafts outstanding ......................................... 33,569 26,367 20,203
Accounts payable ........................................... 491,969 383,161 335,458
Book cash overdraft ........................................ 49,314 28,375 35,994
Accrued expenses ........................................... 100,497 119,373 89,873
Patronage dividends and equity retirements payable ......... 60,019 63,562 16,303
---------- ---------- ----------
Total current liabilities ................................. 979,780 824,513 977,060
LONG-TERM DEBT .............................................. 375,200 442,986 442,616
OTHER LIABILITIES ........................................... 72,113 75,801 80,166
MINORITY INTERESTS IN SUBSIDIARIES .......................... 58,603 59,926 57,925
COMMITMENTS AND CONTINGENCIES
EQUITIES .................................................... 1,058,266 1,065,877 1,082,311
---------- ---------- ----------
$2,543,962 $2,469,103 $2,640,078
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
2
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------- -----------------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS) ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales:
Grain and oilseed ............................ $1,350,557 $ 974,093 $2,792,895 $2,031,964
Energy ....................................... 342,955 254,766 814,291 584,634
Processed grain and oilseed .................. 164,490 134,255 326,660 271,810
Feed and farm supplies ....................... 72,925 84,699 211,990 207,534
Agronomy ..................................... 128,088 119,685 274,890 227,287
---------- ---------- ---------- ----------
2,059,015 1,567,498 4,420,726 3,323,229
Patronage dividends ........................... 35,011 3,433 35,643 3,902
Other revenues ................................ 32,349 25,777 58,186 52,988
---------- ---------- ---------- ----------
2,126,375 1,596,708 4,514,555 3,380,119
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of goods sold ............................ 2,041,606 1,540,787 4,356,010 3,266,653
Marketing, general and administrative ......... 36,544 37,189 73,359 76,270
Interest ...................................... 9,451 10,422 18,138 19,972
Minority interests ............................ (2,318) 645 (3,179) (756)
---------- ---------- ---------- ----------
2,085,283 1,589,043 4,444,328 3,362,139
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ..................... 41,092 7,665 70,227 17,980
INCOME TAX EXPENSE (BENEFIT) ................... 5,085 (965) 8,025 1,035
---------- ---------- ---------- ----------
NET INCOME ..................................... $ 36,007 $ 8,630 $ 62,202 $ 16,945
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
3
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- -------------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS) ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 36,007 $ 8,630 $ 62,202 $ 16,945
---------- ---------- --------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ....................... 18,231 20,171 36,692 40,146
Noncash (income) loss from joint ventures ........... (3,405) 3,402 6,046 (1,267)
Noncash portion of patronage dividends received ..... (19,694) (3,291) (31,149) (3,466)
Gain on sale of property, plant and equipment ....... (71) (524) (1,316) (1,321)
Adjustment of inventories to market value ........... 7,843 (5,913) 19,609 4,829
Other ............................................... (4,448) (990) (2,966) (990)
Changes in operating assets and liabilities:
Receivables ........................................ 138,236 88,110 (26,252) (71,089)
Inventories ........................................ 62,275 13,986 (11,406) (31,414)
Other current assets and other assets .............. (89,253) (101,600) (85,572) (108,837)
Patrons' credit balances ........................... 52,813 (9,882) 76,442 11,747
Patrons' advance payments .......................... (79,677) (25,000) 31,507 13,487
Accounts payable and accrued expenses .............. (117,968) (146,984) (97,718) (77,203)
Drafts outstanding and other liabilities ........... 1,688 (1,609) (2,993) (1,798)
---------- ---------- --------- ----------
Total adjustments ................................ (33,430) (170,124) (89,076) (227,176)
---------- ---------- --------- ----------
Net cash provided by (used in)
operating activities ............................ 2,577 (161,494) (26,874) (210,231)
---------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment .......... (18,434) (37,128) (58,187) (70,943)
Proceeds from disposition of property,
plant and equipment .................................. 2,195 1,640 16,498 4,852
Investments ........................................... (4,846) (8,995) (8,228) (11,212)
Investments redeemed .................................. 1,916 962 3,968 5,424
Changes in notes receivable ........................... (625) 1,294 8,904 2,651
Other investing activities, net ....................... 2,116 156 986 (65)
---------- ---------- --------- ----------
Net cash used in investing activities ............ (17,678) (42,071) (36,059) (69,293)
---------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable .............................. 53,894 217,000 134,751 246,525
Long-term debt borrowings ............................. 3,187 10,565 23,590 10,565
Principal payments on long-term debt .................. (9,402) (2,629) (13,051) (7,257)
Changes in book cash overdraft ........................ (34,446) (6,200) (10,035) 7,619
Retirements of equity ................................. (3,017) (1,328) (19,014) (10,599)
Cash patronage dividends paid ......................... 26 (28,591) (13,388) (43,683)
---------- ---------- --------- ----------
Net cash provided by financing activities ........ 10,242 188,817 102,853 203,170
---------- ---------- --------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ...................................... (4,859) (14,748) 39,920 (76,354)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ................................... 79,783 58,402 35,004 120,008
---------- ---------- --------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ......................................... $ 74,924 $ 43,654 $ 74,924 $ 43,654
========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
4
<PAGE>
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 six months ended February 28, 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 was derived from audited consolidated financial statements but
does not include all disclosures required by generally accepted accounting
principles.
The unaudited consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Reclassifications have been made to the prior year's financial statements
to conform to the current year presentation.
NOTE 2. RECEIVABLES
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Trade ........................................ $564,737 $474,454 $553,917
Other ........................................ 23,635 20,376 8,662
-------- -------- --------
588,372 494,830 562,579
Less allowance for doubtful accounts ......... 24,187 23,314 23,399
-------- -------- --------
$564,185 $471,516 $539,180
======== ======== ========
</TABLE>
NOTE 3. INVENTORIES
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
---------- ------------ -------------
<S> <C> <C> <C>
Energy products .............................. $208,055 178,792 $182,217
Grain and oilseed ............................ 166,925 171,099 133,154
Agronomy ..................................... 82,168 80,030 86,407
Feed and farm supplies ....................... 46,871 30,064 85,448
Processed grain and oilseed products ......... 19,000 19,749 19,093
-------- ------- --------
$523,019 $479,734 $506,319
======== ======== ========
</TABLE>
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 February 28, 1998 and 1999, total
comprehensive income amounted to $36,007 and $8,544 respectively. Total
comprehensive income was $62,202 and $18,260 for the six months ended February
28, 1998 and 1999, respectively. Accumulated other comprehensive income (loss)
at May 31, 1998, August 31, 1998 and February 28, 1999 was $1,195, $(99) and
$1,216, respectively.
5
<PAGE>
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 six months and second 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. There is no assurance that these joint ventures will take place.
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, currently 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, will assume
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. 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 encounter business
disruption because of the Year 2000 issue, the Company in turn could experience
disruption of normal business processes and as a result incur additional costs
or loss of revenue.
In preparation for the Year 2000, the Company has reviewed the primary
internally-developed software programs used within the divisions and defined
business units comprising 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,
6
<PAGE>
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 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 $0.9 million was expended
through February 28, 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
effect 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
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
The Company's consolidated net income for the three months ended February
28, 1999 and 1998 was $8.6 million and $36.0 million, respectively, which
represents a $27.4 million (76%) decrease during the current three-month
period. This decline in profitability in the 1999 three-month period is
primarily attributable to the absence of an agronomy product patronage refund
and reduced gross margins in the Company's food processing operations and its
consumer products packaging joint venture.
During the three-month period ended February 28, 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
three-month period, the Company did not receive a patronage dividend due to
depressed earnings in that particular industry. This decline in patronage
dividend revenue was partially offset by volume rebates for crop protection
products purchased from various companies and sold through the Company's
agronomy joint venture.
Within the Wheat Milling Defined Business Unit, gross margins declined 66
cents per hundred-weight for all products, which contributed to an overall
decline in pretax income of approximately $3.7 million for that business unit.
Within the Oilseed Processing and Refining Defined Business Unit, gross margins
for soymeal and other processed soybean products declined by $16 per ton, which
was the primary factor in the decline of approximately $5.1 million in pretax
operating results for that business unit, compared to the same three-month
period ended February 28, 1998. In addition, the Company's share of income from
its consumer products packaging joint venture was reduced approximately $5.8
million during the current three-month period compared to the same period ended
in 1998.
Net operating results produced by the Company's energy and grain
operations for the three months ended February 28, 1999 were not significantly
different in total from the results produced by those businesses during the
same period ended a year ago.
Consolidated net sales of $1.6 billion decreased approximately $500
million (24%) during the three-month period ended February 28, 1999 compared to
the same period ended in 1998.
The average sales price for all grain and oilseeds marketed by the Company
declined $1.19 per bushel, which was the primary factor in a reduction in grain
sales during the 1999 period of
7
<PAGE>
approximately $376 million (28%). Grain volume of approximately 284 million
bushels for the three-month period ended February 28, 1999 was essentially
unchanged compared to the same period in 1998.
Sales of energy products declined approximately $88 million (26%) during
the three-month period ended February 28, 1999 compared with the same period in
1998. This was primarily the result of an 11% decline in refined fuel volume at
an average price that was 14 cents per gallon less than that of a year ago.
Processed grain and oilseed sales decreased approximately $30 million
(18%) during the three months ended February 28, 1999 compared to the same
period in 1998. This decrease is primarily attributable to a $77 per ton
reduction in the average sales price of soymeal, and a reduction of
approximately $2.55 per hundred-weight for milled wheat products.
Sales of feed and farm supplies and wholesale agronomy products remained
at approximately the same dollar level during the current three-month period
ended February 28, 1999 as that of the same period a year ago.
Patronage dividends received decreased approximately $31.6 million (90%)
during the three months ended February 28, 1999 compared to the same period in
1998, resulting from reduced patronage earnings distributed by the Company's
primary fertilizer supplier.
Other revenues of $25.8 million decreased $6.6 million (20%) for the three
months ended February 28, 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 cause for this decrease was a decline of
$5.8 million in the Company's share of income from its consumer products
packaging joint venture during the current three-month period.
Cost of goods sold of $1.5 billion decreased approximately $500 million
(25%) during the three months ended February 28, 1999 compared to the same
period in 1998. During the three months ended February 28, 1999, the average
cost per bushel for all grains and oilseeds procured by the Company through its
grain marketing and country elevator system decreased $1.21 compared to the
same period ended in 1998. The average cost per gallon for refined fuels
decreased 12 cents during the three-month period ended February 28, 1999
compared to 1998. Within the Company's food processing operations, the average
cost for wheat declined $1.28 per bushel, and the average cost for soybeans
declined $1.83 per bushel, both compared to purchases made during the same
three-month period ended in the previous year.
Marketing, general and administrative expenses of $37.2 million for the
three months ended February 28, 1999 increased $0.6 million (2%) compared to
the same three months ended in 1998. During the three-month period ended in
1999, the Company expended approximately $0.4 million as part of its Year 2000
computer compliance program.
Interest expense of $10.4 million increased $1.0 million (10%) for the
three months ended February 28, 1999 compared to the same period in 1998.
Long-term borrowings since February 28, 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 February
28, 1999 increased approximately $3.0 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 that operation. 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.
An income tax benefit of $1.0 million for the three month period ended
February 28, 1999 is the product of nonpatronage losses in several operations,
the most significant originating from the consumer products packaging joint
venture. Income tax expense for the three months ended February 28, 1998 of
$5.1 million produced an effective tax rate of 12.4%
8
<PAGE>
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
The Company's consolidated net income for the six months ended February
28, 1999 and 1998 was $16.9 million and $62.2 million, respectively, which
represents a $45.3 million (73%) decrease during the current six-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 six-month period, and depressed
gross margins in the Company's food processing operations, food packaging joint
venture, and energy operations.
During the six-month period ended February 28, 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 six-month
period, the Company did not receive a patronage dividend due to depressed
earnings in that particular industry.
Net operating income produced by the Company's grain operations during the
six months ended February 28, 1999 was not significantly different in total
from that produced during the same period ended a year ago.
Grain volume of approximately 600 million bushels was essentially
unchanged comparing the six months ended February 28, 1999 with that same
period in 1998. The average sales price for all grain and oilseeds marketed by
the Company, however, declined $1.24 per bushel, which was the primary factor
in a reduction in grain and oilseed sales during the 1999 period of
approximately $761 million (27%).
Sales of energy products declined approximately $230 million (28%) during
the three-month period ended February 28, 1999 compared with the same period in
1998. This was primarily the result of a 10% decline in refined fuel volume at
an average price 16 cents per gallon less than that of a year ago.
Processed grain and oilseed sales decreased approximately $55 million
(17%) during the six months ended February 28, 1999 compared to the same period
in 1998. This decrease is primarily attributable to an $84 per ton reduction in
the average sales price of soymeal and a reduction of approximately $2.73 per
hundred-weight for milled wheat products.
Feed and farm supplies sales remained at approximately the same dollar
level as that of the comparable six months ended a year ago.
Wholesale agronomy product sales declined approximately $48 million (17%)
during the six months ended February 28, 1999 compared to the same period in
1998. This was primarily the result of an 11% decline in plant food volume at
an average price of $11 per ton less than that of a year ago.
Patronage dividends received decreased approximately $31.7 million (89%)
during the six months ended February 28, 1999 compared to the same period in
1998. This decline in patronage dividends was primarily the result of reduced
earnings generated by the Company's primary fertilizer supplier.
Other revenues of $53.0 million decreased $5.2 million (9%) for the six
months ended February 28, 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 cause for this decrease was a decline of
$5.4 million in the Company's share of earnings from its consumers products
packaging joint venture during the current period.
Cost of goods sold of approximately $3.3 billion decreased approximately
$1.1 billion (25%) during the six months ended February 28, 1999 compared to
the same period in 1998. During the six months ended February 28, 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 $1.26
compared to the same period ended in 1998. The average cost per gallon for
refined fuels decreased 14 cents during the six-month period ended February 28,
1999 compared to 1998, and volume for refined fuels declined approximately 10%
as well. Fertilizer costs declined an average of approximately $12 per ton, and
volume for that product line was diminished by 11% compared to activity during
the six months ended February 28, 1998. In the Company's food processing
operations, the average cost of wheat and soybeans declined $1.44 and $1.60 per
bushel, respectively.
Marketing, general, and administrative expenses of $76.3 million increased
$2.9 million (4%) for the six months ended February 28, 1999 compared to the
same period in 1998. Approximately $1.5 million
9
<PAGE>
of this change is from credits to expenses produced as a result of the
divestiture of a petroleum exploration project during the six-month period
ended February 28, 1998. During the six-month period ended February 28, 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 $0.6 million during the six-month period ended February
28, 1999 for the purpose of assessing and remediating issues related to Year
2000 computer compliance.
Interest expense of $20.0 million increased $1.8 million (10%) during the
six months ended February 28, 1999 compared to the same period in 1998.
Long-term borrowings since February 28, 1998 to finance the acquisition of
property, plant and equipment generated most of this additional expense.
Minority interests in operations for the six-month period ended February
28, 1999 increased approximately $2.4 million compared to the same period in
1998. Substantially all of the minority interest is in National Cooperative
Refinery Association, which operates a refinery near McPherson, Kansas. The
Company owns approximately 75% of that operation. This change in minority
interests during the current period is reflective of more profitable operations
within the partially owned subsidiaries during the current six-month period
compared to that same period of a year ago.
Income tax expense of $1.0 million and $8.0 million for the six months
ended February 28, 1999 and 1998, respectively, resulted in effective tax rates
of 5.8% and 11.4%. The reduced 1999 effective tax rate is reflective of reduced
nonpatronage earnings in several operations of the Company, most significantly,
the consumer products packaging joint venture.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $161.5 million and
provided cash of $2.6 million for the three months ended February 28, 1999 and
1998, respectively. For the period ended in 1999, net income of $8.6 million
and net non-cash income and expenses of approximately $12.9 million were offset
by increased working capital requirements of approximately $183.0 million. For
the three-month period ending February 28, 1998, net income of $36.0 million
was partially offset by net non-cash income and expenses of approximately $1.5
million and by increased working capital requirements of approximately $31.9
million.
Operating activities of the Company used net cash of $210.2 million and
$26.9 million for the six months ended February 28, 1999 and 1998,
respectively. For the period ended in 1999, net income of $16.9 million and net
non-cash income and expenses of approximately $38.0 million were offset by
increased working capital requirements of approximately $265.1 million. For the
six-month period ended February 28, 1998, net income of $62.2 million and net
non-cash income and expenses of $26.9 million were offset by increased working
capital requirements of approximately $116.0 million.
CASH FLOWS FROM INVESTING
Investing activities of the Company used net cash of $42.1 million during
the three-month period ended February 28, 1999. Expenditures for the
acquisition of property, plant and equipment of $37.1 million and additional
investments of $9.0 million were partially offset by proceeds from the
disposition of property, plant and equipment, proceeds from the redemption of
prior investments and collections on various notes receivable. The Company
projects total expenditures for the acquisition of property, plant and
equipment for the fiscal year ending August 31, 1999 to be approximately $196
million.
Investing activities of the Company used net cash of $17.7 million during
the three-month period ended February 28, 1998. Expenditures for the
acquisition of property, plant and equipment of $18.4 million and additional
investments of $4.8 million were partially offset by proceeds from the
disposition of property, plant and equipment and proceeds from the redemption
of prior investments.
Investing activities of the Company used net cash of $69.3 million during
the six-month period ended February 28, 1999. Expenditures for the acquisition
of property, plant and equipment of $70.9
10
<PAGE>
million and additional investments of $11.2 million were partially offset by
proceeds from the disposition of property, plant and equipment, proceeds from
the redemption of prior investments and collections on various notes
receivable.
Investing activities of the Company used net cash of $36.1 million during
the six-month period ended February 28, 1998. Expenditures for the acquisition
of property, plant and equipment of $58.2 million and additional investments of
$8.2 million were partially offset by proceeds from the disposition of
property, plant and equipment, and proceeds from the redemption of prior
investments and collections on various notes receivable. The largest single
source of cash partially offsetting capital expenditures and investments was
the proceeds of approximately $10.3 million received as part of a
sale-leaseback transaction for equipment within the Oilseed Processing and
Refining Defined Business Unit.
CASH FLOWS FROM FINANCING
The Company finances its working capital needs through short-term lines of
credit with the banks for cooperatives and commercial banks. In June 1998, the
Company established a 364-day credit facility of $400 million and a five-year
revolving facility of $200 million, all of which is committed. In addition to
these credit lines, the Company has a 364-day credit facility dedicated to
NCRA, a subsidiary of which the Company owns 75%, with the St. Paul Bank for
Cooperatives in the amount of $52 million, all of which is committed, and a
364-day credit facility dedicated to Swiss Valley Cooperative, a subsidiary of
which the Company owns 60%, with CoBank in the amount of $0.75 million, all of
which is committed. On February 28, 1999 the Company had total short-term
indebtedness on these various facilities totaling $247 million. On August 31,
1998 and May 31, 1998, respectively, the Company had $0.48 million and $53.5
million outstanding on its short-term lines of credit. The increase in
short-term borrowings in the six-month period ended February 28, 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.
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 million represented long-term
borrowings by NCRA. In June 1998, the Company established a new long-term
credit agreement through the banks for cooperatives whereby the Company repaid
$279.6 million of the loan balance, and borrowed $134 million on the new
long-term facility with the banks for cooperatives. This new facility commits
$200 million of long-term borrowing capacity to the Company, with repayments
through the year 2009. The amount outstanding on this credit agreement was $134
million with $66 million remaining available on both August 31, 1998 and
February 28, 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 May 31, 1998,
August 31, 1998 and February 28, 1999, of $40.6 million, $39.5 million and
$35.5 million, respectively, in the form of Industrial Revenue Bonds,
capitalized leases and miscellaneous notes payable.
The Company, through the National Cooperative Refinery Association,
incurred additional long-term debt of $10.0 million with the banks for
cooperatives during the three months ended February 28, 1999. During that same
period, the Company repaid long-term debt totaling approximately $2.6 million.
During the three months ended February 28, 1998 the Company incurred additional
long-term debt of $3.2 million, and repaid approximately $9.4 million of
long-term debt.
During the six-month periods ended February 28, 1999 and 1998, the Company
incurred additional long-term debt of $10.6 million and $23.6 million,
respectively. Repayments of long-term debt totaled $7.3 million and $13.1
million during the six months ended February 28, 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
11
<PAGE>
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 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 February 28, 1999 and 1998 were approximately
$1.3 million and $3.0 million, respectively. During the six months ended
February 28, 1999 and 1998, respectively, the Company redeemed approximately
$10.6 million and $19.0 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.
12
<PAGE>
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
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
(DOLLARS IN THOUSANDS) --------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Receivables ...................................... $32,585 $28,703 $29,233
Inventories ...................................... 23,759 18,569 26,431
Other current assets ............................. 185
------- ------- -------
Total current assets ............................ 56,529 47,272 55,664
PROPERTY, PLANT AND EQUIPMENT ..................... 34,953 35,596 37,981
------- ------- -------
$91,482 $82,868 $93,645
======= ======= =======
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $22,890 $15,071 $21,487
Accounts payable ................................. 8,868 7,547 10,185
Accrued expenses ................................. 1,660 1,773 3,496
------- ------- -------
Total current liabilities ....................... 33,418 24,391 35,168
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY ...................... 58,064 58,477 58,477
------- ------- -------
$91,482 $82,868 $93,645
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements
(unaudited)
13
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------ -------------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS) ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Processed oilseed sales ....................... $110,444 $91,311 $218,625 $186,773
Other revenues ................................ 289 68 501 72
-------- ------- -------- --------
110,733 91,379 219,126 186,845
-------- ------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 102,396 87,914 198,267 176,887
Marketing, general and administrative ......... 1,291 1,339 2,634 2,649
Interest ...................................... 146 292 301 594
-------- ------- -------- --------
103,833 89,545 201,202 180,130
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES ..................... 6,900 1,834 17,924 6,715
INCOME TAX EXPENSE ............................. 100 195 225 275
-------- ------- -------- --------
NET INCOME ..................................... $ 6,800 $ 1,639 $ 17,699 $ 6,440
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
(unaudited)
14
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- --------------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS) ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 6,800 $ 1,639 $ 17,699 $ 6,440
--------- -------- --------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation .............................................. 467 566 933 1,112
Gain on disposal of property, plant and equipment ......... (202)
Changes in operating assets and liabilities:
Receivables .............................................. 4,383 2,697 (4,091) (530)
Inventories .............................................. (11,248) (2,647) (21,787) (7,862)
Other current assets ..................................... 1,273 240 2,131
Accounts payable and accrued expenses .................... 526 3,756 (1,493) 4,361
--------- -------- --------- --------
Total adjustments ...................................... (4,599) 4,612 (24,509) (2,919)
--------- -------- --------- --------
Net cash provided by (used in)
operating activities .................................. 2,201 6,251 (6,810) 3,521
--------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ................ (1,229) (1,992) (4,471) (3,500)
Proceeds from disposition of property,
plant and equipment ........................................ 3 10,267 3
--------- -------- --------- --------
Net cash (used in) provided by
investing activities .................................. (1,229) (1,989) 5,796 (3,497)
--------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to Cenex Harvest States Cooperatives .......... 5,828 (2,623) 18,713 6,416
Defined business unit equity distributed .................... (6,800) (1,639) (17,699) (6,440)
--------- -------- --------- --------
Net cash (used in) provided by
financing activities .................................. (972) (4,262) 1,014 (24)
--------- -------- --------- --------
INCREASE (DECREASE) IN CASH .................................. -- -- -- --
CASH AT BEGINNING OF PERIOD .................................. -- -- -- --
--------- -------- --------- --------
CASH AT END OF PERIOD ........................................ -- -- -- --
========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements
(unaudited)
15
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. ACCOUNTING POLICIES
The unaudited statements of operations and cash flows for the three and
six months ended February 28, 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
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
--------- ------------ ------------
<S> <C> <C> <C>
Trade ........................................ $32,980 $29,098 $29,628
Less allowance for doubtful accounts ......... 395 395 395
------- ------- -------
$32,585 $28,703 $29,233
======= ======= =======
</TABLE>
NOTE 3. INVENTORIES
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
--------- ------------ ------------
<S> <C> <C> <C>
Oilseed ..................................... $ 6,926 $ 712 $10,318
Processed oilseed products .................. 16,833 17,857 16,113
------- ------- -------
$23,759 $18,569 $26,431
======= ======= =======
</TABLE>
16
<PAGE>
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 six months and
second 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
--------------------- ----------------------
1998 1999 1998 1999
(IN THOUSANDS EXCEPT PER BUSHEL INFORMATION) --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Income before income taxes ................... $6,900 $1,834 $17,924 $ 6,715
Income from purchased oil .................... (866) (120) (753) (873)
Book to tax differences ...................... 4 4
------ ------ ------- -------
Taxable income ............................... $6,034 $1,718 $17,171 $ 5,846
====== ====== ======= =======
Bushels processed ............................ 9,849 9,553 19,102 17,618
Income per bushel ............................ $ 0.61 $ 0.18 $ 0.90 $ 0.33
====== ====== ======= =======
</TABLE>
Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of processed
oilseed sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------- ----------------------
1998 1999 1998 1999
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Gross margin ................................. 7.29% 3.72% 9.31% 5.29%
Marketing, general and administrative ........ 1.17% 1.47% 1.20% 1.42%
Interest ..................................... 0.13% 0.32% 0.14% 0.32%
</TABLE>
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
The Oilseed Processing and Refining Defined Business Unit net income of
$1.6 million for the three months ended February 28, 1999 represents a $5.2
million decrease (76%) 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 $16 per ton during the three months ended February 28, 1999
compared to the same three-month period of a year ago.
Processed oilseed sales of $91.3 million for the three-month period ended
February 28, 1999 decreased by $19.1 million (17%) compared to the same period
in 1998. A decline in processing volumes of approximately 14,000 tons, a lower
average sales price of approximately $77 per ton for such products and a
decline in the average sales price of approximately one cent per pound for
refined oil contributed to the decrease. This decrease was partially offset by
a slight increase in refining volumes.
17
<PAGE>
Other revenues declined $0.2 million (77%) during the three months ended
February 28, 1999 compared to the same period in 1998. During the 1998 period,
the Defined Business Unit received insurance proceeds of approximately $0.3
million related to a business interruption claim occurring in 1997.
Cost of goods sold of $87.9 million for the three months ended February
28, 1999 decreased $14.5 million (14%) compared to the same period in 1998.
During the 1999 period, a decline in soybeans processed of approximately
300,000 bushels reduced such costs almost $2.0 million. A reduced cost for
soybeans of $1.83 per bushel during the three months ended February 28, 1999
compared to the same period in 1998 reduced cost of goods sold by approximately
$17.5 million. These reductions were partially offset by an increase in the
cost of crude soybean oil, as well as slightly increased refining volumes.
Marketing, general and administrative expenses of $1.3 million for the
three months ended February 28, 1999 was essentially unchanged compared to the
same period in 1998.
Interest expense for the three months ended February 28, 1999 was $0.3
million, compared with approximately $0.2 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 $0.2 million and $0.1 million for the three-month
periods ended February 28, 1999 and 1998, respectively, resulted in effective
tax rates of 10.6% and 1.4%. The increase in the effective tax rate in the 1999
period is the result of increased nonpatronage earnings as a percentage of
total earnings.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
The Oilseed Processing and Refining Defined Business Unit's net income of
$6.4 million for the six months ended February 28, 1999 represents a $11.3
million decrease (64%) 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 $20 per ton during the six months ended February 28, 1999
compared to the same six-month period of a year ago.
Processed oilseed sales of $186.8 million for the six-month period ended
February 29, 1999 decreased $31.9 million (15%) compared to the same period in
1998. This decrease resulted from a decline in processing volumes of
approximately 14,000 tons and a reduction in the average sales price of
approximately $84 a ton for such products, partially offset by approximately a
1.8 cent per pound increase in the sales price for refined oil and a 3%
increase in refining volumes.
Other revenues declined $0.4 million (86%) during the six months ended
February 28, 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.
Cost of goods sold of $176.9 million for the six months ended February 28,
1999 decreased $21.4 million (11%) compared to same period ended in 1998.
During the 1999 period, a decline in soybeans processed of approximately
1,500,000 bushels reduced such costs almost $10.0 million. A reduced cost for
soybeans of $1.60 per bushel during the six months ended February 28, 1999
compared to the same period in 1998 resulted in a decline cost of goods sold by
approximately $28.2 million. These reductions were partially offset by a 4.7
cent per pound increase in the cost of crude soybean oil, as well as by a 5%
increase in crude soybean oil purchases.
Marketing, general, and administrative expenses of $2.6 million for the
six months ended February 28, 1999 was essentially unchanged from the same
period in 1998.
Interest expense for the six months ended February 28, 1999 was $0.6
million compared with $0.3 million for the same period of a year ago. This
increase of $0.3 million is primarily attributable to capital expenditures made
since the 1998 period.
Income tax expense of $0.3 million and $0.2 million for the six-month
periods ended February 28, 1999 and 1998, respectively, resulted in effective
tax rates of 4.1% and 1.3%. The increase in the effective tax rate in the 1999
period is the result of increased nonpatronage earnings as a percentage of
total earnings.
18
<PAGE>
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 February 28, 1999 provided
net cash of $6.3 million. Net income of $1.6 million, non-cash expenses of $0.6
million and a reduction in working capital requirements of $4.1 million
generated this net cash. For the same three-month period of a year ago, net
earnings of $6.8 million and non-cash expenses of approximately $0.5 million
were partially offset by increased working capital requirements of about $5.1
million, thereby providing net cash of $2.2 million.
Operating activities for the six months ended February 28, 1999 provided
net cash of $3.5 million. Net income of $6.4 million and non-cash expenses of
$1.1 million were partially offset by increased working capital requirements
totaling approximately $4.0 million. For the same six-month period a year ago,
net income of $17.7 million and non-cash expenses and income of approximately
$0.9 million were offset by increased working capital requirements totaling
approximately $25.4 million, thereby using net cash in operating activities of
$6.8 million.
CASH FLOWS FROM INVESTING
The Oilseed Processing and Refining Defined Business Unit used cash of
approximately $2.0 million and $1.2 million during the three-month periods
ended February 28, 1999 and 1998, respectively, for the acquisition of
property, plant and equipment.
During the six-month period ended February 29, 1999, the Oilseed
Processing and Refining Defined Business Unit used approximately $3.5 million
for the acquisition of property, plant and equipment. During the six-months
ended February 28, 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 $4.5 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 $21.5 million as of February 28, 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.
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.
19
<PAGE>
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
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
(DOLLARS IN THOUSANDS) ----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Receivables ...................................... $ 35,757 $ 35,228 $ 32,765
Inventories ...................................... 13,785 18,895 23,137
Other current assets ............................. 394 430 165
-------- -------- --------
Total current assets ............................ 49,936 54,553 56,067
INTANGIBLE ASSETS ................................. 10,748 10,481 9,948
PROPERTY, PLANT AND EQUIPMENT ..................... 85,627 97,428 110,577
-------- -------- --------
$146,311 $162,462 $176,592
======== ======== ========
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $ 16,739 $ 33,238 $ 49,391
Accounts payable ................................. 8,836 11,003 11,998
Accrued expenses ................................. 1,569 1,667 3,527
Current portion of long-term debt ................ 10,005 10,005 10,005
-------- -------- --------
Total current liabilities ....................... 37,149 55,913 74,921
LONG-TERM DEBT .................................... 41,204 38,516 33,638
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY ...................... 67,958 68,033 68,033
-------- -------- --------
$146,311 $162,462 $176,592
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
(unaudited)
20
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------- --------------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS) ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Processed grain sales ......................... $54,047 $42,944 $108,036 $85,037
Other revenues ................................ 83
------- ------- -------- -------
54,047 42,944 108,119 85,037
------- ------- -------- -------
COSTS AND EXPENSES:
Cost of goods sold ............................ 49,755 41,806 98,966 81,837
Marketing, general and administrative ......... 2,202 2,441 4,388 4,679
Interest ...................................... 858 1,136 1,818 2,079
------- ------- -------- -------
52,815 45,383 105,172 88,595
------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME
TAXES ......................................... 1,232 (2,439) 2,947 (3,558)
INCOME TAX EXPENSE (BENEFIT) ................... 100 (175) 250 (275)
------- ------- -------- -------
NET INCOME (LOSS) .............................. $ 1,132 ($ 2,264) $ 2,697 ($ 3,283)
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements
(unaudited)
21
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------------- --------------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS) ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 1,132 ($2,264) $ 2,697 ($ 3,283)
-------- ------ -------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ............................ 1,523 1,357 2,443 2,619
Changes in operating assets and liabilities:
Receivables ............................................. 9,140 (1,104) 3,793 2,463
Inventories ............................................. 2,028 (1,823) (1,933) (4,242)
Other current assets .................................... 160 (1) (28) 265
Accounts payable and accrued expenses ................... (5,146) 2,220 (6,526) 2,855
-------- -------- -------- --------
Total adjustments ..................................... 7,705 649 (2,251) 3,960
-------- -------- -------- --------
Net cash provided by (used in) operating
activities ........................................... 8,837 (1,615) 446 677
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ............... (4,695) (5,508) (8,910) (15,235)
-------- -------- -------- --------
Net cash used in investing activities ................. (4,695) (5,508) (8,910) (15,235)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to Cenex Harvest States Cooperatives ......... (571) 7,298 16,039 16,153
Principal payments on long-term debt ....................... (2,439) (2,439) (4,878) (4,878)
Defined business unit equity distributed ................... (1,132) 2,264 (2,697) 3,283
-------- -------- -------- --------
Net cash (used in) provided by
financing activities ................................. (4,142) 7,123 8,464 14,558
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH ................................. -- -- -- --
CASH AT BEGINNING OF PERIOD ................................. -- -- -- --
-------- -------- -------- --------
CASH AT END OF PERIOD ....................................... -- -- -- --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
(unaudited)
22
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. ACCOUNTING POLICIES
The unaudited statements of operations and cash flows for the three and
six months ended February 28, 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
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
--------- ------------ ------------
<S> <C> <C> <C>
Trade ........................................ $35,703 $34,825 $32,990
Other ........................................ 738 1,074 527
------- ------- -------
36,441 35,899 33,517
Less allowance for doubtful accounts ......... 684 671 752
------- ------- -------
$35,757 $35,228 $32,765
======= ======= =======
</TABLE>
NOTE 3. INVENTORIES
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, FEBRUARY 28,
1998 1998 1999
--------- ------------ ------------
<S> <C> <C> <C>
Grain ....................................... $11,618 $17,003 $20,157
Processed grain products .................... 1,395 1,270 2,196
Other ....................................... 772 622 784
------- ------- -------
$13,785 $18,895 $23,137
======= ======= =======
</TABLE>
23
<PAGE>
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 six months and
second 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.
Mr. Garry A. Pistoria, who served as a group vice president responsible
for the operations of the Wheat Milling Defined Business Unit, retired as of
December 31, 1998. Mr. James Tibbetts, who previously served as group vice
president of the Oilseed Processing and Refining Defined Business Unit, has
assumed responsibility for the Wheat Milling Defined Business Unit as part of
his current responsibilities for the Foods Group.
RESULTS OF OPERATIONS
Patronage refunds to the Wheat Milling Defined Business Unit holders are
calculated on the basis of tax earnings per bushel. Because of this, the
Company believes that the calculation below is an important measure of the
Defined Business Unit's performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- --------------------------
1998 1999 1998 1999
(IN THOUSANDS EXCEPT PER BUSHEL INFORMATION) ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Income (loss) before income taxes ......... $ 1,232 $ (2,439) $ 2,947 $ (3,558)
Book to tax differences ................... 193 193
------- -------- -------- --------
Taxable income (loss) ..................... $ 1,232 $ (2,246) $ 2,947 $ (3,365)
======= ======== ======== ========
Bushels processed ......................... 7,893 8,255 15,818 16,559
Income (loss) per bushel .................. $ 0.16 $ (0.27) $ 0.19 $ (0.20)
======= ======== ======== ========
</TABLE>
Certain operating information pertaining to the Wheat Milling Defined
Business Unit is set forth below, as a percentage of processed grain sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross margin ............................... 7.94% 2.65% 8.40% 3.76%
Marketing, general and administrative ...... 4.07% 5.68% 4.06% 5.50%
Interest ................................... 1.59% 2.65% 1.68% 2.44%
</TABLE>
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
The Wheat Milling Defined Business Unit incurred a net loss of $2.3 million
for the three months ended February 28, 1999 compared to net income of $1.1
million for the same period in 1998, for a decrease of $3.4 million.
Approximately $1.5 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 27% compared to the same period in 1998,
with essentially the same fixed costs applied against the lower volumes. While
the decrease in volumes at Huron was offset by increased production at the other
mills, a general deterioration in gross margins of approximately 66 cents per
hundred weight on all products resulted in the balance of the change in net
income. The Huron
24
<PAGE>
conversion was operational in February 1999, and the Wheat Milling Defined
Business Unit is currently attempting to increase its share of the bakery flour
market from this mill's production.
Processed grain sales for the three-month period ended February 28, 1999
of $42.9 million decreased $11.1 million (21%) compared to the same period in
1998. A reduction in the average sales price of $2.55 per hundred weight,
partially offset by a 156,000 hundred weight volume increase resulted in the
decline in sales revenue.
Cost of goods sold of $41.8 million for the three months ended February
28, 1999 decreased $7.9 million (16%) compared to the same period in 1998. This
decrease was due primarily to a $1.28 per bushel decline in the cost of raw
material during the three months ended February 28, 1999, compared to that same
period in 1998. This price variance was partially offset by an increase in
volume of approximately 350,000 bushels and a $0.5 million increase in plant
expenses, essentially all of which is attributable to the Mount Pocono mill
which commenced partial operations in January 1999.
Marketing, general and administrative expenses of $2.4 million for the
three months ended February 28, 1999 increased approximately $0.2 million (11%)
compared to the same period in 1998. This increase is attributable to
additional administrative expenses incurred at the new mill in Mount Pocono.
Interest expense of $1.1 million during the three months ended February
28, 1999 increased $0.3 million (32%) compared to the same period in 1998. 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 construction of the Mount Pocono mill,
additional borrowings have been required to finance working capital. The
increase in interest expense during the three-month period ended February 28,
1999 compared to the same period ended in 1998 is attributable to this
activity.
An income tax benefit of $0.2 million for the three months ended February
28, 1999 is based upon an effective tax rate of 7.2% applied to the pretax
operating loss of $2.4 million for the period. For the three months ended
February 28, 1998, income tax expense of $0.1 million resulted in an effective
tax rate of 8.1%.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
The Wheat Milling Defined Business Unit incurred a net loss of $3.3
million for the six months ended February 28, 1999 compared to net income of
$2.7 million for the same period in 1998, for a decrease of $6.0 million.
Approximately $2.5 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 32% compared to the same
period in 1998, with essentially the same fixed costs applied against the lower
volumes. While the decrease in volumes at Huron was offset by increased
production at the other mills, a general deterioration in gross margins of
approximately 63 cents per hundred weight on all products resulted in the
balance of the change in net income. The Huron conversion was operational in
February 1999, and the Wheat Milling Defined Business Unit is currently
attempting to increase its share of the bakery flour market from this mill's
production.
Processed grain sales for the six-month period ended February 28, 1999 of
$85.0 million decreased $23.0 million (21%) compared to the same period in
1998. A reduction in the average sales price of $2.73 per hundred weight,
partially offset by a 400,000 hundred weight volume increase resulted in the
decline in sales revenue.
Cost of goods sold of $81.8 million for the six months ended February 28,
1999 decreased by $17.1 million (17%) compared to the same period in 1998. This
decrease was due primarily to a $1.44 per bushel decline in the cost of raw
material during the six months ended February 28, 1999, compared to the same
period in 1998. This price variance was partially offset by an increase in
volume of approximately 831,000 bushels and a $1.9 million increase in plant
expenses, attributable primarily to the Houston, Rush City and Mount Pocono
mills. The Houston mill was operating in a startup phase during
25
<PAGE>
much of the 1998 period and the volume at the Rush City mill in 1999 has
exceeded its 1998 volume by 36%. The Mount Pocono mill commenced partial
operations during the second quarter of the 1999 fiscal year.
Marketing, general and administrative expenses of $4.7 million for the six
months ended February 28, 1999 increased approximately $0.3 million (7%)
compared to the same period in 1998. This increase is primarily attributable to
additional administrative expenses incurred at the new mill in Mount Pocono.
Interest expense of $2.1 million during the six months ended February 28,
1999 increased $0.3 million (14%) compared to the same period in 1998. 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 the construction of the Mount Pocono mill,
additional borrowings have been required to finance working capital. The
increase in interest expense during the six-month period ended February 28,
1999 compared to the same period ended in 1998 is attributable to this
activity.
An income tax benefit of $0.3 million for the six months ended February
28, 1999 is based upon an effective tax rate of 7.7% applied to the pretax
operating loss of $3.6 million for the period. For the six months ended
February 28, 1998, income tax expense of $0.3 million resulted in an effective
tax rate of 8.5%.
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 $37.2 million has been expended
through February 28, 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 three months ended
February 28, 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
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 February 28, 1999 used net
cash of $1.6 million. The net operating loss of $2.3 million and increased
working capital requirements of approximately $0.7 million were partially
offset by non-cash expenses of $1.4 million. For the same three-month period
ended a year ago, net income of $1.1 million, non-cash expenses of $1.5 million
and a decrease in working capital of $6.2 million provided cash from operating
activities totaling approximately $8.8 million.
26
<PAGE>
Operating activities for the six months ended February 28, 1999 provided
net cash of approximately $0.7 million. The net operating loss of $3.3 million
for that period was offset by non-cash expenses of $2.6 million and reduced
working capital requirements of approximately $1.4 million. For the same
six-month period ending in 1998, net income of $2.7 million and non-cash
expenses of $2.4 million were partially offset by increased working capital
requirements of $4.7 million, thereby providing net cash from operating
activities of approximately $0.4 million.
CASH FLOWS FROM INVESTING
Cash expended for the acquisition of property, plant and equipment during
the three-month periods ended February 28, 1999 and 1998, respectively, totaled
approximately $5.5 million and $4.7 million, respectively.
During the six month periods ended February 28, 1999 and 1998, the Wheat
Milling Defined Business Unit expended approximately $15.2 million and $8.9
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.
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 February 28,
1999 was $49.4 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 February 28, 1999 the Wheat Milling Defined Business Unit had long-term
debt of $43.6 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
February 28, 1999 is payable within the next twelve months.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
------- ------------------------------------------------------------
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
None.
28
<PAGE>
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/ T.F. BAKER Executive Vice-President -- Finance & April 9, 1999
- ------------------- Administration
T.F. Baker
29
Exhibit 99
CAUTIONARY STATEMENT
Cenex Harvest States Cooperatives (the "Company"), or persons acting on
behalf of the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time, may
make, in writing or orally, "forward-looking statements" as defined under the
Private Securities Litigation Reform Act of 1995 (the "Act"). This Cautionary
Statement is for the purpose of qualifying for the "safe harbor" provisions of
the Act and is intended to be a readily available written document that
contains factors which could cause results to differ materially from those
projected in such forward-looking statements. These factors are in addition to
any other cautionary statements, written or oral, which may be made or referred
to in connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement shall be deemed to be a
statement that any one or more of the following factors may cause actual
results to differ materially from those which might be projected, forecast,
estimated or budgeted by the Company in such forward-looking statement or
statements:
COMPANY SUBJECT TO SUPPLY AND DEMAND FORCES. The Company may be adversely
affected by supply and demand relationships, both domestic and international.
Supply is affected by weather conditions, disease, insect damage, acreage
planted, government regulation and policies and commodity price levels. The
business is also affected by transportation conditions, including rail, vessel,
barge and truck. 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.
Demand may also be affected by changes in eating habits, by population growth
and increased or decreased per capita consumption of some products.
The Freedom to Farm Act of 1996, enacted in April of 1996, may affect crop
production in several ways. The Act more narrowly defines what will qualify as
environmentally sensitive acreage for purposes of the conservation reduction
program, with the result that 3 to 4 million acres may be put back into
agricultural production in the future from a present enrollment of 36.4 million
acres. The Act also removes restrictions on the type of crops planted (other
than fruit and vegetables), allowing farmers to plant crops having favorable
prices and thereby increasing the production of those crops. Increased
production may lower prices of certain crops but increase the amount available
for export. However, the Act also reduces Export Enhancement Program subsidies,
which may adversely affect the ability of the U.S. exports to compete with
those of other countries. 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.
COMPANY SUBJECT TO 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 entered into. The Company is exposed to risks 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 price
positions, the Company generally takes opposite and offsetting positions by
entering into commodity futures contracts (either a straight futures contract
or an options futures contract) on regulated commodity futures exchanges. While
hedging activities reduce the risk of loss from changing market values, such
activities also limit the gain potential which otherwise could result from
changes in market prices. Hedging arrangements do not protect against
nonperformance of a contract. The Company's policy is to generally maintain
hedged positions in grain and petroleum, which are hedgeable, but the Company
can be long or short at any time. The Company's profitability is primarily
derived from margins on grain and products merchandised and processed, not from
hedging transactions.
At any one time the Company's inventory and purchase contracts for
delivery to the Company may be substantial.
<PAGE>
OILSEED PROCESSING AND REFINING BUSINESS COMPETITION. Competition in the
soybean processing and refining business is driven by price, transportation
costs, service and product quality. The industry is highly competitive.
Competitors are adding new plants and expanding capacity of existing plants.
Media newsletters and other publications indicate that new crush plants and
refinery operations are being constructed or under strong consideration. The
Company estimates that U.S. crushing capacity has increased by about 30% to 35%
between 1994 and 1998. Refining capacity has increased by an estimated 25% to
30% between 1996 and 1999. 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. Several competitors operate over various
market segments and may be suppliers to, or customers of, other competitors.
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.
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's relies will be remediated in
a timely fashion to avoid having a material adverse effect on the Company's
operations or its financial results.
TAXATION OF COOPERATIVES COULD CHANGE. Although under Subchapter T of the
Internal Revenue Code patronage refunds are excluded in determining taxable
income of a cooperative and patronage refunds are taxable to the recipient,
current income tax laws, regulations and interpretations pertaining to the
receipt of patronage refunds could be changed.
DEPENDENCE ON CERTAIN CUSTOMERS. Each of the Wheat Milling Defined
Business Unit and the Oilseed Processing and Refining Defined Business Unit has
certain major customers. Loss of or a decline in the business done with one or
more of these customers could have a material adverse effect on the operations
of the affected Defined Business Unit. In addition, the Wheat Milling Defined
Business Unit would be adversely affected by a decline in pasta production in
the United States.
The foregoing review of factors pursuant to the Act should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of the Act.
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