-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R2ew55yTLSeQfwmf/xsTApl/R9Vvo6YRR8EnfYBPOYbvLdlTCnYNETmcaoDRIWxC Qlov2e4Qz4e6nbVe6G9qew== 0000897101-97-000416.txt : 19970414 0000897101-97-000416.hdr.sgml : 19970414 ACCESSION NUMBER: 0000897101-97-000416 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970411 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARVEST STATES COOPERATIVES CENTRAL INDEX KEY: 0000823277 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FARM PRODUCT RAW MATERIALS [5150] IRS NUMBER: 410251095 STATE OF INCORPORATION: MN FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-17865 FILM NUMBER: 97579296 BUSINESS ADDRESS: STREET 1: 1667 NORTH SNELLING P O BOX 64594 CITY: ST PAUL STATE: MN ZIP: 55164 BUSINESS PHONE: 6126469433 MAIL ADDRESS: STREET 1: 1667 NORTH SNEFLLING P O BOX 64594 CITY: ST PAUL STATE: MN ZIP: 55164 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended February 28, 1997. [] 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 HARVEST STATES COOPERATIVES (Exact name of registrant as specified in its charter) MINNESOTA 41-0121095 --------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1667 NORTH SNELLING AVENUE, ST. PAUL, MN 55108 (612) 646-9433 - ---------------------------------------------- -------------- (Address of principal executive offices and zip code) (Registrant's telephone number including area code) Include by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES ____ NO __X__ 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, 1997) INDEX PART I. FINANCIAL INFORMATION PAGE NO. HARVEST STATES COOPERATIVES AND SUBSIDIARIES Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of May 31, 1996, and February 28, 1997 Consolidated Statements of Earnings for the three months and nine months ended February 28, 1996, and February 28, 1997 Consolidated Statement of Capital as of February 28, 1997 Consolidated Cash Flow Statements for the three months and nine months ended February 28, 1996, and February 28, 1997 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OILSEED PROCESSING AND REFINING DIVISION (a division of Harvest States Cooperatives) Item 1. Financial Statements (Unaudited) Balance Sheets as of May 31, 1996, and February 28, 1997 Statements of Earnings for the three months and nine months ended February 28, 1996, and February 28, 1997 Statement of Divisional Equity as of February 28, 1997 Cash Flow Statements for the three months and nine months ended February 28, 1996, and February 28, 1997 Notes to Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations WHEAT MILLING DIVISION (a division of Harvest States Cooperatives) Item 1. Financial Statements (Unaudited) Balance Sheets as of May 31, 1996, and February 28, 1997 Statements of Earnings for the three months and nine months ended February 28, 1996, and February 28, 1997 Statement of Divisional Equity as of February 28, 1997 Cash Flow Statements for the three months and nine months ended February 28, 1996, and February 28, 1997 Notes to Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Items 1 through 5 have been omitted since all items are inapplicable or answers are negative Item 6. Exhibits and Reports on Form 8-K SIGNATURE PAGE EXHIBIT INDEX 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. When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer, the word or phrases "believes," "anticipates," "expects," "intends," "will likely result," "estimates," "projects" or similar expressions are intended to identify such forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to: SUPPLY AND DEMAND FORCES. The Company may be adversely affected by supply and demand relationships, both domestic and international. Supply is affected by weather conditions, disease, insect damage, acreage planted, government regulation and policies and commodity price levels. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations, and substitution of commodities. Demand may also be affected by changes in eating habits, by population growth and increased or decreased per capita consumption of some products. PRICE DECLINES AND FALL IN DEMAND. Rising grain and oilseed prices in the 1995 growing and harvesting season, which continued into 1996, tended to reduce inventories of stored grain, but prompted producers in Europe, Canada, Argentina, Australia and other countries to plant additional grain. Prices for most grains have fallen substantially through February 1997. PRICE RISKS. Upon purchase, the Company has risks of carrying grain, 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 risk of loss in the market value of positions held, consisting of grain 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 positions, the Company generally takes opposite and offsetting positions by entering into grain commodity futures contracts (either a straight futures contract or an option futures contract) on regulated commodity futures exchanges. PROCESSING AND REFINING BUSINESS COMPETITION. The industry is highly competitive. Competitors are adding new plants and expanding capacity of existing plants. Unless exports increase or existing refineries are closed, this extra capacity is likely to put additional pressure on prices and erode margins, adversely affecting the profitability of the Processing and Refining Division. MILLING BUSINESS COMPETITION. In March 1997, it was reported that Borden (which represented 23.8% of the Milling Division's semolina and durum flour sales in the year ended May 31, 1996) was closing half of its North American pasta manufacturing plants which could have an impact on the earnings of the Milling Division. The closing of the Borden plants is discussed in greater detail in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Wheat Milling Division. The forward-looking statements herein are qualified in their entirety by the cautions and risk factors set forth in Exhibit 99, under the caption "Cautionary Statement" to the Quarterly Report on Form 10-Q, for the quarter ended February 28, 1997. HARVEST STATES COOPERATIVES AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS May 31, February 28, 1996 1997 -------------- -------------- (unaudited) CURRENT ASSETS: Cash $ 21,426,227 $ 6,568,569 Receivables 367,244,539 337,521,170 Inventories 434,507,118 161,564,581 Prepaid expenses and deposits 41,825,850 53,612,416 -------------- -------------- Total current assets 865,003,734 559,266,736 OTHER ASSETS: Investments 83,269,566 123,967,470 Other 48,353,983 34,533,422 -------------- -------------- Total other assets 131,623,549 158,500,892 PROPERTY PLANT AND EQUIPMENT 232,145,401 224,310,964 -------------- -------------- $1,228,772,684 $ 942,078,592 ============== ============== LIABILITIES AND CAPITAL CURRENT LIABILITIES: Notes payable $ 324,000,000 $ 123,000,000 Patron credit balances 29,007,419 39,668,949 Advances received on grain sales 201,825,190 136,573,747 Drafts outstanding 23,837,715 28,745,424 Accounts payable and accrued expenses 163,435,268 103,172,167 Patronage dividends payable 13,100,000 8,800,000 Current portion of long-term debt 13,923,204 17,746,083 -------------- -------------- Total current liabilities 769,128,796 457,706,370 LONG-TERM DEBT 118,705,972 114,652,007 OTHER LIABILITIES 3,685,797 4,501,651 COMMITMENTS AND CONTINGENCIES CAPITAL 337,252,119 365,218,564 -------------- -------------- $1,228,772,684 $ 942,078,592 ============== ==============
See notes to consolidated financial statements
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended Nine Months Ended February 28, February 28, -------------------------------- -------------------------------- 1996 1997 1996 1997 ---- ---- ---- ---- REVENUES: Sales: Grain and oilseed $2,003,567,248 $1,347,181,612 $5,333,525,829 $4,895,823,810 Processed grain and oilseed 193,903,117 170,619,575 597,619,457 566,997,937 Feed and farm supplies 28,917,534 35,252,183 114,582,801 149,076,530 -------------------------------- -------------------------------- 2,226,387,899 1,553,053,370 6,045,728,087 5,611,898,277 Patronage dividends 4,924,666 3,062,133 6,815,690 7,789,427 Other revenues 19,278,627 20,091,794 55,100,245 53,901,006 -------------------------------- -------------------------------- 2,250,591,192 1,576,207,297 6,107,644,022 5,673,588,710 COSTS AND EXPENSES: Cost of good sold 2,198,462,847 1,535,885,774 5,978,113,941 5,565,810,727 Marketing, general and administrative 20,900,548 15,716,213 60,152,187 52,643,909 Interest 9,376,734 4,797,141 23,273,353 13,215,390 -------------------------------- -------------------------------- 2,228,740,129 1,556,399,128 6,061,539,481 5,631,670,026 -------------------------------- -------------------------------- EARNINGS BEFORE INCOME TAXES 21,851,063 19,808,169 46,104,541 41,918,684 INCOME TAXES 2,650,000 2,350,000 5,700,000 4,950,000 -------------------------------- -------------------------------- NET EARNINGS $ 19,201,063 $ 17,458,169 $ 40,404,541 $ 36,968,684 ================================ ================================
See notes to consolidated financial statements
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CAPITAL PATRONAGE NONPATRONAGE PATRONAGE CAPITAL TOTAL CERTIFICATES CERTIFICATES PAYABLE RESERVE ------------- ------------- ------------ ------------ ------------ BALANCE AT MAY 31, 1996: Stated as capital $ 337,252,119 $ 241,516,152 $ 9,739,995 $ 30,600,000 $ 55,395,972 Stated as current liability 13,100,000 13,100,000 Distribution of patronage dividends payable for preceding year including cash payment of $13,194,270 (unaudited) (13,194,270) 30,767,070 6,112,120 (43,700,000) (6,373,460) Redemption of capital equity certificates (unaudited) (4,331,121) (4,279,974) (51,147) Equities issued (unaudited) 4,193,985 4,193,985 Other (unaudited) 29,167 234,390 154 (205,377) Net earnings (unaudited) 36,968,684 29,400,000 7,568,684 Patronage dividends payable in cash, stated as a current liability (unaudited) (8,800,000) (8,800,000) ------------- ------------- ------------ ------------ ------------ BALANCE AT FEBRUARY 28, 1997 (unaudited) $ 365,218,564 $ 272,431,623 $ 15,801,122 $ 20,600,000 $ 56,385,819 ============= ============= ============ ============ ============
See notes to consolidated financial statements
HARVEST STATES COOPERATIVES CONSOLIDATED CASH FLOW STATEMENTS (UNAUDITED) Three Months Ended Nine Months Ended February 28, February 28, ----------------------------- ----------------------------- 1996 1997 1996 1997 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 19,201,063 $ 17,458,169 $ 40,404,541 $ 36,968,684 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 5,178,804 4,601,860 15,356,584 18,377,418 Noncash income from joint venture (5,579,912) (3,421,698) (10,192,436) (7,728,631) Noncash portion of patronage dividends received (4,448,642) (3,185,553) (5,954,201) (6,391,031) Loss (gain) on sale of property, plant, and equipment (3,320) (138,355) 92,991 50,219 Change in assets and liabilities: Receivables (4,303,601) 56,307,761 (221,085,197) 49,393,607 Inventories 79,397,121 58,966,478 (117,595,531) 272,942,537 Patron credit balances (34,613,391) (90,218,623) (30,007,167) 10,661,530 Advances received on grain and oilseed sales (13,487,263) (123,148,157) 168,196,884 (65,251,443) Accounts payable, accrued expenses, and drafts outstanding (71,974,104) (74,789,136) 2,356,834 (54,193,787) Prepaid expenses, deposits, and other (51,823,076) (40,336,526) (81,713,554) (30,030,264) ----------------------------- ----------------------------- Total adjustments (101,657,384) (215,361,949) (280,544,793) 187,830,155 ----------------------------- ----------------------------- Net cash (used in) provided by operating activities (82,456,321) (197,903,780) (240,140,252) 224,798,839 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposition of property, plant, and equipment 170,146 223,962 864,051 1,229,229 Investments redeemed 1,511,987 414,766 2,345,740 6,314,791 Acquisition of property, plant, and equipment (7,874,979) (8,791,362) (31,831,745) (34,138,386) Payments on notes receivable 197,233 (28,926) 499,776 184,775 Investments (1,002,530) (124,962) (1,002,530) (1,377,118) Investments in joint ventures 7,215,059 Other (418,874) (14,770) (36,898) ----------------------------- ----------------------------- Net cash used in investing activities (6,998,143) (8,725,396) (29,139,478) (20,608,548) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit agreements 74,500,000 123,000,000 242,000,000 (201,000,000) Long-term debt borrowings 29,000,000 54,361,058 10,000,000 Principal payments on long-term debt (1,971,612) (2,869,961) (5,367,546) (9,268,247) Principal payments under capital lease obligations (367,010) (711,430) (731,207) (1,254,311) Redemption of capital equity certificates (1,268,409) (1,088,985) (4,413,655) (4,331,121) Cash patronage dividends paid 101,443 (10,934,810) (13,194,270) ----------------------------- ----------------------------- Net cash provided by (used in) financing activities 99,892,969 118,431,067 274,913,840 (219,047,949) ----------------------------- ----------------------------- INCREASE (DECREASE) IN CASH 10,438,505 (88,198,109) 5,634,110 (14,857,658) CASH AT BEGINNING OF PERIOD 6,852,282 94,766,678 11,656,677 21,426,227 ----------------------------- ----------------------------- CASH AT END OF PERIOD $ 17,290,787 $ 6,568,569 $ 17,290,787 $ 6,568,569 ============================= =============================
See notes to consolidated financial statements HARVEST STATES COOPERATIVES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting of only normal, recurring accruals) necessary for a fair presentation thereof. Operating results for the nine month period ended February 28, 1997 are not necessarily indicative of the results that may be expected for the year ending May 31, 1997. These statements should be read in conjunction with the financial statements and footnotes included in the Company's Annual Report for the year ended May 31, 1996 included in the Company's Prospectus dated February 14, 1997, previously filed with the Commission. Certain reclassifications have been made to the prior year's financial statements to conform to the current year presentation. NOTE 2. RECEIVABLES MAY 31, FEBRUARY 28, 1996 1997 --------------- --------------- Trade................................. $297,112,614 $253,081,516 Elevator accounts..................... 59,163,181 75,965,289 Other................................. 18,003,744 15,959,351 --------------- --------------- 374,279,539 345,006,156 Less allowance for losses............. (7,035,000) (7,484,986) --------------- --------------- $367,244,539 $337,521,170 =============== =============== NOTE 3. INVENTORIES MAY 31, FEBRUARY 28, 1996 1997 --------------- --------------- Grain and oilseed..................... $351,504,342 $100,496,448 Processed grain and oilseed products.. 52,555,945 32,888,542 Feed and Farm supplies................ 30,446,831 28,179,591 --------------- --------------- $434,507,118 $161,564,581 =============== =============== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1997 AND 1996 The Company's consolidated net earnings for the three months ended February 28, 1997 and 1996 were $17,500,000 and $19,200,000, respectively, which represents a $1,700,000 decrease for the period ended in 1997. Included in the three-month net earnings for the period ended February 28, 1996 are insurance settlements totaling approximately $6,000,000 related to a fire at a joint venture export facility which interrupted business at the Company's country elevator facilities as well as at the export facility during the summer and fall of calendar year 1995. This revenue was partially offset during the three months ended February 28, 1997 by improved earnings from the Company's grain processing activities when compared with the results for the same period ended in 1996. Consolidated net sales of $1,550,000,000 decreased by $675,000,000 (30%) during the three-month period ended February 28, 1997 compared to the same period ended in 1996. This decrease is primarily the result of a decline in volume of 115,800,000 bushels of grain sold as well as a reduction in the average weighted sales price per bushel, from $4.69 per bushel for this period in 1996 to $4.33 per bushel for the current three-month period. Also contributing to the decline in sales dollars for the three-month period ended February 28, 1997 compared to the three months ended a year earlier is the fact that on August 30, 1996 the Company transferred its consumer products packaging division to a nonconsolidated joint venture. This division had sales of $95,000,000 during the three months ended February 29, 1996. Patronage dividends received decreased $1,900,000 (38%) for the three-month period ended February 28, 1997 compared to the same period ended in 1996 as a result of lower patronage earnings distributed by cooperative customers and suppliers. Other Revenue of $20,100,000 decreased $800,000 for the three months ended February 28, 1997 compared to the same period ended in 1996. This net decrease is primarily attributable to a decrease in joint venture income of $2,200,000, partially offset by an increase in service income at the Company's country elevator facilities. Cost of goods sold of $1,536,000,000 decreased $662,000,000 (30%) for the three months ended February 28, 1997 compared to the same period ended in 1996. This decrease is primarily the result of the decline in bushel volume as well as a decrease in the weighted average cost per bushel of $4.64 for the period ended in 1996 compared to $4.29 during the current three-month period. The Company's consumer products packaging division which was transferred to a nonconsolidated joint venture on August 30, 1996 had costs of goods sold for the three months ended February 28, 1996 of $89,000,000. Marketing and administrative expenses declined by $5,200,000 (25%) during the three months ended February 28, 1997 compared to the same period ended in 1996. The primary cause for this decrease was the elimination of such expenses related to the consumer products packaging division which was transferred to the nonconsolidated joint venture on August 30, 1996. Interest expense decreased $4,600,000 (49%) during the three months ended February 28, 1997 compared to the same period ended in 1996 due to a decline in working capital requirements. Income tax expense decreased $300,000 (11%) for the three-month period ended February 28, 1997 which is reflective of slightly lower pretax earnings with effective tax rates of $11.8% and 12.1% for 1997 and 1996, respectively. COMPARISON OF NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1996 The Company's consolidated net earnings for the nine-month period ended February 28, 1997 of $37,000,000 declined $3,400,000 (8%) compared to the same period ended in 1996 due to a decline in grain volume at both its country and export facilities, partially offset by increases in volumes and gross margins from the Company's grain and oilseed processing activities. Consolidated net sales of $5,600,000,000 decreased by $400,000,000 (7%) during the nine-month period ended February 28, 1997 compared to the same period ended in 1996. This decrease is primarily the result of a decline in volume of 287,200,000 bushels of grain, partially offset by higher average weighted sales price per bushel, from $4.13 per bushel for this period in 1996 to $4.82 per bushel for the current nine-month period. The Company transferred its consumer products packaging division to a nonconsolidated joint venture on August 30, 1996; this change in structure accounts for $130,000,000 of the sales dollar decrease for the nine months ended February 28, 1997 compared to the same period ended in 1996. Patronage dividends received increased $1,000,000 (15%) for the nine-month period ended February 28, 1997 compared to the same period ended in 1996 as a result of higher patronage earnings distributed by cooperative customers and suppliers. Other Revenues of $53,900,000 for the nine months ended February 28, 1997 decreased $1,200,000 (2%). This net decrease is primarily attributable to a decrease in grain joint venture income of $5,400,000 offset by earnings of $2,200,000 from the consumer products packaging joint venture, and a reduction in interest income of $2,800,000. These decreases were partially offset by an increase in country elevator service revenues of $5,700,000. Cost of goods sold of $5,565,000,000 decreased $400,000,000 (7%) for the nine months ended February 28, 1997 compared to the same period ended in 1996. This decrease is primarily the result of the decline in bushel volume, partially offset by an increase in the weighted average cost per bushel of $4.78 for the nine months ended in 1997 compared to $4.09 for the same period ended in 1996. The Company's consumer products packaging division which was transferred to a nonconsolidated joint venture on August 30, 1996 had costs of goods sold for the nine months ended February 28, 1997 and 1996 of $89,000,000 and $208,000,000, respectively, a decrease of $119,000,000. Marketing and administrative expenses declined by $7,500,000 (12%) during the nine months ended February 28, 1997 compared to the same period ended in 1996. The primary cause for this decrease was the elimination of such expenses related to the consumer products packaging division which was transferred to the nonconsolidated joint venture on August 30, 1996. Interest expense decreased $10,100,000 (43%) during the nine months ended February 28, 1997 compared to the same period ended in 1996 due to a decline in working capital requirements. Income tax expense decreased $750,000 for the nine-month period ended February 28, 1997 which is reflective of lower pretax earnings with effective tax rates of $11.8% and 12.4% for 1997 and 1996, respectively. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FROM OPERATIONS Operating activities of the Company used cash of $197,900,000 and $82,500,000 during the three months ended February 28, 1997 and 1996, respectively. Net cash used for operations during these periods is primarily attributable to the changes in working capital requirements with such balances increasing and therefore using cash of $213,300,000 and $77,600,000 during the three months ended February 28, 1997 and 1996, respectively. Operating activities of the Company provided cash of $224,800,000 during the nine months ended February 28, 1997, while operating activities used $240,100,000 during the same period ended in 1996. Net cash provided during the nine months ended February 28, 1997 is primarily the result of reduced working capital requirements created by the reduced grain volumes during this period, with such balances contributing $183,600,000. Net cash used during the nine months ended February 28, 1996 was primarily the result of increased working capital requirements created by increased volume and rising prices, with such balances using $300,100,000. CASH FLOWS FROM INVESTING Net cash used for the Company's investing activities were $8,700,000 and $7,000,000 for the three months ended February 28, 1997 and 1996, respectively. Acquisitions of property, plant and equipment comprised the principal use of this cash in each of the periods. Such expenditures totaled approximately $8,800,000 and $7,900,000 for the three months ended February 28, 1997 and 1996 respectively. On August 30, 1996 the Company formed a joint venture with a regional consumer products packaging company, and contributed substantially all of the net assets of the consumer products packaging division as its capital investment in the joint venture. In return for these assets, the Company received a 40% interest in the joint venture and the joint venture assumed debt to the Company of approximately $33,700,000. For the nine months ended February 28, 1997 and 1996, net cash flows used in the Company's investing activities totaled $20,600,000 and $29,100,000, respectively. Acquisitions of property, plant and equipment comprised the principal use of this cash in each of the periods. Such expenditures totaled approximately $34,100,000 and $31,800,000 for the nine months ended February 28, 1997 and 1996 respectively. Redemption of investments in other cooperatives and joint ventures partially offsets these expenditures. Such redemptions during the nine months ended February 28, 1997 and 1996 totaled $13,500,000 and $2,300,000 respectively. CASH FLOWS FROM FINANCING The Company finances its working capital needs through short-term lines of credit. As of February 28, 1997 the Company had short-term lines of credit totaling $550,000,000, all of which is committed. Total outstanding was $123,000,000 and $324,000,000 on February 28, 1997 and May 31, 1996, respectively. The Company increased its short-term borrowings by $123,000,000 and $74,500,000 during the three-month periods ended February 28, 1997 and 1996, respectively. The Company decreased its short-term borrowings by $201,000,000 during the nine months ended February 28, 1997, and increased its short-term borrowing by $242,000,000 during the same period ended February 28, 1996. The Company has financed its long-term capital needs, primarily for the acquisition of property, plant, and equipment, with long term agreements through the banks for cooperatives with maturities through the year 2007. Total indebtedness of these agreements totaled $123,000,000 and $120,700,000 on February 28, 1997 and May 31, 1996, respectively. The Company also had long-term debt in the form of capital leases, industrial development revenue bonds and miscellaneous notes payable totaling approximately $9,400,000 and $11,900,000 on February 28, 1997 and May 31, 1996, respectively. The Company borrowed on a long-term basis $29,000,000 during the three months ended February 28, 1996. The Company borrowed no additional funds on a long term-basis during that same period ended in 1997. The Company repaid long-term debt of $3,600,000 and $2,400,000 during the three months ended February 28, 1997 and 1996, respectively. The Company borrowed on a long-term basis $10,000,000 and $54,400,000 during the nine-month periods ended February 28, 1997 and 1996, respectively, and repaid long-term debt totaling $10,500,000 and $6,100,000 during the nine-month periods ended February 28, 1997 and 1996, respectively. The Company anticipates further short-term financing needs to fund increases in the volume of grain handled and further long-term needs to fund acquisitions of grain facilities and for the expansion and development of existing value-added businesses. Management believes such needs can be financed with a combination of debt and equity, including the results of the offering of Equity Participation Units in its Wheat Milling and Oilseed Processing and Refining Defined Business Units. In accordance with the bylaws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each year and are based on amounts reportable for federal income tax purposes as adjusted in accordance with the bylaws. The cash portion of this distribution, deemed by the Board of Directors to be 30% of such earnings for fiscal year 1996, totaled $11,000,000. The Board of Directors authorized the redemption of patronage certificates held by patrons who were 72 years of age and those held by estates of deceased patrons during the nine months ended February 28, 1997 and 1996. These amounts totaled $4,300,000 and $4,400,000, respectively, of which $1,100,000 and $1,300,000 were redeemed during the three months ended February 28, 1997 and 1996, respectively. OILSEED PROCESSING AND REFINING DIVISION ITEM 1. FINANCIAL STATEMENTS OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) BALANCE SHEETS ASSETS MAY 31, FEBRUARY 28, 1996 1997 -------------------------- (Unaudited) CURRENT ASSETS: Receivables $22,795,612 $31,769,322 Inventories 26,235,220 21,629,586 Prepaid expenses and deposits 310,692 1,826,008 -------------------------- Total current assets 49,341,524 55,224,916 PROPERTY, PLANT AND EQUIPMENT 24,771,413 31,922,758 -------------------------- $74,112,937 $87,147,674 ========================== LIABILITIES AND CAPITAL CURRENT LIABILITIES: Due to Harvest States Cooperatives $ 9,482,351 $19,693,173 Accounts payable and accrued expenses 11,239,588 14,063,503 -------------------------- Total current liabilities $20,721,939 $33,756,676 COMMITMENTS AND CONTINGENCIES DIVISIONAL EQUITY 53,390,998 53,390,998 -------------------------- $74,112,937 $87,147,674 ========================== See notes to financial statements
OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF EARNINGS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28 FEBRUARY 28 ----------- ----------- 1996 1997 1996 1997 ---- ---- ---- ---- REVENUES: Processed oilseed sales $ 95,521,420 $ 117,617,535 $ 293,384,676 $ 326,969,828 Other revenue 736 (430,661) 1,399,766 145,826 ----------------------------------------------------------------- 95,522,156 117,186,874 294,784,442 327,115,654 COSTS AND EXPENSES: Cost of goods sold 87,033,882 107,203,129 273,061,744 302,508,583 Marketing, general, and administrative 1,268,250 1,291,563 3,713,971 3,733,026 Interest 85,200 173,700 85,200 209,200 ----------------------------------------------------------------- 88,387,332 108,668,392 276,860,915 306,450,809 ----------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 7,134,824 8,518,482 17,923,527 20,664,845 INCOME TAXES 575,000 850,000 1,775,000 2,050,000 ----------------------------------------------------------------- NET EARNINGS $ 6,559,824 $ 7,668,482 $ 16,148,527 $ 18,614,845 =================================================================
See notes to financial statements OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF DIVISIONAL EQUITY BALANCE AT MAY 31, 1996 $53,390,998 Net earnings (unaudited) 18,614,845 Divisional equity distributed (unaudited) (18,614,845) -------------- BALANCE AT FEBRUARY 28, 1997 (UNAUDITED) $53,390,998 ============== See notes to financial statements
OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28 FEBRUARY 28 ----------- ----------- 1996 1997 1996 1997 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 6,559,824 $ 7,668,482 $ 16,148,527 $ 18,614,845 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 376,792 467,265 1,135,774 1,291,222 Gain (loss) on disposal of property, plant, and equipment (1,013) (458,024) (32,778) (469,756) Changes in assets and liabilities: Receivables 3,145,456 2,159,021 (1,218,327) (8,973,710) Inventories 35,453 8,412,758 (3,764,644) 4,605,634 Prepaid expenses and deposits (416,953) 69,757 (1,390,777) (1,515,316) Accounts payable and accrued expenses 6,690,714 (6,559,199) 7,471,268 2,823,915 --------------------------- --------------------------- Total adjustments 9,830,449 4,091,578 2,200,516 (2,238,011) Net cash provided by --------------------------- --------------------------- operating activities 16,390,273 11,760,060 18,349,043 16,376,834 --------------------------- --------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquistion of property, plant, and equipment (1,978,049) (804,135) (5,016,945) (7,972,811) --------------------------- --------------------------- Net cash used in investing activities (1,978,049) (804,135) (5,016,945) (7,972,811) --------------------------- --------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) Harvest States Cooperatives (7,852,400) (3,287,443) 2,816,429 10,210,822 Divisional equity distributed (6,559,824) (7,668,482) (16,148,527) (18,614,845) Net cash used in --------------------------- --------------------------- financing activities (14,412,224) (10,955,925) (13,332,098) (8,404,023) --------------------------- --------------------------- INCREASE (DECREASE) IN CASH 0 0 0 0 CASH AT BEGINNING OF PERIOD -- -- -- -- --------------------------- --------------------------- CASH AT END OF PERIOD -- -- -- -- =========================== ===========================
See notes to financial statements OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. ACCOUNTING POLICIES The accompanying unaudited divisional financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such unaudited divisional financial statements include all adjustments (consisting of only normal, recurring accruals) necessary for a fair presentation thereof. Operating results for the nine-month period ended February 28, 1997 are not necessarily indicative of the results that may be expected for the year end May 31, 1997. These statements should be read in conjunction with the financial statements and footnotes included in the Division's financial statements for the year ended May 31, 1996 which is included in the Harvest States Cooperatives' Prospectus dated February 14, 1997, previously filed with the Commission. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain events and circumstances of which management has become aware of during or after the three months ended February 28, 1997 which could negatively impact future earnings and liquidity include the following: Margins during the month of March 1997 have declined in this industry. The duration and extent of these depressed margins and consequently the financial impact on the Processing and Refining Division is unpredictable. The Processing and Refining Division has scheduled facility maintenance and new equipment installation for the first quarter of fiscal 1998. (The first quarter of fiscal 1998 is June 1, 1997 through August 31, 1997) This will involve disruption of production at the crushing portion of the business for approximately six weeks, and will have a negative impact on earnings for that period, the extent of which is unknown at this time. RESULTS OF OPERATIONS Certain operating information pertaining to the Processing and Refining Division is set forth below, as a percentage of sales, except for margins. THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28 FEBRUARY 28 ---------------------- ----------------------- 1996 1997 1996 1997 ---- ---- ---- ---- Gross Margin percentage 8.89% 8.49% 7.40% 7.53% Marketing and Administrative 1.33% 1.10% 1.27% 1.14% Interest 0.09% 0.15% 0.03% 0.06% Processing Margins Crushing/bu $0.70 $0.68 $0.55 $0.56 Refining/lb $0.0135 $0.0214 $0.0112 $0.0151 Because of the volatility of commodity prices, the Company believes that processing margins are a better measure of the Division's performance than gross margin percentages. COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1997 AND 1996 The Processing and Refining Division's net earnings of $7,700,000 for the three months ended February 28, 1997 represents a $1,100,000 (17%) increase compared to the same period in 1996. This increase is primarily attributable to improved processing margins for refined oil products. Net sales of $117,600,000 for the three-month period ended February 28, 1997 increased by $22,100,000 (23%) compared to the same period in 1996. Volume increases in processed soybean products, primarily soymeal and soyflour, contributed $800,000 to sales and increased volumes of refined oil contributed $4,900,000. Increased sales prices for soymeal and soyflour contributed $5,000,000 while increased sales prices for refined oil contributed $11,400,000. Cost of goods sold for the 1997 period of $107,200,000 increased by $20,200,000 (23%) compared to the same three-month period of 1996. Of this increase, $13,700,000 is attributable to increased prices for purchased crude oil, $4,000,000 is due to higher prices per bushel for soybeans, and $3,100,000 is attributable to a volume increase in purchased crude soybean oil. These increases were offset slightly by a decline in purchased soybean quantities (about $100,000) and a reduction in plant operating expenses of $500,000. Marketing and administrative expenses were unchanged for the 1997 period compared to the 1996 period. Interest expense increased $89,000 for the three-month period ended February 28, 1997 compared to the same period ended in 1996. This increase was the result of the higher raw material costs which translated to slightly greater working capital requirements. Income tax expense for the three months ended February 28, 1997 of $850,000 increased $275,000 (48%) compared to the same period of a year ago. This increase was the result of slightly greater nonpatronage earnings for the current three months compared to the same period ended in 1996. COMPARISON OF NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1996 The Processing and Refining Division's net earnings of $18,600,000 for the nine months ended February 28, 1997 represents a $2,500,000 (15%) increase compared to the same period in 1996. This increase is primarily attributable to increased volumes of refined oil sales and slightly improved processing margins over those for the same period ended in 1996. Net sales of $327,000,000 for the nine months ended February 28, 1997 increased $33,600,000 (11%) compared to the same period ended 1996. Price increases for processed soybean products, primarily soymeal and soyflour, contributed $33,900,000 to sales and increased volumes for the same products contributed $4,200,000. Increased refined oil sales volumes contributed $10,000,000 while decreased sales prices for refined oil offset these increases by $14,500,000. Other revenues of $150,000 decreased $1,250,000 (90%) for the nine months ended February 28, 1997 compared to the same period ending in 1996. This decrease was due primarily to a reduction in revenue from an oilseed joint venture of about $800,000. Cost of goods sold for the nine months ended February 28, 1997 of $302,500,000 increased $29,400,000 (11%) compared to the same period ended in 1996. Of this increase $5,700,000 is attributable to additional soybean processing volume (24,000,000 bushels compared to 23,100,000 bushels) and $27,600,000 is the result of higher average cost per bushel. Increased amounts of purchased crude oil contributed $1,400,000 to the cost, but was offset by lower prices for the crude oil amounting to $4,500,000. Plant expense reductions further offset costs by $800,000. Marketing and administrative expenses were unchanged for the nine months ended February 28, 1997 compared to the same period ended in 1996. Interest expense increased $124,000 (146%) for the nine-month period ended February 28, 1997 compared to the same period ended in 1996. This increase was the result of higher raw material costs which translated to slightly greater working capital requirements. Income tax expense for the nine months ended February 28, 1997 of $2,050,000 increased $275,000 (15%) compared to the same period of a year ago. This increase was the result of slightly greater nonpatronage earnings for the current nine months compared to the same period ended in 1996. LIQUIDITY AND CAPITAL RESOURCES The Processing and Refining Division's cash requirements result from capital improvements and from a need to finance additional inventories and receivables based on increased raw material costs or levels. These cash needs are expected to be fulfilled by the Company, which includes equity from the results of the offering of the Equity Participation Units in the Division. CASH FLOWS FROM OPERATIONS Operating activities for the three months ended February 28, 1997 and 1996, respectively, provided cash of $11,800,000 and $16,400,000 due to net earnings of $7,700,000 and $6,600,000 and decreased working capital requirements of $3,600,000 and $9,500,000. For the nine months ended February 28, 1997 and 1996, the Processing and Refining Division's operating activities provided cash of $16,400,000 and $18,300,000, respectively. Net earnings of $18,600,000 and $16,100,000 for the nine months ended February 28, 1997 and 1996, respectively, contributed cash. Noncash expenses deducted from these net earnings of $1,300,000 and $1,100,000 for the nine months ended February 28, 1997 and 1996, respectively, represent additional cash for these periods. Increased working capital requirements for this period ended in 1997 decreased cash $3,500,000, while decreased working capital requirements for the period ended in 1996 increased cash $1,100,000. CASH FLOWS USED FOR INVESTING The Processing and Refining Division used $800,000 and $2,000,000 during the three months ended February 28, 1997 and 1996 respectively, for the purchase of property, plant, and equipment. Net cash used by the Division for the purchase of property, plant, and equipment during the nine months ended February 28, 1997 and 1996, were $8,000,000 and $5,000,000 respectively. CASH FLOWS FROM FINANCING ACTIVITIES The Processing and Refining Division'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 Division 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 of the Company are reviewed on a periodic basis, and could potentially be restricted based upon availability of funds. The Processing and Refining Division had debt of $19,700,000 on February 28, 1997, an increase of $10,200,000 from May 31, 1996, which reflects working capital and fixed asset financing requirements. Debt outstanding and payable to the Company as of May 31, 1996 was $9,500,000, which represents working capital and fixed asset financing requirements through that date. WHEAT MILLING DIVISION ITEM 1. FINANCIAL STATEMENTS WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) BALANCE SHEETS ASSETS MAY 31, FEBRUARY 28, 1996 1997 ---------------------------- (Unaudited) CURRENT ASSETS: Receivables $ 43,749,134 $ 47,651,612 Inventories 9,308,275 11,258,956 Prepaid expenses and deposits 149,873 201,768 ---------------------------- Total current assets 53,207,282 59,112,336 OTHER ASSETS 12,881,236 12,081,225 PROPERTY, PLANT AND EQUIPMENT 59,233,046 70,244,648 ---------------------------- $125,321,564 $141,438,209 ============================ LIABILITIES AND CAPITAL CURRENT LIABILITIES: Due to Harvest States Cooperatives $ 31,044,150 $ 39,646,885 Accounts payable and accrued expenses 12,480,342 15,523,263 Current portion of long term debt 6,344,584 9,330,000 ---------------------------- Total current liabilities 49,869,076 64,500,148 LONG-TERM DEBT 47,655,416 49,140,989 COMMITMENTS AND CONTINGENCIES DIVISIONAL EQUITY 27,797,072 27,797,072 ---------------------------- $125,321,564 $141,438,209 ============================ See notes to financial statements
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF EARNINGS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28 FEBRUARY 28 ----------- ----------- 1996 1997 1996 1997 ---- ---- ---- ---- REVENUES: Processed grain sales $ 47,538,934 $ 48,878,729 $119,349,973 $160,305,189 COSTS AND EXPENSES: Cost of goods sold 44,185,038 44,689,634 111,164,551 147,064,882 Marketing, general, and administrative 1,026,345 1,320,751 2,682,093 3,824,406 Interest 1,565,200 1,472,690 3,410,808 4,298,669 ------------------------------------------------------------ 46,776,583 47,483,075 117,257,452 155,187,957 ------------------------------------------------------------ EARNINGS BEFORE INCOME TAXES 762,351 1,395,654 2,092,521 5,117,232 INCOME TAXES 75,000 150,000 200,000 400,000 ------------------------------------------------------------ NET EARNINGS $ 687,351 $ 1,245,654 $ 1,892,521 $ 4,717,232 ============================================================
See notes to financial statements WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENT OF DIVISIONAL EQUITY BALANCE AT MAY 31, 1996 $27,797,072 Net earnings (unaudited) 4,717,232 Divisional equity distributed (unaudited) (4,717,232) -------------- BALANCE AT FEBRUARY 28, 1997 (UNAUDITED) $27,797,072 ============== See notes to financial statements
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28 FEBRUARY 28 ----------- ----------- 1996 1997 1996 1997 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 687,351 $ 1,245,654 $ 1,892,521 $ 4,717,232 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 992,065 1,045,636 2,415,150 3,072,700 Changes in assets and liabilities: Receivables (13,368,917) (8,636,263) (18,775,239) (3,902,478) Inventories 4,693,249 (1,080,755) (4,227,650) (1,950,681) Prepaid expenses and deposits 19,494 49,392 (76,134) (51,895) Accounts payable and accrued expenses 5,707,068 1,519,220 9,694,468 3,042,921 ----------------------------- ----------------------------- Total adjustments (1,957,041) (7,102,770) (10,969,405) 210,567 Net cash (used in) provided by ----------------------------- ----------------------------- operating activities (1,269,690) (5,857,116) (9,076,884) 4,927,799 ----------------------------- ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquistion of property, plant, and equipment (2,003,054) (4,162,057) (14,555,602) (13,284,291) ----------------------------- ----------------------------- Net cash used in investing activities (2,003,054) (4,162,057) (14,555,602) (13,284,291) ----------------------------- ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) Harvest States Cooperatives (839,905) 13,521,546 5,275,007 8,602,735 Long term debt borrowings 5,518,750 22,606,250 10,000,000 Principal payments on long term debt (718,750) (2,256,719) (2,356,250) (5,529,011) Divisional equity distributed (687,351) (1,245,654) (1,892,521) (4,717,232) Net cash provided by ----------------------------- ----------------------------- financing activities 3,272,744 10,019,173 23,632,486 8,356,492 ----------------------------- ----------------------------- INCREASE (DECREASE) IN CASH 0 0 0 0 CASH AT BEGINNING OF PERIOD -- -- -- -- ----------------------------- ----------------------------- CASH AT END OF PERIOD -- -- -- -- ============================= =============================
See notes to financial statements WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. ACCOUNTING POLICIES The accompanying unaudited divisional financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such unaudited divisional financial statements include all adjustments (consisting of only normal, recurring accruals) necessary for a fair presentation thereof. Operating results for the nine-month period ended February 28, 1997 are not necessarily indicative of the results that may be expected for the year end May 31, 1997. These statements should be read in conjunction with the financial statements and footnotes included in the Division's financial statements for the year ended May 31, 1996 which is included in the Harvest States Cooperatives' Prospectus dated February 14, 1997, previously filed with the Commission. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain events and circumstances of which management has become aware during or after the three months ended February 28, 1997 which could negatively impact future earnings and liquidity include the following: In March 1997, it was reported that Borden (which represented 23.8% of the Milling Division's semolina and durum flour sales in the year ended May 31, 1996) was closing five of its ten North American pasta manufacturing plants. Four of the plants to be closed are customers of the Milling Division. For the years ended May 31, 1995 and 1996, shipments to those four plants were 16% and 22%, respectively, of total semolina and durum flour shipments and for the nine months ended February 28, 1997, were 22% of the total semolina and durum flour shipments. Because overall domestic demand for pasta remains strong and durum milling capacity is fixed, the Company believes that sales made to these closed plants can be replaced by sales to the purchaser or purchasers of one or more of the closed plants, should Borden determine to sell such plants, increased sales to Borden's remaining plants or increased sales to other pasta manufacturers (either current or new customers of the Milling Division). Alternatively, excess durum milling capacity could be converted to other types of wheat milling, such as specialty or blended flours or bakery flour. A substantial portion (31.5% in the year ended May 31, 1996) of the production of the Company's Rush City facility is sold to one of the plants to be closed. Because there are no other large pasta manufacturing plants located in geographical proximity to Rush City, the Company could be forced to close that facility and possibly to relocate it's machinery to a different location. The Company is unable to predict the effect of disruption in sales because of the closing of the plants, including a temporary disruption while the Company locates alternative customers. Completion of the Houston plant, which was projected to commence operations in March of 1997, has been slower than anticipated. It is now projected that operations will begin sometime in April, 1997. The intent to expand wheat flour milling capacity has recently been announced by certain competing milling companies. This expansion will increase the supply of product, and could negatively impact gross margins in this industry. RESULTS OF OPERATIONS Certain operating information pertaining to the Milling Division is set forth below, as a percentage of sales, except for margins/cwt. THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28 FEBRUARY 28 --------------------- -------------------- 1996 1997 1996 1997 ---- ---- ---- ---- Gross Margin percentage 7.06% 8.57% 6.86% 8.26% Marketing and Administrative 2.16% 2.70% 2.25% 2.39% Interest 3.29% 3.01% 2.86% 2.68% Margins/cwt 1.18 1.20 1.11 1.24 Because of the volatility of commodity prices, the Company believes that margins per hundred weight (manufacturing margins) are a better measure of the Division's performance than gross margin percentages. COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1997 AND 1996 The Milling Division's net earnings of $1,200,000 for the three months ended February 28, 1997 increased $500,000 (81%) over the same period in 1996. This increase in net earnings is attributable primarily to higher volumes of production at slightly improved manufacturing margins compared to the same period of a year ago. Net sales for the three-month period ended February 28, 1997 of $48,900,000 increased $1,300,000 (3%) from the same period in 1996 primarily because of an increase in shipments of semolina and flour from 2,800,000 hundred weights to 3,500,000 hundred weights (25%). The effect of this volume increase in sales was largely offset by the average sales price of such product which decreased from $15.43 for the three months ended February 28,1996 to $12.68 per hundred weight for the current three month period. Cost of goods sold for the three months ended February 28, 1997 of $44,700,000 increased $500,000 (1%). Although raw material purchased increased l,200,000 bushels for the current three-month period compared to the same period of a year ago, the average price paid for a bushel of grain declined from $6.71 per bushel for the three months in 1996 to $5.55 per bushel during the current three-month period. Consequently, the dollars expended for raw material remained essentially unchanged when comparing the two periods. Plant expense increases of $500,000 are attributable to the higher production level, and were incurred principally at Kenosha. Marketing and administrative expenses were $1,300,000 for the three-month period ended February 28, 1997, compared to $1,000,000 for the same period in 1996. This increase is attributable to staff and system expansion to handle the volume increases already experienced, and anticipated future volumes from the Houston mill which will begin operations later this spring. Interest expense of $1,500,000 for the 1997 period decreased by $100,000 compared to the same period a year ago. This decrease is reflective of the decline in grain prices which are a component of inventory and eventually accounts receivable. COMPARISON OF NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1996 The Milling Division's net earnings of $4,700,000 for the nine months ended February 28, 1997 represents a $2,800,000 (149%) increase from the same period in 1996 due to an increase in manufacturing margins per hundred weight milled and an increase in volume of production. Net sales of $160,300,000 for the nine months ended February 28, 1997 increased $41,000,000 (34%) from the same period in 1996 due to an increase in shipments from 7,400,000 hundred weights to 10,700,000 hundred weights as the Division's Kenosha mill came on line in November of 1995, offset slightly by a decrease in the average price per hundred weight from $15.11 to $13.64. Cost of goods sold of $147,100,000 for the nine months ended February 28, 1997 increased by $35,900,000 (32%) from the same period in 1996. Raw material costs increased by $32,700,000 due to an increase in bushels milled (22,000,000 bushels in the 1997 period and 15,500,000 bushels in the 1996 period). The impact of this volume increase was offset partially by a decline in the average cost per bushel from $6.61 in the 1996 period to $6.14 in the 1997 period. Plant expenses increased $3,200,000 in the 1997 period, essentially all of which is attributable to the Kenosha mill which commenced operation in November of 1995. Marketing and administrative expenses were $3,800,000 for the nine months ended February 28, 1997, compared to $2,700,000 for the same period of 1996. This increase is attributable to an increase in staff and system expansion to handle the additional volumes generated by the Kenosha mill. Interest expense of $4,300,000 for the 1997 period increased $900,000 (26%) compared to the same period in 1996. This increase is attributable to additional short-term borrowings necessary to carry increased inventories and receivables resulting from the production at the Kenosha mill, and additional interest expense on the long-term debt used to finance the construction of the Kenosha mill. LIQUIDITY AND CAPITAL RESOURCES The Milling Division's cash needs are primarily the result of continued capital additions. The Division's Kenosha plant, which began operations in late 1995, represented an investment of $39,000,000. The Division's Houston plant, which is expected to begin operations in April 1997, is expected to represent an investment of $17,300,000. In addition, if the Pocono facility is constructed, the Division expects capital additions of $38,800,000. The Division anticipates capital additions to all of its facilities. Commencement of operations at a particular facility involves increased working capital to fund required inventories and receivables related to increased sales. In addition, increased carrying value of inventories and receivables because of higher prices, increased receivables because of slow collections or increased inventories above historical levels requires additional financing. All of the Milling Division's financing needs are expected to be met by the Company, which includes equity from the results of the offering of the Equity Participation Units in the Division. CASH FLOWS FROM OPERATIONS Operating activities used net cash of $5,900,000 for the three months ended February 28, 1997 and used net cash of $1,300,000 for the same three months a year ago. The usage is generally attributable to working capital needs, namely an increase in working capital of $8,100,000 for the three-month period ended February 28, 1997 and an increase of $3,000,000 in working capital for the same period a year ago. Cash requirements were offset by net earnings of $1,200,000 and $700,000 for the three months ended February 28, 1997 and 1996 respectively, as well as by noncash depreciation and amortization expenses of $1,000,000 for each of these periods. Operating activities for the nine months ended February 28, 1997 provided net cash of $4,900,000 due to net earnings of $4,700,000, noncash expenses such as depreciation and amortization of $3,100,000, offset by increased working capital requirements of $2,900,000. For the same period in 1996, operating activities used net cash of $9,100,000 due to increased working capital requirements of $13,400,000, partially offset by net earnings of $1,900,000 and noncash expenses of $2,400,000. CASH FLOWS USED FOR INVESTING Cash expended for the acquisition of property, plant and equipment during the three-month periods ended February 28, 1997 and 1996 totaled $4,200,000 and $2,000,000 respectively. Cash expended for the acquisition of property, plant and equipment during the nine-month periods ended February 28, 1997 and 1996 totaled $13,300,000 and $14,600,000 respectively. CASH FLOWS FROM FINANCING ACTIVITIES The Milling Division'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 Division 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 of the Company are reviewed on a periodic basis, and could potentially be restricted based upon availability of funds. The Milling Division has short-term debt of $39,600,000 on February 28, 1997, an increase of $8,600,000 which is primarily attributable to an increase in working capital requirements of $2,900,000, long term-debt repayments of $5,500,000, and partial financing of fixed asset additions which includes the Houston mill of $3,200,000. These cash requirements were partially covered by cash generated from operations. The Milling Division incurred additional long term-debt during the nine-month period ended February 28, 1997 in the amount of $10,000,000 as partial financing of the construction of the Houston mill. The Milling Division had short-term debt outstanding and payable to the Company of $31,000,000 on May 31, 1996. This interest bearing balance reflects working capital and fixed asset financing requirements. On May 31, 1996 the Milling Division had long-term debt of $54,000,000 which had been incurred primarily with the acquisition of the Huron facility in 1990, to expand the Huron facility in 1990 and 1991, and to construct the Kenosha mill in the 1995 and 1996 fiscal years. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Description ------- ----------- 99 Cautionary Statement 27 Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARVEST STATES COOPERATIVES (Registrant) April 11, 1997 /s/ T. F. Baker -------------- --------------- (Date) T. F. Baker Group Vice-President - Finance EXHIBIT INDEX Page No. in Sequentially Exhibit Description of Exhibit Numbered Order - ------- ---------------------- -------------- 99 Cautionary Statement . . . . . . . . . . Filed Electronically 27 Financial Data Schedule. . . . . . . . . Filed Electronically EX-99 2 CAUTIONARY STATEMENT EXHIBIT 99 CAUTIONARY STATEMENT 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. Demand may also be affected by changes in eating habits, by population growth and increased or decreased per capita consumption of some products. RECENT PRICE DECLINES AND FALL IN DEMAND. Rising grain and oilseed prices in the 1995 growing and harvesting season, which continued into 1996, tended to reduce inventories of stored grain, but prompted producers in Europe, Canada, Argentina, Australia and other countries to plant additional grain. Prices for most grains have fallen substantially in recent months. According to a report dated January 10, 1997, published by the Foreign Agricultural Service (FAS) Division of the United States Department of Agriculture, worldwide wheat production for the year ended May 31, 1996, was 536.89 million metric tons and worldwide wheat production for the year ending May 31, 1997, is projected to be 579.59 million metric tons. According to the same report, exports for the year ended May 31, 1996, were 108.32 million metric tons and exports for the year ending May 31, 1997, are projected to be 102.97 million metric tons. The Freedom to Farm Act of 1996, enacted in April 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 U.S. exports to compete with those of other countries. COMPANY SUBJECT TO PRICE RISKS. Upon purchase, the Company has risks of carrying grain, 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 risk of loss in the market value of positions held, consisting of grain 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 grain 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 of grain, such activities also limit the gain potential which otherwise could result from changes in market prices of grain. Hedging arrangements do not protect against nonperformance of a contract. The Company's policy is to generally maintain hedged positions in grain which is hedgeable, but the Company can be long or short at any time. The Company's profitability is primarily derived from margins on grain 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. 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. Should those facilities be constructed, the Company estimates that domestic crush capacity would increase from 10 to 15% and domestic refining capacity would increase from 20 to 30%. Unless exports increase or existing refineries are closed, this extra capacity is likely to put additional pressure on prices and erode margins, adversely affecting the profitability of the Processing and Refining Division. Several competitors operate over various market segments and may be suppliers to or customers of other competitors. WHEAT MILLING BUSINESS COMPETITION. The Company's Milling Division has under construction a flour mill in Houston, Texas, which is not yet operational, and plans to construct semolina and flour and bread flour mills in Pocono, Pennsylvania, but final approvals by local and state authorities have not been received. There can be no assurance that these new mills, if completed, will be competitively or operationally successful. There can be no assurance that the necessary approvals for the Pocono facility will be obtained. 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 Milling Division and the Processing and Refining Division 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 Division. In addition, the Milling Division 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. EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS MAY-31-1997 FEB-28-1997 6,568,569 0 253,081,516 7,484,986 161,564,581 559,266,736 427,438,659 203,127,695 942,078,592 457,706,370 132,398,090 0 0 0 365,218,564 942,078,592 5,611,898,277 5,673,588,710 5,565,810,727 0 0 449,986 13,215,390 41,918,684 4,950,000 36,968,684 0 0 0 36,968,684 0 0
-----END PRIVACY-ENHANCED MESSAGE-----