10-Q 1 cenex031442_10q.txt CENEX HARVEST STATES COOPERATIVES FORM 10Q ================================================================================ 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, 2003. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 333-17865 ----------------- CENEX HARVEST STATES COOPERATIVES (Exact name of registrant as specified in its charter) MINNESOTA 41-0251095 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5500 CENEX DRIVE, (651) 451-5151 INVER GROVE HEIGHTS, MN 55077 (Registrant's telephone number (Address of principal executive including 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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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. (Number of shares outstanding at (Class) February 28, 2003) ------- ------------------ NONE NONE ================================================================================ INDEX PAGE NO. ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of February 28, 2003 (unaudited), August 31, 2002 and February 28, 2002 (unaudited) ....................... 2 Consolidated Statements of Operations for the three months and six months ended February 28, 2003 and 2002 (unaudited) ................. 3 Consolidated Statements of Cash Flows for the three months and six months ended February 28, 2003 and 2002 (unaudited) ................. 4 Notes to Consolidated Financial Statements (unaudited) .................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 20 Item 4. Controls and Procedures ......................................... 21 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................ 21 SIGNATURE PAGE ........................................................... 22 SECTION 302 CERTIFICATIONS ............................................... 23 i PART I. FINANCIAL INFORMATION SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q contains 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. These factors include those set forth in Exhibit 99.1, under the caption "Cautionary Statement" to this Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2003. 1 ITEM 1. FINANCIAL STATEMENTS CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS FEBRUARY 28, AUGUST 31, FEBRUARY 28, 2003 2002 2002 -------------- ------------ ------------- (DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents ................. $ 108,886 $ 108,192 $ 86,498 Receivables ............................... 767,147 741,578 586,232 Inventories ............................... 861,753 759,663 601,650 Other current assets ...................... 254,841 140,944 105,096 ---------- ---------- ---------- Total current assets ..................... 1,992,627 1,750,377 1,379,476 INVESTMENTS ................................ 469,456 496,607 461,058 PROPERTY, PLANT AND EQUIPMENT .............. 1,075,152 1,057,421 1,029,214 OTHER ASSETS ............................... 178,357 177,322 217,027 ---------- ---------- ---------- Total assets ............................. $3,715,592 $3,481,727 $3,086,775 ========== ========== ========== LIABILITIES AND EQUITIES CURRENT LIABILITIES: Notes payable ............................. $ 370,561 $ 332,514 $ 298,244 Current portion of long-term debt ......... 59,987 89,032 14,658 Customer credit balances .................. 103,420 26,461 63,244 Customer advance payments ................. 159,538 169,123 83,154 Checks and drafts outstanding ............. 55,750 84,251 69,535 Accounts payable .......................... 470,048 517,667 325,422 Accrued expenses .......................... 229,990 225,704 153,509 Dividends and equities payable ............ 20,580 56,510 32,198 ---------- ---------- ---------- Total current liabilities ................ 1,469,874 1,501,262 1,039,964 LONG-TERM DEBT ............................. 649,863 483,092 565,250 OTHER LIABILITIES .......................... 111,302 118,280 105,720 MINORITY INTERESTS IN SUBSIDIARIES ......... 98,222 89,455 90,678 COMMITMENTS AND CONTINGENCIES EQUITIES ................................... 1,386,331 1,289,638 1,285,163 ---------- ---------- ---------- Total liabilities and equities ........... $3,715,592 $3,481,727 $3,086,775 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 2 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED FEBRUARY 28, FEBRUARY 28, ----------------------------- ----------------------------- 2003 2002 2003 2002 (DOLLARS IN THOUSANDS) ------------- ------------- ------------- ------------- REVENUES: Net sales .................................... $2,449,130 $1,859,811 $5,075,758 $3,731,763 Patronage dividends .......................... 793 1,188 959 1,909 Other revenues ............................... 27,790 23,648 62,879 55,724 ---------- ---------- ---------- ---------- 2,477,713 1,884,647 5,139,596 3,789,396 Cost of goods sold ............................ 2,416,412 1,822,402 4,979,206 3,626,766 Marketing, general and administrative ......... 48,072 46,377 91,220 89,275 ---------- ---------- ---------- ---------- OPERATING EARNINGS ............................ 13,229 15,868 69,170 73,355 Interest ...................................... 11,436 10,249 24,249 21,064 Equity loss (income) from investments ......... 5,772 2,176 (2,393) (1,766) Minority interests ............................ 3,345 2,674 8,776 5,710 ---------- ---------- ---------- ---------- (LOSS) INCOME BEFORE INCOME TAXES ................................. (7,324) 769 38,538 48,347 INCOME TAXES .................................. (3,224) (1,602) 2,282 4,621 ---------- ---------- ---------- ---------- NET (LOSS) INCOME ............................. $ (4,100) $ 2,371 $ 36,256 $ 43,726 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 3 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED FEBRUARY 28, FEBRUARY 28, ---------------------------- ---------------------------- 2003 2002 2003 2002 (DOLLARS IN THOUSANDS) ------------ ------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ....................................... $ (4,100) $ 2,371 $ 36,256 $ 43,726 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization ......................... 25,768 26,845 51,634 51,544 Noncash net loss (income) from equity investments .......................................... 5,772 2,176 (2,393) (1,766) Minority interests .................................... 3,345 2,674 8,776 5,710 Adjustment of inventories to market value ............. -- (8,444) -- 6,441 Noncash portion of patronage dividends received ............................................. (497) (970) (681) (1,736) Gain on sale of property, plant and equipment ......... (733) (395) (270) (2,743) Other, net ............................................ 2,014 181 2,460 121 Changes in operating assets and liabilities: Receivables .......................................... 58,291 51,663 (14,131) 97,716 Inventories .......................................... 68,242 (55,246) (102,090) (107,637) Other current assets and other assets ................ (51,237) (15,732) (118,051) (41,622) Customer credit balances ............................. 11,628 654 76,959 24,758 Customer advance payments ............................ (62,599) (19,693) (9,585) (25,981) Accounts payable and accrued expenses ................ (173,502) (125,337) (42,291) (169,596) Other liabilities .................................... (4,842) 348 (6,978) 5,814 ---------- ---------- ---------- ---------- Net cash used in operating activities .............. (122,450) (138,905) (120,385) (115,251) ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment ............ (36,762) (30,097) (77,375) (51,905) Proceeds from disposition of property, plant and equipment .......................................... 7,177 2,530 11,925 8,646 Investments ............................................. (2,791) (51) (4,175) (6,176) Equity investments redeemed ............................. 12,780 7,282 28,093 21,374 Investments redeemed .................................... 1,670 700 3,383 2,028 Changes in notes receivable ............................. (275) 4,571 (11,516) 2,408 Acquisition of intangibles .............................. (55) (62) (434) (27,531) Distribution to minority owners ......................... -- (366) (463) (4,351) Other investing activities, net ......................... 23 (29) 467 1,061 ---------- ---------- ---------- ---------- Net cash used in investing activities .............. (18,233) (15,522) (50,095) (54,446) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in notes payable ................................ 124,500 187,429 38,047 201,049 Long-term debt borrowings ............................... -- -- 175,000 30,000 Principal payments on long-term debt .................... (33,377) (4,348) (37,279) (10,128) Payments on derivative instruments ...................... -- -- (7,574) -- Changes in checks and drafts outstanding ................ (14,400) 9,472 (28,501) (18,273) Proceeds from sale of preferred stock, net of expenses 82,516 2,858 82,580 2,858 Preferred stock dividends paid .......................... (190) (10) (374) (10) Retirements of equities ................................. (21,938) (21,357) (24,360) (23,187) Cash patronage dividends paid ........................... (26,365) (39,572) (26,365) (39,572) ---------- ---------- ---------- ---------- Net cash provided by financing activities .......... 110,746 134,472 171,174 142,737 ---------- ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................................... (29,937) (19,955) 694 (26,960) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................... 138,823 106,453 108,192 113,458 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................... $ 108,886 $ 86,498 $ 108,886 $ 86,498 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 4 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) NOTE 1. ACCOUNTING POLICIES The unaudited consolidated balance sheets as of February 28, 2003 and 2002, and the statements of operations and cash flows for the three and six months ended February 28, 2003 and 2002 reflect, in the opinion of management of Cenex Harvest States Cooperatives (CHS or the Company), all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full fiscal year because of, among other things, the seasonal nature of the Company's businesses. The consolidated balance sheet data as of August 31, 2002 has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries and limited liability companies. The effects of all significant intercompany accounts and transactions have been eliminated. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2002, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 25, 2002. GOODWILL AND OTHER INTANGIBLE ASSETS The Company had $27.5 million of goodwill as of February 28, 2003, and during the six months then ended the Company disposed of $0.4 million due to sales of related assets in the Energy segment. Intangible assets subject to amortization primarily include trademarks, tradenames, customer lists and non-compete agreements, and are amortized on a straight-line basis over the number of years that approximate their respective useful lives (ranging from 2 to 15 years). The gross carrying amount of these intangible assets is $42.8 million with total accumulated amortization of $9.3 million as of February 28, 2003. Intangible assets of $0.4 million were acquired during the six months ended February 28, 2003. Total amortization expense for intangible assets during the three-month and six-month periods ended February 28, 2003 was approximately $1.2 million and $2.3 million, respectively. The estimated amortization expense related to intangible assets subject to amortization for the next five years will approximate $4.0 million annually. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is in the process of finalizing its analysis of adopting this standard. The Company's Energy segment operates oil refineries and related pipelines for which the Company would be subject to Asset Retirement Obligations (ARO) if such assets were to be dismantled. The Company, however, expects to operate its refineries and related pipelines indefinitely. Since the time period to dismantle these assets is indeterminate, a corresponding ARO is not estimable and therefore has not been recorded. The Company continues to assess whether any other ARO's exist related to its remaining operations, however, based on available information to date, no ARO's have been identified. As such, the Company believes that the effects of adopting this standard do not have a material effect on the Company. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities". The interpretation addresses consolidation of certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The interpretation applies immediately to variable interest entities created after January 31, 2003, and to 5 variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes that the effects of adopting this standard do not have a material effect on the Company. NOTE 2. RECEIVABLES
FEBRUARY 28, AUGUST 31, FEBRUARY 28, 2003 2002 2002 -------------- ------------ ------------- Trade ......................................... $727,301 $717,888 $584,512 Other ......................................... 66,362 49,846 27,540 -------- -------- -------- 793,663 767,734 612,052 Less allowances for doubtful accounts ......... 26,516 26,156 25,820 -------- -------- -------- $767,147 $741,578 $586,232 ======== ======== ========
NOTE 3. INVENTORIES
FEBRUARY 28, AUGUST 31, FEBRUARY 28, 2003 2002 2002 -------------- ------------ ------------- Grain and oilseed ................... $411,584 $393,095 $256,503 Energy .............................. 274,008 229,981 213,954 Feed and farm supplies .............. 134,446 91,138 112,247 Processed grain and oilseed ......... 35,225 36,264 15,933 Other ............................... 6,490 9,185 3,013 -------- -------- -------- $861,753 $759,663 $601,650 ======== ======== ========
NOTE 4. INVESTMENTS During the three months ended February 28, 2003 the Company impaired the balance of its investment in Farmland Industries, Inc. in the amount of $1.7 million. The following provides summarized unaudited financial information for the Company's unconsolidated significant subsidiaries Ventura Foods, LLC and Agriliance, LLC, of which the Company has a 50% and 25% equity ownership, respectively, for the three-month and six-month periods as indicated below. VENTURA FOODS, LLC
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED FEBRUARY 28, FEBRUARY 28, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net sales ............ $275,392 $238,219 $562,417 $496,619 Gross profit ......... 29,643 36,997 79,371 78,098 Net income ........... 1,612 10,584 22,403 25,828
AGRILIANCE, LLC
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED FEBRUARY 28, FEBRUARY 28, ------------------------- ----------------------------- 2003 2002 2003 2002 ----------- ----------- ------------- ------------- Net sales ............ $ 553,390 $ 576,171 $1,146,120 $1,253,218 Gross profit ......... 44,924 39,082 93,446 84,986 Net loss ............. (25,246) (31,956) (45,356) (53,108)
NOTE 5. PROPERTY, PLANT AND EQUIPMENT During the three months ended February 28, 2003 the Country Operations segment recorded impairments of $3.2 million related to facilities where the undiscounted projected income and related cash flows were less than the carrying value of the facilities. 6 NOTE 6. DEBT In October 2002, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $175.0 million, which was layered into two series. The first series of $115.0 million has an interest rate of 4.96% and will be repaid in equal semi-annual installments of approximately $8.8 million during the years 2007 through 2013. The second series of $60.0 million has an interest rate of 5.60% and will be repaid in equal semi-annual installments of approximately $4.6 million during fiscal years 2012 through 2018. NOTE 7. EQUITIES In January 2003, the Board of Directors authorized the sale and issuance of up to 3,500,000 shares of 8% Cumulative Redeemable Preferred Stock (New Preferred) at a price of $25.00 per share. The Company filed a registration statement on Form S-2 with the Securities and Exchange Commission registering 3,000,000 shares of the New Preferred (with an additional over-allotment option of 450,000 shares granted to the underwriters), which was declared effective on January 27, 2003. The shares were subsequently sold and are listed on the Nasdaq National Market. As of February 28, 2003, the Company had $86.3 million (3,450,000 shares) of the New Preferred outstanding. Expenses related to the issuance of the New Preferred were $3.7 million through the same period. As of February 28, 2003, the Company had $9.5 million (9,454,874 shares) of 8% Preferred Stock (Old Preferred) outstanding. The Company had previously suspended sales of the Old Preferred, and on February 25, 2003 the Company filed a post-effective amendment to terminate the offering of the Old Preferred shares. On March 5, 2003, the Company's Board of Directors authorized the redemption and conversion of the Old Preferred shares. A redemption notification and a conversion election form were sent to holders of the Old Preferred shares on March 21, 2003 explaining that on April 25, 2003 all shares of the Old Preferred will be redeemed by the Company for $1 per share unless they are converted into shares of the Company's New Preferred. The conversion will not change the base liquidation amount or dividend amount of the Old Preferred since 25 shares of the Old Preferred will convert to 1 share of the New Preferred. NOTE 8. COMPREHENSIVE INCOME For the three months ended February 28, 2003 and 2002, total comprehensive income amounted to $4.9 million loss and $1.6 million income, respectively. For the six months ended February 28, 2003 and 2002, total comprehensive income amounted to $29.7 million and $44.0 million, respectively. Accumulated other comprehensive loss on February 28, 2003, August 31, 2002 and February 28, 2002 was $58.5 million, $51.9 million and $1.7 million, respectively. NOTE 9. NON-CASH FINANCING ACTIVITIES During the six months ended February 28, 2003 and 2002 the Company accrued dividends and equities payable of $16.3 million and $21.9 million, respectively. NOTE 10. SEGMENT REPORTING Segments, which are based on products and services, include Agronomy, Energy, Country Operations, Grain Marketing and Processed Grains and Foods. Reconciling Amounts represent the elimination of intracompany sales between segments. Due to cost allocations and intersegment activity, management does not represent that these segments, if operated independently, would report the income before income taxes and other financial information as presented. 7 Segment information for the three months and six months ended February 28, 2003 and 2002 is as follows:
COUNTRY AGRONOMY ENERGY OPERATIONS ------------ ----------- ------------ FOR THE THREE MONTHS ENDED FEBRUARY 28, 2003 Net sales .................... $900,029 $430,832 Patronage dividends .......... $ (57) 50 795 Other revenues ............... 1,993 16,448 -------- -------- -------- (57) 902,072 448,075 Cost of goods sold ........... 887,705 420,857 Marketing, general and administrative .............. 1,578 13,577 15,332 Interest ..................... (380) 4,001 2,616 Equity loss (income) from investments ................. 6,012 (235) (255) Minority interests ........... 3,070 275 -------- -------- -------- (Loss) income before income taxes ................ $ (7,267) $ (6,046) $ 9,250 ======== ======== ======== Capital expenditures ......... $ 16,065 $ 3,029 ======== ======== Depreciation and amortization $ 311 $ 14,510 $ 5,333 ======== ======== ======== FOR THE THREE MONTHS ENDED FEBRUARY 28, 2002 Net sales .................... $588,564 $312,089 Patronage dividends .......... 25 947 Other revenues ............... 820 15,793 -------- -------- 589,409 328,829 Cost of goods sold ........... 563,148 309,590 Marketing, general and administrative .............. $ 1,637 15,667 11,953 Interest ..................... (306) 4,218 2,661 Equity loss (income) from investments ................. 8,304 157 219 Minority interests ........... 2,462 212 -------- -------- -------- (Loss) income before income taxes ................ $ (9,635) $ 3,757 $ 4,194 ======== ======== ======== Capital expenditures ......... $ 15,970 $ 4,790 ======== ======== Depreciation and amortization $ 311 $ 15,814 $ 5,170 ======== ======== ========
[WIDE TABLE CONTINUED FROM ABOVE]
PROCESSED GRAIN GRAINS AND RECONCILING MARKETING FOODS OTHER AMOUNTS TOTAL -------------- ------------ ---------- -------------- ------------- FOR THE THREE MONTHS ENDED FEBRUARY 28, 2003 Net sales .................... $1,224,746 $128,291 $ (234,768) $2,449,130 Patronage dividends .......... (52) 27 $ 30 793 Other revenues ............... 6,232 947 2,170 27,790 ---------- -------- ------ ---------- ---------- 1,230,926 129,265 2,200 (234,768) 2,477,713 Cost of goods sold ........... 1,222,653 119,965 (234,768) 2,416,412 Marketing, general and administrative .............. 5,912 10,057 1,616 48,072 Interest ..................... 1,024 3,319 856 11,436 Equity loss (income) from investments ................. 1,710 (1,460) 5,772 Minority interests ........... 3,345 ---------- -------- ------ ---------- ---------- (Loss) income before income taxes ................ $ (373) $ (2,616) $ (272) $ -- $ (7,324) ========== ======== ====== ========== ========== Capital expenditures ......... $ 399 $ 16,808 $ 461 $ 36,762 ========== ======== ====== ========== Depreciation and amortization $ 1,605 $ 3,267 $ 742 $ 25,768 ========== ======== ====== ========== FOR THE THREE MONTHS ENDED FEBRUARY 28, 2002 Net sales .................... $1,006,680 $126,143 $ (173,665) $1,859,811 Patronage dividends .......... 173 $ 43 1,188 Other revenues ............... 5,838 538 659 23,648 ---------- -------- ------ ---------- ---------- 1,012,691 126,681 702 (173,665) 1,884,647 Cost of goods sold ........... 1,003,681 119,648 (173,665) 1,822,402 Marketing, general and administrative .............. 5,590 10,394 1,136 46,377 Interest ..................... 1,398 2,393 (115) 10,249 Equity loss (income) from investments ................. (976) (5,528) 2,176 Minority interests ........... 2,674 ---------- -------- ------ ---------- ---------- (Loss) income before income taxes ................ $ 2,998 $ (226) $ (319) $ -- $ 769 ========== ======== ====== ========== ========== Capital expenditures ......... $ 2,713 $ 6,306 $ 318 $ 30,097 ========== ======== ====== ========== Depreciation and amortization $ 1,347 $ 3,408 $ 795 $ 26,845 ========== ======== ====== ==========
8
COUNTRY AGRONOMY ENERGY OPERATIONS ------------- ------------- ------------ FOR THE SIX MONTHS ENDED FEBRUARY 28, 2003 Net sales ............................ $1,811,618 $919,898 Patronage dividends .................. $ (57) 63 846 Other revenues ....................... 4,729 40,985 --------- ---------- -------- (57) 1,816,410 961,729 Cost of goods sold ................... 1,748,034 906,970 Marketing, general and administrative ...................... 2,718 27,762 27,935 Interest ............................. (678) 8,011 8,004 Equity loss (income) from investments ......................... 10,030 (555) (470) Minority interests ................... 8,205 571 --------- ---------- -------- (Loss) income before income taxes ........................ $ (12,127) $ 24,953 $ 18,719 ========= ========== ======== Goodwill assets ...................... $ 3,647 $ 262 ========== ======== Capital expenditures ................. $ 34,024 $ 13,351 ========== ======== Depreciation and amortization ........ $ 623 $ 29,048 $ 10,754 ========= ========== ======== Total identifiable assets at February 28, 2003 ................... $ 222,578 $1,363,611 $986,896 ========= ========== ======== FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 Net sales ............................ $1,142,806 $686,755 Patronage dividends .................. 448 1,008 Other revenues ....................... 3,439 36,282 ---------- -------- 1,146,693 724,045 Cost of goods sold ................... 1,061,123 683,807 Marketing, general and administrative ...................... $ 2,804 30,667 24,405 Interest ............................. (733) 8,300 5,804 Equity loss (income) from investments ......................... 11,606 1,533 213 Minority interests ................... 5,357 353 --------- ---------- -------- (Loss) income before income taxes ........................ $ (13,677) $ 39,713 $ 9,463 ========= ========== ======== Goodwill assets ...................... $ 4,892 $ 325 ========== ======== Capital expenditures ................. $ 25,650 $ 10,538 ========== ======== Depreciation and amortization ........ $ 623 $ 29,674 $ 10,543 ========= ========== ======== Total identifiable assets at February 28, 2002 ................... $ 217,822 $1,202,734 $784,546 ========= ========== ========
[WIDE TABLE CONTINUED FROM ABOVE]
PROCESSED GRAIN GRAINS AND RECONCILING MARKETING FOODS OTHER AMOUNTS TOTAL ------------- ------------ ------------ -------------- ------------- FOR THE SIX MONTHS ENDED FEBRUARY 28, 2003 Net sales ............................ $2,612,024 $ 242,124 $ (509,906) $5,075,758 Patronage dividends .................. 26 27 $ 54 959 Other revenues ....................... 12,836 1,856 2,473 62,879 ---------- --------- -------- ---------- ---------- 2,624,886 244,007 2,527 (509,906) 5,139,596 Cost of goods sold ................... 2,607,824 226,284 (509,906) 4,979,206 Marketing, general and administrative ...................... 11,983 18,145 2,677 91,220 Interest ............................. 2,882 5,665 365 24,249 Equity loss (income) from investments ......................... 896 (12,294) (2,393) Minority interests ................... 8,776 ---------- --------- -------- ---------- ---------- (Loss) income before income taxes ........................ $ 1,301 $ 6,207 $ (515) $ -- $ 38,538 ========== ========= ======== ========== ========== Goodwill assets ...................... $ 23,605 $ 27,514 ========= ========== Capital expenditures ................. $ 916 $ 27,964 $ 1,120 $ 77,375 ========== ========= ======== ========== Depreciation and amortization ........ $ 3,210 $ 6,402 $ 1,597 $ 51,634 ========== ========= ======== ========== Total identifiable assets at February 28, 2003 ................... $ 466,919 $ 454,453 $221,135 $3,715,592 ========== ========= ======== ========== FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 Net sales ............................ $1,988,577 $ 289,192 $ (375,567) $3,731,763 Patronage dividends .................. 352 $ 101 1,909 Other revenues ....................... 14,290 563 1,150 55,724 ---------- --------- -------- ---------- ---------- 2,003,219 289,755 1,251 (375,567) 3,789,396 Cost of goods sold ................... 1,985,678 271,725 (375,567) 3,626,766 Marketing, general and administrative ...................... 11,067 17,973 2,359 89,275 Interest ............................. 3,027 4,989 (323) 21,064 Equity loss (income) from investments ......................... (1,965) (13,153) (1,766) Minority interests ................... 5,710 ---------- --------- -------- ---------- ---------- (Loss) income before income taxes ........................ $ 5,412 $ 8,221 $ (785) $ -- $ 48,347 ========== ========= ======== ========== ========== Goodwill assets ...................... $ 23,605 $ 28,822 ========= ========== Capital expenditures ................. $ 3,728 $ 11,485 $ 504 $ 51,905 ========== ========= ======== ========== Depreciation and amortization ........ $ 2,691 $ 6,429 $ 1,584 $ 51,544 ========== ========= ======== ========== Total identifiable assets at February 28, 2002 ................... $ 306,445 $ 396,734 $178,494 $3,086,775 ========== ========= ======== ==========
NOTE 11. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL The Company, including NCRA, expects to incur capital expenditures related to the Environmental Protection Agency low sulfur fuel regulations required by 2006. These expenditures are expected to be approximately $387.0 million in total for the Company's Laurel, Montana and NCRA's McPherson, Kansas refineries over the next three years, of which $0.1 million has been spent at the Laurel refinery and $15.5 million has been spent by NCRA at the McPherson refinery as of February 28, 2003. It is expected that approximately 80% of the costs for these projects will be incurred at NCRA's McPherson facility. The Company expects to fund the refinery expenditures with a combination of cash, future earnings and additional borrowings. 9 GAIN ON LEGAL SETTLEMENTS During the six months ended February 28, 2003 the Company received cash proceeds and recorded gains of $10.7 million, of which $8.9 million was received during the current quarter then ended, related to legal settlements from several vitamin product suppliers against whom the Company alleged certain price-fixing claims. The Company has recorded these gains in cost of goods sold. GUARANTEES In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of the guarantee for obligations the guarantor has undertaken in issuing the guarantee. The Company makes seasonal and term loans to member cooperatives, and its wholly-owned subsidiary, Fin-Ag, Inc., makes loans for agricultural purposes to individual producers. Some of these loans are sold to CoBank, ACB, and the Company guarantees a portion of the loans sold. In addition, the Company also guarantees certain debt and obligations under contracts for its subsidiaries and members. 10 The Company's obligations pursuant to its guarantees as of February 28, 2003 were as follows:
(DOLLARS IN THOUSANDS) GUARANTEE EXPOSURE ON MAXIMUM FEBRUARY 28, SUBSIDIARY/AFFILIATE EXPOSURE 2003 NATURE OF GUARANTEE ------------------------ ----------- -------------- ----------------------- The Company's $ 8,481 10% of the obligations Financial Services of borrowers cooperative loans (agricultural sold to CoBank, cooperatives) under ACB credit agreements for loans sold Fin-Ag, Inc. $31,102 15% of the obligations agricultural loans of borrowers under sold to CoBank, credit agreements for ACB some of the loans sold, and 100% of the obligations of borrowers for the remaining loans sold TEMCO, LLC $ 7,500 $ 6,288 Obligations by TEMCO, LLC under credit agreement North Valley $ 194 $ 194 Obligations by North Petroleum, LLC Valley Petroleum, LLC under credit agreement Third parties $ 407 Surety for, or ------- indemnification of surety for sales contracts between affiliates and sellers of grain under deferred payment contracts $46,472 =======
[WIDE TABLE CONTINUED FROM ABOVE]
TRIGGERING RECOURSE ASSETS HELD SUBSIDIARY/AFFILIATE EXPIRATION DATE EVENT PROVISIONS AS COLLATERAL ------------------------ ------------------ ------------ ------------- --------------- The Company's None stated, but Credit Subrogation Some or all Financial Services may be Agreement against assets of cooperative loans terminated by Default borrower borrower are sold to CoBank, either party held as ACB upon 60 days collateral and prior notice in should be regard to future sufficient to obligations cover guarantee exposure Fin-Ag, Inc. None stated, but Credit Subrogation Some or all agricultural loans may be Agreement against assets of sold to CoBank, terminated by Default borrower borrower are ACB either party held as upon 90 days collateral and prior notice in should be regard to future sufficient to obligations cover guarantee exposure TEMCO, LLC None stated Credit Subrogation None Agreement against Default TEMCO, LLC North Valley None stated Credit Subrogation None Petroleum, LLC Agreement against Default North Valley Petroleum, LLC Third parties Annual renewal Nonpayment Subrogation Some or all on December against assets of 1st in regard to affiliates borrower are surety for one held as third party, collateral but otherwise none might not be stated and may sufficient to be terminated cover by the Company guarantee at any time in exposure regard to future obligations
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cenex Harvest States Cooperatives (CHS or the Company) is one of the nation's leading integrated agricultural companies. As a cooperative, the Company is owned by farmers, ranchers and their local cooperatives from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. CHS buys commodities from, and provides products and services to members and other customers. The Company provides a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies and crop nutrients, to agricultural outputs that include grains and oilseeds, grain and oilseed processing, and food products. The Company has five distinct business segments: Agronomy, Energy, Country Operations, Grain Marketing and Processed Grains and Foods. Summary data for each of these segments for the three months and six months ended February 28, 2003 and 2002 is shown in Note 10 to the Consolidated Financial Statements. Many of the Company's businesses are highly seasonal. As a result, operating income will vary throughout the year, but overall revenues remain fairly constant, partly because the Company does not consolidate revenues in the Agronomy segment. Overall, the Company's income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Certain business segments are subject to varying seasonal fluctuations. For example, Agronomy and Country Operations segments experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. The Grain Marketing segment, as well, is somewhat subject to fluctuations in revenue and earnings based on producer harvests, world grain prices and demand. The Company's Energy segment generally experiences higher revenues and profitability in certain operating areas, such as refined products, in the summer when gasoline and diesel usage is highest. Other energy products, such as propane, typically experience higher revenues and profitability during the winter heating and crop drying seasons. While the Company's sales and operating earnings are derived from businesses and operations which are wholly-owned and majority-owned, a portion of business operations are conducted through companies in which the Company holds ownership interests of 50% or less and does not control the operations. The Company accounts for these investments primarily using the equity method of accounting, wherein CHS records as equity income from investments its proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in the Company's consolidated statements of operations. These investments principally include the Company's 25% ownership in Agriliance, LLC (Agriliance), the 50% ownership in TEMCO, LLC, the 50% ownership in United Harvest, LLC, the 24% ownership in Horizon Milling, LLC (Horizon) and the 50% ownership in Ventura Foods, LLC (Ventura). RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 28, 2003 AND 2002 NET (LOSS) INCOME. Consolidated net loss for the three months ended February 28, 2003 was $4.1 million compared to net income of $2.4 million for the three months ended February 28, 2002, which represents a $6.5 million variance. Losses in the Energy segment were partially offset by increased income in the Country Operations segment compared to the three months ended February 28, 2002. NET SALES. Consolidated net sales of $2.4 billion for the three months ended February 28, 2003 increased $589.3 million (32%) compared to the three months ended February 28, 2002. Energy net sales of $877.1 million increased $304.6 million (53%) during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. Sales for the three months ended February 28, 2003 and 2002 were $900.0 million and $588.6 million, respectively. The Company eliminated all intracompany sales from the Energy segment to the Country Operations segment of $22.9 million and $16.1 million for the three months ended February 28, 2003 and 2002, respectively. The net increase in sales was primarily a result of a refined fuels average sales price increase of $0.34 per gallon and a volume increase of 5% compared to the three months ended February 28, 2002. In addition, 12 propane sales volumes increased 20% and the average sales price increased $0.08 per gallon compared to the three months ended February 28, 2002. Refined fuels commodity price increases were primarily the result of worldwide market uncertainties and a colder winter compared to the prior year. The propane volume increases were primarily a result of increased demand due to a colder winter compared to the prior year. Country Operations farm supply sales of $119.8 million increased by $25.0 million (26%) during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. The increase is primarily due to increased volumes from an acquisition, price increases on energy products and additional tons of feed sold. Company-wide grain and oilseed net sales of $1.3 billion increased $257.6 million (24%) during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. Sales for the three months ended February 28, 2003 were $1,224.7 million and $311.1 million from the Grain Marketing and Country Operations segments, respectively. Sales for the three months ended February 28, 2002 were $1,006.7 million and $217.3 million from the Grain Marketing and Country Operations segments, respectively. The Company eliminated all intracompany sales from the Country Operations segment to the Grain Marketing segment, of $211.8 million and $157.6 million, for the three months ended February 28, 2003 and 2002, respectively. The net increase in sales was primarily due to an increase of $0.69 per bushel (18%) in the average sales price of all grain and oilseed marketed by the Company and an increase in grain volume of 5% compared to the three months ended February 28, 2002. Processed Grains and Foods net sales of $128.3 million increased $2.1 million (2%) during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. This increase is primarily due to a sales volume increase of 3% and an average sales price increase of $0.08 per pound on refined oil. This increase was partially offset by a decrease in wheat milling sales due to the formation of Horizon, a joint venture that was formed in January 2002. After that date, the Company has accounted for operating results of Horizon under the equity method of accounting. The Company has a 24% interest in Horizon, and Cargill, Incorporated (Cargill) has a 76% interest. The Company is leasing its five mills and related equipment to Horizon under an operating lease. PATRONAGE DIVIDENDS. Patronage dividends received of $0.8 million decreased $0.4 million (33%) during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. OTHER REVENUES. Other revenues of $27.8 million increased $4.1 million (18%) during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. The most significant changes were increased revenues within the Energy and Other segments compared to the three months ended February 28, 2002. COST OF GOODS SOLD. Cost of goods sold of $2.4 billion increased $594.0 million (33%) during the three months ended February 28, 2003, compared to the three months ended February 28, 2002. The Energy segment cost of goods sold increased by $324.6 million (58%) during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. Refined fuels average cost increased by $0.36 per gallon and volumes increased by 5% compared to the three months ended February 28, 2002, primarily the result of worldwide market uncertainties and a colder winter compared to the prior year. Propane volumes increased by 20% and the average cost increased by $0.09 per gallon compared to the three months ended February 28, 2002, which was primarily the result of a colder winter compared to the prior year. The cost of all grains and oilseed procured by the Company through its Grain Marketing and Country Operations segments increased $249.5 million (24%) compared to the three months ended February 28, 2002 primarily due to a $0.68 average cost per bushel increase (18%) and a 5% increase in volume. Country Operations segment farm supply cost of goods sold increased by $17.9 million (25%) during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. Volumes increased due to acquisitions and additional feed volumes and the average cost per unit increased on energy products. In addition, during the three months ended February 28, 2003 the Country Operations segment recorded impairments of $3.2 million on its facilities. The increase in the Country Operations segment was partially offset by $8.9 million of cash received in January 2003 from a class action lawsuit, alleging illegal price-fixing against various feed vitamin product suppliers. Processed 13 Grains and Foods segment cost of goods sold increased $0.3 million compared to the three months ended February 28, 2002, primarily due to increased volumes of 3% and an average cost of raw materials increase of $0.07 per pound on soybeans, which was offset by decreased cost of goods sold due to the formation of Horizon, as previously discussed. MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative expenses of $48.1 million for the three months ended February 28, 2003 increased by $1.7 million (4%) compared to the three months ended February 28, 2002. Marketing, general and administrative expenses increased by $1.7 million related to an impairment on the balance of the Company's investment in Farmland Industries, Inc. (Farmland), of which $1.6 million was in the Country Operations segment. In addition, marketing, general and administrative expense changes in Country Operations and Energy segments were primarily due to acquisitions. INTEREST. Interest expense of $11.4 million for the three months ended February 28, 2003 increased by $1.2 million (12%) compared to the three months ended February 28, 2002. The average level of short-term borrowings increased $33.2 million to finance working capital needs, primarily due to increased inventories related to higher commodity prices. The average short-term interest rate increased 0.4% during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. EQUITY LOSS (INCOME) FROM INVESTMENTS. Equity loss from investments of $5.8 million for the three months ended February 28, 2003 increased by $3.6 million compared to the three months ended February 28, 2002. The additional equity loss was primarily attributable to decreased earnings from Ventura, a Processed Grains and Foods segment investment and losses in Grain Marketing investments due to tighter grain margins compared to February 28, 2002. These decreases were partially offset by decreased losses in Agriliance, an Agronomy segment investment, compared to the three-month period ended February 28, 2002. MINORITY INTERESTS. Minority interests of $3.3 million for the three months ended February 28, 2003 increased by $0.7 million (25%) compared to the three months ended February 28, 2002. The net change in minority interests was primarily a result of more profitable operations within the Company's majority-owned subsidiaries during the three months ended February 28, 2003 compared to the three months ended February 28, 2002. Substantially all minority interests relate to National Cooperative Refinery Association (NCRA), an approximately 74.5% owned subsidiary. INCOME TAXES. An income tax benefit of $3.2 million for the three months ended February 28, 2003 increased $1.6 million compared to the three months ended February 28, 2002. The income taxes and the effective tax rate vary each period based upon profitability and nonpatronage business activity during each of the comparable periods. COMPARISON OF THE SIX MONTHS ENDED FEBRUARY 28, 2003 AND 2002 NET (LOSS) INCOME. Consolidated net income for the six months ended February 28, 2003 was $36.3 million compared to $43.7 million for the six months ended February 28, 2002, which represents a $7.4 million (17%) decrease. Reduced income in the Energy segment was partially offset by increased income in the Country Operations segment compared to the six months ended February 28, 2002. NET SALES. Consolidated net sales of $5.1 billion for the six months ended February 28, 2003 increased $1.3 billion (36%) compared to the six months ended February 28, 2002. Energy net sales of $1.8 billion increased $651.9 million (59%) during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. Sales for the six months ended February 28, 2003 and 2002 were $1,811.6 million and $1,142.8 million, respectively. The Company eliminated all intracompany sales from the Energy segment to the Country Operations segment of $46.9 million and $30.0 million for the six months ended February 28, 2003 and 2002, respectively. The increase was primarily the result of increased refined fuels volumes of 32% and an average sales price increase of $0.22 per gallon compared to the six months ended February 28, 2002. In addition, propane sales volumes increased 38% and the average sales price increased $0.04 per gallon compared to the six months ended February 28, 2002. Refined fuels and propane increases were primarily a result of the 14 acquisition of the wholesale energy business of Farmland, as well as all interest in Country Energy, LLC a joint venture formerly with Farmland at a purchase price of $39.2 million. In addition, refined fuels commodity prices increased as a result of worldwide market uncertainties and a colder winter compared to the prior year. Propane volumes increased due to a colder winter compared to the prior year. Country Operations farm supply sales of $274.3 million increased by $47.2 million (21%) during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. The increase is primarily due to increased volumes from an acquisition, increased tons of feed sold and price increases on energy products. Company-wide grain and oilseed net sales of $2.8 billion increased $692.0 million (33%) during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. Sales for the six months ended February 28, 2003 were $2,612.0 million and $645.6 million from Grain Marketing and Country Operations segments, respectively. Sales for the six months ended February 28, 2002 were $1,988.6 million and $459.6 million from the Grain Marketing and Country Operations segments, respectively. The Company eliminated all intracompany sales from the Country Operations segment to the Grain Marketing segment, of $463.0 million and $345.6 million, for the six months ended February 28, 2003 and 2002, respectively. The net increase in sales was primarily due to an increase of $1.36 per bushel (40%) in the average sales price of all grain and oilseed marketed by the Company, which was partially offset by a decrease in grain volume of 5% compared to the six months ended February 28, 2002. Processed Grains and Foods net sales of $242.1 million decreased $47.1 million (16%) during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. The net decrease in sales is primarily due to the formation of Horizon, as previously discussed. This decrease was partially offset by increased refined oil sales primarily due to a volume increase of 1% and an average price increase of $0.05 per pound. PATRONAGE DIVIDENDS. Patronage dividends received of $1.0 million decreased $1.0 million during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. OTHER REVENUES. Other revenues of $62.9 million increased $7.2 million (13%) during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. The most significant changes were due to increased service and other revenues within the Country Operations segment compared to the six months ended February 28, 2002. COST OF GOODS SOLD. Cost of goods sold of $5.0 billion increased $1.4 billion (37%) during the six months ended February 28, 2003, compared to the six months ended February 28, 2002. Cost of goods sold in the Energy segment increased by $686.9 million (65%) during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. Refined fuels volumes increased by 32% and the average cost increased by $0.24 per gallon compared to the six months ended February 28, 2002, primarily the result of the acquisition previously discussed, worldwide market uncertainties and a colder winter compared to the prior year. Propane volumes increased by 38% and the average cost increased by $0.04 per gallon compared to the six months ended February 28, 2002, primarily the result of the acquisition previously discussed and a colder winter compared to the prior year. The cost of all grains and oilseed procured by the Company through its Grain Marketing and Country Operations segments increased $673.7 million (33%) compared to the six months ended February 28, 2002 primarily due to a $1.35 average cost per bushel increase (40%), which was partially offset by a 5% decrease in volume. Country Operations segment farm supply cost of goods sold increased by $34.7 million (19%) during the six months ended February 28, 2003 compared to the six months ended February 28, 2002 primarily due to an acquisition, volume increases on feed, and an average cost per unit increase on energy products. In addition, during the six months ended February 28, 2003 the Country Operations segment recorded impairments of $3.2 million on its facilities. The increase in the Country Operations segment was partially offset by $10.7 million of cash received from a class action lawsuit, alleging illegal price fixing against various feed vitamin product suppliers. Cost of goods sold in the Processed Grains and Foods segment decreased by $45.4 million (17%) compared to the six months ended February 28, 2002, primarily due to the formation of Horizon, as previously discussed, which was partially offset by refined oil volume increases of 1% and cost of raw material increases of $0.04 per pound. 15 MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative expenses of $91.2 million for the six months ended February 28, 2003 increased by $1.9 million (2%) compared to the six months ended February 28, 2002. Marketing, general and administrative expenses increased by $1.7 million related to an impairment on the balance of the Company's investment in Farmland, of which $1.6 million was in the Country Operations segment. In addition, marketing, general and administrative expense changes in Country Operations and Energy segments were primarily due to acquisitions. INTEREST. Interest expense of $24.2 million for the six months ended February 28, 2003 increased by $3.2 million (15%) compared to the six months ended February 28, 2002. The average level of short-term borrowings increased $142.1 million to finance working capital needs, primarily due to increases in inventories in the Grain Marketing, Country Operations and Energy segments, related to higher commodity prices and the purchase of Farmland's wholesale energy business, discussed previously. The average short-term interest rate decreased 0.4% during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. Long-term debt borrowings increased due to an additional $175.0 million of private placement debt which was issued in October 2002. EQUITY (LOSS) INCOME FROM INVESTMENTS. Equity income from investments of $2.4 million for the six months ended February 28, 2003 increased by $0.6 million (36%) compared to the six months ended February 28, 2002. The increase was primarily attributable to increased earnings from the Energy segment investments and decreased losses from Agriliance, an Agronomy segment investment. The increase was partially offset by decreased investment earnings in the Grain Marketing and Processed Grain and Foods segments. MINORITY INTERESTS. Minority interests of $8.8 million for the six months ended February 28, 2003 increased by $3.1 million (54%) compared to the six months ended February 28, 2002. The net change in minority interests was primarily a result of more profitable operations within the Company's majority-owned subsidiaries during the six months ended February 28, 2003 compared to the six months ended February 28, 2002. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary. INCOME TAXES. Income tax expense of $2.3 million for the six months ended February 28, 2003 decreased $2.3 million (51%) compared to the six months ended February 28, 2002, resulting in effective tax rates of a 5.9% and 9.6%, respectively. The income taxes and the effective tax rate vary each period based upon profitability and nonpatronage business activity during each of the comparable periods. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FROM OPERATIONS Operating activities of the Company used net cash of $122.5 million and $138.9 million during the three months ended February 28, 2003 and 2002, respectively. For the three-month period ended in 2003, net non-cash expenses of $35.6 million were offset by a net loss for the period of $4.1 million and increased working capital requirements of $154.0 million. For the three-month period ended in 2002, net income of $2.4 million and net non-cash expenses of $22.1 million were offset by increased working capital requirements of $163.4 million. Operating activities of the Company used net cash of $120.4 million and $115.3 million during the six months ended February 28, 2003 and 2002, respectively. For the six-month period ended in 2003, net income of $36.3 million and net non-cash expenses of $59.5 million were offset by increased working capital requirements of $216.2 million. For the six-month period ended in 2002, net income of $43.7 million and net non-cash expenses of $57.6 million were offset by increased working capital requirements of $216.6 million. CASH FLOWS FROM INVESTING ACTIVITIES For the three months ended February 28, 2003 and 2002, the net cash flows used in the Company's investing activities totaled $18.2 million and $15.5 million, respectively. The acquisition of property, plant and equipment comprised the primary use of cash totaling $36.8 million and $30.1 million for the three months ended February 28, 2003 and 2002, respectively. For the year ended August 31, 2003 the Company expects to spend approximately $216.8 million for the 16 acquisition of property, plant and equipment, which includes $57.0 million of expenditures for the construction of an oilseed processing facility in Fairmont, Minnesota. Total expenditures related to the construction of the facility are projected to be approximately $80.0 million, of which $47.4 million was used for construction through February 28, 2003. Capital expenditures primarily related to the Environmental Protection Agency low sulfur fuel regulations required by 2006, are expected to be approximately $387.0 million in total for the Company's Laurel, Montana and NCRA's McPherson, Kansas refineries over the next three years, of which $0.1 million has been spent at the Laurel refinery and $15.5 million has been spent by NCRA at the McPherson refinery as of February 28, 2003. It is expected that approximately 80% of the costs will be incurred at NCRA's McPherson refinery. The Company expects to fund the refinery expenditures with a combination of cash, future earnings and additional borrowings. Investments made during the three months ended February 28, 2003 and 2002 totaled $2.8 million and $0.1 million, respectively. Acquisitions of intangibles were $0.1 million for each of the three months ended February 28, 2003 and 2002, respectively. During the three months ended February 28, 2003 the changes in notes receivable resulted in a decrease in cash flows of $0.3 million, and during the three months ended February 28, 2002 the changes in notes receivable resulted in an increase in cash flows of $4.6 million. Partially offsetting cash outlays in investing activities were proceeds from the disposition of property, plant and equipment of $7.2 million and $2.5 million for the three months ended February 28, 2003 and 2002, respectively. Also partially offsetting cash outlays were distributions received from joint ventures and investments totaling $14.5 million and $8.0 million for the three months ended February 28, 2003 and 2002, respectively. For the six months ended February 28, 2003 and 2002, the net cash flows used in the Company's investing activities totaled $50.1 million and $54.4 million, respectively. The acquisition of property, plant and equipment comprised the primary use of cash totaling $77.4 million and $51.9 million for the six months ended February 28, 2003 and 2002, respectively. Investments made during the six months ended February 28, 2003 and 2002 totaled $4.2 million and $6.2 million, respectively. Acquisitions of intangibles were $0.4 million and $27.5 million for the six months ended February 28, 2003 and 2002, respectively. During the six months ended February 28, 2002, the acquisitions of intangibles were primarily related to the purchase of Farmland's interest in its wholesale energy business, as previously discussed, and represents trademarks, tradenames and non-compete agreements. During the six months ended February 28, 2003 the changes in notes receivable resulted in a decrease in cash flows of $11.5 million primarily from additional related party notes receivables at NCRA from its minority owners, Growmark, Inc. and MFA Oil Company. During the six months ended February 28, 2002 the changes in notes receivable resulted in an increase of $2.4 million. Distributions to minority owners for the six months ended February 28, 2003 and 2002 were $0.5 million and $4.4 million, respectively, and were primarily related to NCRA. Partially offsetting cash outlays in investing activities were distributions received from joint ventures and investments totaling $31.5 million and $23.4 million for the six months ended February 28, 2003 and 2002, respectively. Also partially offsetting cash outlays were proceeds from the disposition of property, plant and equipment of $11.9 million and $8.6 million for the six months ended February 28, 2003 and 2002, respectively. CASH FLOWS FROM FINANCING ACTIVITIES The Company finances its working capital needs through short-term lines of credit with a syndication of banks. In May 2002, the Company renewed its 364-day credit facility of $550.0 million committed. In addition to these lines of credit, the Company has a 364-day credit facility dedicated to NCRA, with a syndication of banks in the amount of $30.0 million committed. On February 28, 2003, 17 August 31, 2002 and February 28, 2002, the Company had total short-term indebtedness outstanding on these various facilities and other short-term notes payable totaling $370.6 million, $332.5 million and $298.2 million, respectively. The increase in 2003 is primarily due to increases in inventories in the Grain Marketing and Country Operations segments related to higher grain prices. In October 2002, $175.0 million received from private placement proceeds was used to pay down the Company's 364-day credit facility. In January 2003, $83.0 million of proceeds received from the issuance of the Company's preferred stock (net of broker commissions of $3.2 million) was also used to pay down the 364-day credit facility. In June 1998, the Company established a five-year revolving credit facility with a syndication of banks, with $200.0 million committed. The Company had outstanding balances on this facility of $45.0 million, $75.0 million and $75.0 million on February 28, 2003, August 31, 2002 and February 28, 2002, respectively. Repayments of $30.0 million were made on this facility during the three months ended February 28, 2003. The Company finances its long-term capital needs, primarily for the acquisition of property, plant and equipment, with long-term agreements with various insurance companies and cooperative banks. In June 1998, the Company established a long-term credit agreement through the cooperative banks. This facility committed $200.0 million of long-term borrowing capacity to the Company, with repayments through fiscal year 2009. The amount outstanding on this credit facility was $141.0 million, $144.3 million and $147.6 million on February 28, 2003, August 31, 2002 and February 28, 2002, respectively. Repayments of $1.6 million and $3.3 million were made on this facility during each of the three months and six months ended February 28, 2003 and 2002. Also in June 1998, the Company completed a private placement with several insurance companies for long-term debt in the amount of $225.0 million. Repayments will be made in equal annual installments of $37.5 million each in the years 2008 through 2013. In January 2001, the Company entered into a note purchase and private shelf agreement with Prudential Insurance Company. The long-term note in the amount of $25.0 million will be repaid in equal annual installments of approximately $3.6 million, in the years 2005 through 2011. A subsequent note for $55.0 million was issued in March 2001, related to the private shelf facility. The $55.0 million note will be repaid in equal annual installments of approximately $7.9 million, in the years 2005 through 2011. In October 2002, the Company completed a private placement with several insurance companies for long-term debt in the amount of $175.0 million which was layered into two series. The first series of $115.0 million has an interest rate of 4.96% and will be repaid in equal semi-annual installments of approximately $8.8 million during the years 2007 through 2013. The second series of $60.0 million has an interest rate of 5.60% and will be repaid in equal semi-annual installments of approximately $4.6 million during fiscal years 2012 through 2018. The Company, through NCRA, had revolving term loans outstanding of $16.5 million, $18.0 million and $19.5 million on February 28, 2003, August 31, 2002 and February 28, 2002, respectively. Repayments of $0.8 million and $1.5 million were made during each of the three months and six months ended February 28, 2003 and 2002. On February 28, 2003, the Company had total long-term debt outstanding of $709.9 million, of which $219.1 million was bank financing, $480.0 million was private placement proceeds and $10.8 million was industrial development revenue bonds and other notes and contracts payable. The aggregate amount of long-term debt payable presented in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended August 31, 2002 has not materially changed during the six months ended February 28, 2003 other than for the $30.0 million repayment on the five-year revolver which was classified as a current payable on August 31, 2002, and the $175.0 million of private placement debt discussed previously, of which repayments will not start until 2007. The Company is in compliance with all debt covenants and restrictions as of February 28, 2003. During the three months ended February 28, 2003 and 2002, the Company received no proceeds from borrowings on a long-term basis, and repaid long-term debt of $33.4 million and $4.3 million, respectively. 18 During the six months ended February 28, 2003 and 2002, the Company borrowed on a long-term basis $175.0 million and $30.0 million, respectively, and during the same periods repaid long-term debt of $37.3 million and $10.1 million, respectively. 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 fiscal year. Effective September 1, 2000, patronage refunds are calculated based on earnings for financial statement purposes rather than based on amounts reportable for federal income tax purposes as had been the Company's practice prior to this date. This change was authorized through a bylaw amendment at the Company's annual meeting on December 1, 2000. The patronage earnings from the fiscal year ended August 31, 2002 were distributed during the three months ended February 28, 2003. The cash portion of this distribution, deemed by the Board of Directors to be 30%, was $26.4 million. During the three months ended February 28, 2002 the Company distributed cash patronage of $39.6 million from the patronage earnings of the fiscal year ended August 31, 2001. The current equity redemption policy, as authorized by the Board of Directors, allows for the redemption of capital equity certificates held by inactive direct members and patrons and active direct members and patrons at age 72 or death that were of age 61 or older on June 1, 1998. For active direct members and patrons who were of age 60 or younger on June 1, 1998, and member cooperatives, equities that have been outstanding for more than 10 years 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 that have been outstanding for more than 10 years held by such eligible members and patrons. Total redemptions related to the year ended August 31, 2002, to be distributed in fiscal year 2003, are expected to be approximately $30.3 million, of which $24.4 million was redeemed during the six months ended February 28, 2003. During the six months ended February 28, 2002 the Company redeemed $23.2 million of equity. Redemptions of equity by the Company during the three-month periods ended February 28, 2003 and 2002 were $21.9 million and $21.4 million, respectively. In January 2003, the Board of Directors authorized the sale and issuance of up to 3,500,000 shares of 8% Cumulative Redeemable Preferred Stock (New Preferred) at a price of $25.00 per share. The Company filed a registration statement on Form S-2 with the Securities and Exchange Commission registering 3,000,000 shares of the New Preferred (with an additional over-allotment option of 450,000 shares granted to the underwriters), which was declared effective on January 27, 2003. The shares were subsequently sold and are listed on the Nasdaq National Market. As of February 28, 2003 the Company had $86.3 million (3,450,000 shares) of the New Preferred outstanding. Expenses related to the issuance of the New Preferred were $3.7 million through the same period. As of February 28, 2003 the Company had $9.5 million (9,454,874 shares) of 8% Preferred Stock (Old Preferred) outstanding. The Company had previously suspended sales of the Old Preferred, and on February 25, 2003 the Company filed a post-effective amendment to terminate the offering of the Old Preferred shares. On March 5, 2003 the Company's Board of Directors authorized the redemption and conversion of the Old Preferred shares. A redemption notification and a conversion election form were sent to holders of the Old Preferred shares on March 21, 2003 explaining that on April 25, 2003 all shares of the Old Preferred will be redeemed by the Company for $1 per share unless they are converted into shares of the Company's New Preferred. The conversion will not change the base liquidation amount or dividend amount of the Old Preferred since 25 shares of the Old Preferred will convert to 1 share of the New Preferred. OFF BALANCE SHEET FINANCING ARRANGEMENTS LEASE COMMITMENTS: The Company's lease commitments presented in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended August 31, 2002 have not materially changed during the six months ended February 28, 2003. GUARANTEES: The Company is a guarantor for lines of credit for related companies of which $46.5 million was outstanding on February 28, 2003. The Company's bank covenants allow maximum guarantees of $100.0 million. All outstanding loans with respective creditors are current as of February 28, 2003. 19 DEBT: There is no material off balance sheet debt. CRITICAL ACCOUNTING POLICIES The Company's Critical Accounting Policies are presented in the Company's Annual Report on Form 10-K for the year ended August 31, 2002. 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. The Company has recently opened a grain marketing office in Brazil that will impact its exposure to foreign currency fluctuations. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is in the process of finalizing its analysis of adopting this standard. The Company's Energy segment operates oil refineries and related pipelines for which the Company would be subject to Asset Retirement Obligations (ARO) if such assets were to be dismantled. The Company, however, expects to operate its refineries and related pipelines indefinitely. Since the time period to dismantle these assets is indeterminate, a corresponding ARO is not currently estimable and therefore has not been recorded. The Company continues to assess whether any other ARO's exist related to its remaining operations, however, based on available information to date, no ARO's have been identified. As such, the Company believes that the effects of adopting this standard do not have a material effect on the Company. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of the guarantee for obligations the guarantor has undertaken in issuing the guarantee. The Company has adopted this interpretation for the quarter ended February 28, 2003. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities". The interpretation addresses consolidation of certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes that the effects of adopting this standard do not have a material effect on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For the period ended February 28, 2003 the Company did not experience any adverse changes in market risk exposures that materially affect the quantitative and qualitative disclosures presented in the Company's Annual Report on Form 10-K for the year ended August 31, 2002. 20 ITEM 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that the Company's disclosure controls and procedures are adequately designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms. There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect those controls, subsequent to the date of such evaluation, including any corrective actions taken with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT DESCRIPTION --------- ----------- 4.1 Resolution amending the Certificate of Designations for the Company's 8% Preferred Stock 10.1 2002 Amended and Restated Credit Agreement (364-Day Revolving Loan) dated December 17, 2002 by and among National Cooperative Refinery Association, CoBank, ACB and Farm Credit Bank of Wichita, D/B/A U.S. AgBank, FCB 99.1 Cautionary Statement 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None. 21 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) DATE SIGNATURE ---- --------- April 4, 2003 /s/ JOHN SCHMITZ -------------------------- --------------------------------- (Date) John Schmitz Executive Vice President and Chief Financial Officer 22 SECTION 302 CERTIFICATION I, John D. Johnson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cenex Harvest States Cooperatives; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 4, 2003 /s/ JOHN D. JOHNSON ------------------------------------- John D. Johnson President and Chief Executive Officer 23 SECTION 302 CERTIFICATION I, John Schmitz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cenex Harvest States Cooperatives; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 4, 2003 /s/ JOHN SCHMITZ ---------------------------- John Schmitz Executive Vice President and Chief Financial Officer 24