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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A-3
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE1 FISCAL YEAR ENDED AUGUST 31, 2002 OR
|_| 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: 0-50150
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CHS INC.
(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) 355-6000
INVER GROVE HEIGHTS, MINNESOTA 55077 (Registrant's Telephone number,
(Address of principal executive office) including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not applicable
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES _____ NO __|X|__
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: The registrant has no voting stock
outstanding.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: The registrant has
no common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CHS INC.
EXPLANATORY NOTE
This Amendment No. 3 on Form 10-K/A amends the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 31, 2002, and is being
filed solely to amend Item 8 of the Annual Report to identify the auditor
associated with the audit report appearing on page F-27. In addition, in
connection with the filing of this Amendment and pursuant to the rules of the
Securities and Exchange Commission, the Registrant is including with this
Amendment certain currently dated certifications in Item 15(a)(3). No other
changes have been made to the Annual Report. This Form 10-K/A does not modify or
update the disclosure contained in the Annual Report in any way other than as
required to reflect the amendments discussed above and reflected below.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8 is hereby amended to identify the auditor associated with the
audit report appearing on page F-27 of the Company's consolidated financial
statements for the years ended August 31, 2002, 2001 and 2000. The Company's
consolidated financial statements which are included in this Form 10-K/A-3
following the signatures, are hereby incorporated by reference in this Item 8.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS FILED ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and the Reports of Independent
Accountants are filed as part of this Form 10-K/A-3.
PAGE NO.
--------
CENEX HARVEST STATES COOPERATIVES
Consolidated Balance Sheets as of August 31, 2002 and 2001 ...... F-1
Consolidated Statements of Operations for the years ended
August 31, 2002, 2001 and 2000 ................................ F-2
Consolidated Statements of Equities and Comprehensive Income
for the years ended August 31, 2002, 2001 and 2000 ............ F-4
Consolidated Statements of Cash Flows for the years ended
August 31, 2002, 2001 and 2000 ................................ F-6
Notes to Consolidated Financial Statements ...................... F-7
Report of Independent Accountants ............................... F-27
VENTURA FOODS, LLC, A NON-CONSOLIDATED 50% OWNED EQUITY INVESTMENT
Independent Auditors' Report F-28
Consolidated Balance Sheets as of March 31, 2003 and 2002 F-29
Consolidated Statements of Income for the years ended
March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000 F-30
Consolidated Statements of Members' Capital for the years ended
March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000 F-31
Consolidated Statements of Cash Flows for the years ended
March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000 F-32
Notes to Consolidated Financial Statements for the years ended
March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000 F-33
(a)(3) EXHIBITS
Item 15(a)(3) is amended to add the following exhibits:
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CHS Inc.
By: /s/ JOHN SCHMITZ Date: January 30, 2004
------------------------------------ -----------------------
John Schmitz
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2002 AND 2001
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 108,192 $ 113,458
Receivables ................................................ 741,578 686,140
Inventories ................................................ 759,663 510,443
Other current assets ....................................... 140,944 60,995
---------- ----------
Total current assets ..................................... 1,750,377 1,371,036
Investments ................................................. 496,607 467,953
Property, plant and equipment ............................... 1,057,421 1,023,872
Other assets ................................................ 177,322 194,458
---------- ----------
TOTAL ASSETS ............................................. $3,481,727 $3,057,319
========== ==========
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .............................................. $ 332,514 $ 97,195
Current portion of long-term debt .......................... 89,032 17,754
Customer credit balances ................................... 26,461 38,486
Customer advance payments .................................. 169,123 109,135
Checks and drafts outstanding .............................. 84,251 87,808
Accounts payable ........................................... 517,667 495,198
Accrued expenses ........................................... 225,704 148,026
Patronage dividends and equity retirements payable ......... 56,510 72,154
---------- ----------
Total current liabilities ................................ 1,501,262 1,065,756
Long-term debt .............................................. 483,092 542,243
Other liabilities ........................................... 118,280 99,906
Minority interests in subsidiaries .......................... 89,455 88,261
Commitments and contingencies
Equities .................................................... 1,289,638 1,261,153
---------- ----------
TOTAL LIABILITIES AND EQUITIES ........................... $3,481,727 $3,057,319
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
2002 2001 2000
------------- ------------- -------------
Restated Restated Restated
(Note 16) (Note 16) (Note 16)
(DOLLARS IN THOUSANDS)
REVENUES:
Net sales .................................... $7,156,454 $7,464,242 $8,248,413
Patronage dividends .......................... 3,885 5,977 5,494
Other revenues ............................... 109,459 116,254 97,471
---------- ---------- ----------
7,269,798 7,586,473 8,351,378
Cost of goods sold ............................ 6,937,956 7,181,433 8,051,057
Marketing, general and administrative ......... 187,292 184,046 155,266
---------- ---------- ----------
Operating earnings ............................ 144,550 220,994 145,055
Interest ...................................... 42,455 61,436 57,566
Equity income from investments ................ (58,133) (28,494) (28,325)
Minority interests ............................ 15,390 35,098 24,546
---------- ---------- ----------
INCOME BEFORE INCOME TAXES .................... 144,838 152,954 91,268
INCOME TAXES .................................. 18,700 (25,600) 3,880
---------- ---------- ----------
NET INCOME .................................... $ 126,138 $ 178,554 $ 87,388
========== ========== ==========
DISTRIBUTION OF NET INCOME:
Patronage refunds ............................ $ 92,900 $ 128,900 $ 87,400
Unallocated capital reserve .................. 33,238 49,654 (12)
---------- ---------- ----------
Net income ................................. $ 126,138 $ 178,554 $ 87,388
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
(This page has been left blank intentionally.)
F-3
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
CAPITAL NONPATRONAGE WHEAT
EQUITY EQUITY PREFERRED MILLING
CERTIFICATES CERTIFICATES STOCK EPUS
-------------- -------------- ----------- ----------
(DOLLARS IN THOUSANDS)
BALANCES, SEPTEMBER 1, 1999 ................................. $ 912,294 $28,785 $ 9,258
Patronage and equity retirement determination .............. 25,750
Patronage distribution ..................................... 41,182
Equities retired ........................................... (28,615) (82)
Equities issued ............................................ 7,921
Other, net ................................................. (178) (194) (12)
Comprehensive income:
Net income ................................................
Other comprehensive loss ..................................
Total comprehensive income .................................
Patronage dividends and equity retirements payable ......... (17,474)
---------- ------- --------
BALANCES, AUGUST 31, 2000 ................................... 940,880 28,509 9,246
Patronage and equity retirement determination .............. 17,474
Patronage distribution ..................................... 60,304
Equities retired ........................................... (18,662) (74)
Equities issued ............................................ 5,481
Equity Participation Units issued ..........................
Equity Participation Units redeemed ........................ (9,066)
Other, net ................................................. (120) (277) (180)
Comprehensive income:
Net income ................................................
Other comprehensive income ................................
Total comprehensive income .................................
Patronage dividends and equity retirements payable ......... (33,484)
---------- ------- --------
BALANCES, AUGUST 31, 2001 ................................... 971,873 28,158 --
Patronage and equity retirement determination .............. 33,484
Patronage distribution ..................................... 92,484
Equities retired ........................................... (31,099) (46)
Equities issued ............................................ 2,600
Preferred stock issued, net ................................ $9,325
Preferred stock dividends ..................................
Other, net ................................................. (106) (339)
Comprehensive income:
Net income ................................................
Other comprehensive loss ..................................
Total comprehensive income .................................
Patronage dividends and equity retirements payable ......... (28,640)
---------- ------- ------ --------
BALANCES, AUGUST 31, 2002 ................................... $1,040,596 $27,773 $9,325 $ --
========== ======= ====== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
OILSEED PROCESSING UNALLOCATED ACCUMULATED OTHER ALLOCATED
& REFINING PATRONAGE CAPITAL COMPREHENSIVE CAPITAL TOTAL
EPUS REFUNDS RESERVE INCOME (LOSS) RESERVE EQUITIES
-------------------- ------------- ------------- ------------------- ---------- -------------
(DOLLARS IN THOUSANDS)
$ 4,188 $ 40,250 $115,883 $ (1,170) $8,148 $1,117,636
17,250 43,000
(57,500) (1,588) (17,906)
(28,697)
7,921
(6) 453 (28) 35
87,400 (12) 87,388
(1,257) (1,257)
----------
86,131
----------
(26,220) (43,694)
--------- ---------- -------- --------- ------ ----------
4,182 61,180 114,736 (2,427) 8,120 1,164,426
26,220 43,694
(87,400) 967 (26,129)
(18,736)
5,481
1,045 (1,045) --
(5,227) (14,293)
445 (70) (202)
128,900 49,654 178,554
512 512
----------
179,066
----------
(38,670) (72,154)
--------- ---------- -------- --------- ------ ----------
-- 90,230 164,757 (1,915) 8,050 1,261,153
38,670 72,154
(128,900) (3,666) (40,082)
(31,145)
2,600
(3,428) 5,897
(240) (240)
100 (345)
92,900 33,238 126,138
(49,982) (49,982)
----------
76,156
----------
(27,870) (56,510)
--------- ---------- -------- --------- ------ ----------
$ -- $ 65,030 $190,761 $ (51,897) $8,050 $1,289,638
========= ========== ======== ========= ====== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
2002 2001 2000
------------- ------------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 126,138 $ 178,554 $ 87,388
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization ..................................... 103,986 109,180 92,699
Noncash net income from equity investments ........................ (58,133) (28,494) (28,325)
Minority interests ................................................ 15,390 35,098 24,546
Noncash portion of patronage dividends received ................... (2,327) (3,896) (6,825)
(Gain) loss on sale of property, plant and equipment .............. (6,418) (13,941) 1,167
Deferred tax expense (benefit) .................................... 4,400 (46,625) (467)
Other, net ........................................................ 5,467 (801) (3,130)
Changes in operating assets and liabilities:
Receivables ...................................................... (32,881) 147,641 (229,067)
Inventories ...................................................... (259,209) 37,543 1,717
Other current assets and other assets ............................ (88,941) (24,129) (7,041)
Customer credit balances ......................................... (12,025) 1,707 (8,191)
Customer advance payments ........................................ 59,988 (22,800) 4,180
Accounts payable and accrued expenses ............................ 93,802 (129,258) 202,980
Other liabilities ................................................ 9,079 13,050 (3,244)
---------- ---------- ----------
Net cash (used in) provided by operating activities ............. (41,684) 252,829 128,387
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ....................... (140,169) (97,610) (153,796)
Proceeds from disposition of property, plant and equipment ......... 20,205 35,263 7,655
Investments ........................................................ (6,211) (14,247) (35,297)
Equity investments redeemed ........................................ 37,689 30,104 41,250
Investments redeemed ............................................... 6,310 1,672 2,638
Changes in notes receivable ........................................ (22,031) 533 600
Acquisitions of intangibles ........................................ (29,501) (7,328) (26,513)
Distribution to minority owners .................................... (7,413) (19,256) (21,089)
Other investing activities, net .................................... (685) 1,775 (339)
---------- ---------- ----------
Net cash used in investing activities ........................... (141,806) (69,094) (184,891)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable ........................................... 235,319 (120,731) 20,940
Long-term debt borrowings .......................................... 30,000 116,861 49,914
Principal payments on long-term debt ............................... (17,968) (67,364) (22,502)
Changes in checks and drafts outstanding ........................... (3,557) 3,722 35,481
Proceeds from sale of preferred stock, net of expenses ............. 5,897
Preferred stock dividends paid ..................................... (240)
Retirements of equity .............................................. (31,145) (18,736) (28,697)
Equity Participation Units redeemed ................................ (14,293)
Cash patronage dividends paid ...................................... (40,082) (26,129) (17,906)
---------- ---------- ----------
Net cash provided by (used in) financing activities ............. 178,224 (126,670) 37,230
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ................................................... (5,266) 57,065 (19,274)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD .......................................................... 113,458 56,393 75,667
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 108,192 $ 113,458 $ 56,393
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Effective August 5, 2003, Cenex Harvest States Cooperatives
changed its name to CHS, Inc. CHS, Inc. (CHS, Cenex Harvest States, CHS
Cooperatives or the Company) is an agricultural cooperative organized for the
mutual benefit of its members. Members of the cooperative are located throughout
the United States. In addition to grain marketing, wheat milling, oilseed
processing and refining and foods, the Company provides its patrons with energy
and agronomy products as well as other farm supplies. Sales are both domestic
and international.
Effective September 1, 2000, the Company's Board of Directors approved a
resolution providing for the computation of patronage distributions based on
earnings for financial statement purposes rather than federal income tax basis
earnings. On December 1, 2000, this resolution was ratified by the Company's
members, the by-laws were amended and beginning with fiscal year 2001 patronage
distributions have been calculated based on financial statement earnings. The
by-laws further provide that an amount of up to 10% of the distributable annual
net savings from patronage sources be added to the unallocated capital reserve
as determined by the Board of Directors.
CONSOLIDATION -- The consolidated financial statements include the
accounts of CHS Cooperatives and all of its wholly-owned and majority-owned
subsidiaries and limited liability companies, including National Cooperative
Refinery Association (NCRA). The effects of all significant intercompany
transactions have been eliminated.
On September 1, 1999, NCRA and Farmland Industries, Inc. (Farmland) formed
Cooperative Refining, LLC (CRLLC), which was established to operate and manage
the refineries and related pipelines and terminals of NCRA and Farmland. On
December 31, 2000, NCRA and Farmland signed an Agreement of Dissolution and
dissolved CRLLC.
During 2000, the Company entered into a series of transactions, the result
of which was the exchange of its agronomy operations, consisting primarily of
its interests in and ownership of the Cenex/Land O'Lakes Agronomy Company and
Agro Distribution, LLC and related entities for a 25% equity ownership interest
in Agriliance, LLC (Agriliance). Agriliance is a distributor of crop nutrients,
crop protection products and other agronomy inputs and services formerly owned
by the Company, Land O'Lakes, Inc. (Land O'Lakes) and Farmland. The company
accounts for the Agriliance investment under the equity method.
During 2002 and 2001, the Company had various other acquisitions, which
have been accounted for using the purchase method of accounting. Operating
results of the acquisitions are included in the consolidated financial
statements since the respective acquisition dates. The respective purchase
prices were allocated to the assets and liabilities acquired based upon the
estimated fair values. The excess purchase price over the estimated fair values
of the net assets acquired has been reported as identifiable intangible assets
and goodwill.
CASH EQUIVALENTS -- Cash equivalents include short-term highly liquid
investments with original maturities of three months or less at date of
acquisition.
INVENTORIES -- Grain, processed grain, oilseed and processed oilseed are
stated at net realizable values which approximates market values. All other
inventories are stated at the lower of cost or market. The cost of certain
energy inventories (wholesale refined products, crude oil and asphalt) is
determined on the last-in, first-out (LIFO) method; all other energy
inventories are valued on the first-in, first-out (FIFO) and average cost
methods.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into
exchange-traded commodity futures and options contracts to hedge its exposure
to price fluctuations on energy, grain and oilseed transactions to the extent
considered practicable for minimizing risk. Futures and options contracts used
for hedging are purchased and sold through regulated commodity exchanges.
Fluctuations in inventory valuations, however, may not be completely hedged,
due in part to the absence of satisfactory hedging facilities for certain
commodities and geographical areas and in part to the Company's assessment of
its
F-7
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
exposure from expected price fluctuations. The Company also manages its risks
by entering into fixed price purchase contracts with preapproved producers and
establishing appropriate limits for individual suppliers. Fixed price sales
contracts are entered into with customers of acceptable creditworthiness, as
internally evaluated. The Company is exposed to loss in the event of
nonperformance by the counterparties to the contracts. However, the Company
does not anticipate nonperformance by counterparties.
Commodity trading in futures and options contracts is a natural extension
of cash market trading. The commodity futures and options markets have
underlying principles of increased liquidity and longer trading periods than
the cash market, and hedging is one method of reducing exposure to price
fluctuations. The Company's use of the derivative instruments described above
reduces the effects of price volatility, thereby protecting against adverse
short-term price movements while somewhat limiting the benefits of short-term
price movements. Changes in market value of the derivative instruments
described above are recognized in the consolidated statements of operations in
the period such changes occur. The fair value of futures and options contracts
are determined primarily from quotes listed on regulated commodity exchanges.
Fixed price purchase and sales contracts are with various counterparties, and
the fair values of such contracts are determined from the market price of the
underlying product. At August 31, 2002, the Company's derivative assets and
liabilities were $53.8 million and $67.9 million, respectively.
COMMODITY PRICE RISK. The Company utilizes futures and options contracts
offered through regulated commodity exchanges to reduce risk. The Company is
exposed to risk of loss in the market value of inventories and fixed or
partially fixed purchase and sale contracts. So as to reduce that risk, the
Company generally takes opposite and offsetting positions using future
contracts or options. Certain commodities cannot be hedged with futures or
options contracts because such contracts are not offered for these commodities
by regulated commodity exchanges. Inventories and purchase contracts for those
commodities are hedged with forward sales contracts, to the extent practical,
so as to arrive at a net commodity position within the formal position limits
set by the Company and deemed prudent for each of those commodities.
Commodities for which future contracts and options are available are also
typically hedged first in this manner, with futures and options used to hedge
within position limits that portion not covered by forward contracts. These
futures and options contracts and forward purchase and sales contracts used to
hedge against price level change risks are effective economic hedges of
specified risks, but they are not designated as and accounted for as hedging
instruments for accounting purposes.
Unrealized gains and losses on futures contracts and options used as
economic hedges of grain and oilseed inventories and fixed price contracts are
recognized in cost of goods sold for financial reporting. Inventories and fixed
price contracts are marked to market so that gains or losses on the derivative
contracts are offset by gains or losses on inventories and fixed price
contracts during the same accounting period.
Through August 31, 2000, unrealized gains and losses on futures contracts
and options used to hedge energy inventories and fixed price contracts were
deferred until such future contracts and options were closed. Effective
September 1, 2000, those gains and losses are recognized as a component of net
income for financial reporting. The inventories hedged with these derivatives
are valued at lower of cost or market, and effective September 1, 2000, the
fixed price contracts are marked to market. Some derivatives related to propane
in the Energy segment meet the normal purchase and sales exemption, and thus
are not required to be marked to fair value.
A 10% adverse change in market prices would not materially affect the
Company's results of operations, financial position or liquidity, since the
Company's operations have effective economic hedging requirements as a general
business practice.
F-8
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE RISK. The Company manages interest expense using a mix of
fixed and floating rate debt. These debt instruments are carried at amounts
approximating estimated fair value. Short-term debt used to finance inventories
and receivables is represented by notes payable within thirty days or less so
that the blended interest rate to the Company for all such notes approximates
current market rates. Long-term debt used to finance non-current assets carries
various fixed interest rates and is payable at various dates as to minimize the
effect of market interest rate changes. The effective interest rate to the
Company on fixed rate debt outstanding on August 31, 2002 was approximately
6.4%; a 10% adverse change in market rates would not materially affect the
Company's results of operations, financial position or liquidity.
In August 2002, the Company entered into interest rate swap instruments
related to private placement debt issued on October 18, 2002. These derivative
instruments are designated and effective as cash flow hedges for accounting
purposes, and the changes in the fair values of these instruments are recorded
as a component of other comprehensive income. The Company expects to record
operating losses through interest expense of $0.8 million during the year ended
August 31, 2003 related to these derivative instruments.
FOREIGN CURRENCY RISK. The Company conducts essentially all of its
business in U.S. dollars and had minimal risk regarding foreign currency
fluctuations on August 31, 2002. Foreign currency fluctuations do, however,
impact the ability of foreign buyers to purchase U.S. agricultural products and
the competitiveness of U.S. agricultural products compared to the same products
offered by alternative sources of world supply.
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, related to the
accounting for derivative transactions and hedging activities, effective
September 1, 2000. The effect of the adoption did not have a material effect on
the Company's earnings or financial position.
INVESTMENTS -- Investments in other cooperatives are stated at cost, plus
patronage dividends received in the form of capital stock and other equities.
Patronage dividends are recorded at the time qualified written notices of
allocation are received. Joint ventures and other investments, in which the
Company has significant ownership and influence, but not control, are accounted
for in the consolidated financial statements under the equity method of
accounting. Investments in other debt and equity securities are considered
available for sale financial instruments and are stated at market value, with
unrealized amounts included as a component of accumulated other comprehensive
income (loss).
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated
at cost less accumulated depreciation and amortization. Depreciation and
amortization are provided on the straight-line method by charges to operations
at rates based upon the expected useful lives of individual or groups of assets
(primarily 15 to 40 years for land improvements and buildings and 3 to 20 years
for machinery, equipment, office and other). The cost and related accumulated
depreciation and amortization of assets sold or otherwise disposed of are
removed from the related accounts and resulting gains or losses are reflected
in operations. Expenditures for maintenance and repairs and minor renewals are
expensed, while costs of major renewals and betterments are capitalized.
The Company periodically reviews property, plant and equipment and other
long-lived assets in order to assess recoverability based on projected income
and related cash flows on an undiscounted basis. Should the sum of the expected
future net cash flows be less than the carrying value, an impairment loss would
be recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset.
GOODWILL AND OTHER INTANGIBLE ASSETS -- Effective September 1, 2001 the
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other
F-9
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets." This statement discontinued the amortization of goodwill
and indefinite-lived intangible assets, subject to periodic impairment testing.
At August 31, 2001, goodwill (net of accumulated amortization) prior to the
adoption of SFAS No. 142, was $29.2 million and was included as a component of
other assets. The effect of adopting the new standard will reduce goodwill
amortization expense by approximately $2.0 million annually. The Company has
completed its transitional impairment testing and no changes to the carrying
value of goodwill and other intangible assets were required as a result of the
adoption of SFAS No. 142. Subsequent impairment testing will take place
annually as well as when a triggering event indicating impairment may have
occurred. In addition, the classification of the intangible assets was
reviewed, along with the remaining useful lives of intangibles being amortized,
and no changes were required.
The Company's net income, net of taxes, of retroactive application of the
discontinuance of the amortization of goodwill as if SFAS No. 142 had been in
effect during the years ended August 31, 2001 and 2000 would have been $181.1
million and $88.5 million, respectively. For the years ended August 31, 2001
and 2000, discontinued amortization expense of goodwill included in other
assets would have been $1.9 million and $0.8 million, respectively, and
included in equity investments would have been $0.7 million and $0.3 million,
respectively.
REVENUE RECOGNITION -- Grain and oilseed sales are recorded at time of
settlement. All other sales are recognized upon shipment and transfer of title
to customers. Amounts billed to a customer in a sale transaction related to
shipping and handling are included in sales. Country Operations segment
services revenue and rebates are included in other revenues.
ENVIRONMENTAL EXPENDITURES -- Liabilities related to remediation of
contaminated properties are recognized when the related costs are considered
probable and can be reasonably estimated. Estimates of these costs are based on
current available facts, existing technology, undiscounted site-specific costs
and currently enacted laws and regulations. Recoveries, if any, are recorded in
the period in which recovery is considered probable. Liabilities are monitored
and adjusted as new facts or changes in law or technology occur. Environmental
expenditures are capitalized when such costs provide future economic benefits.
INCOME TAXES -- The Company is a nonexempt agricultural cooperative and
files a consolidated federal income tax return with its 80% or more owned
subsidiaries. The Company is subject to tax on income from nonpatronage sources
and undistributed patronage-sourced income. Deferred income taxes reflect the
impact of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for
federal and state income tax purposes, at each year end, based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
In October 2001, members of NCRA ratified a resolution to compute
patronage distributions based on earnings for financial statement purposes
rather than amounts reportable for federal income tax purposes, and beginning
with the year ended August 31, 2002, NCRA's patronage distributions have been
calculated based on financial statement earnings.
COMPREHENSIVE INCOME -- The Company accounts for comprehensive income
(defined as the change in equity of a business enterprise during a period from
sources other than those resulting from investments by owners and distribution
to owners) in accordance with Financial Accounting Standards Board (FASB) SFAS
No. 130, "Reporting Comprehensive Income." At August 31, 2002, comprehensive
income for the Company primarily includes net income and the effects of minimum
pension liability adjustments. Total comprehensive income is reflected in the
consolidated statements of equities and comprehensive income.
F-10
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS -- The 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 adoption of this statement does not have a material
affect on the Company.
The FASB also issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
retains and expands upon the fundamental provisions of existing guidance
related to the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. Generally, the provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The adoption of this
statement does not have a material affect on the Company.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a disposal activity
covered by SFAS No. 144. The costs addressed in SFAS No. 146 include, but are
not limited to, termination benefits, costs to terminate a contract that is not
a capital lease and costs to consolidate facilities or relocate employees. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002.
RECLASSIFICATIONS -- Certain amounts in the 2001 financial statements have
been reclassified to conform with the current year's presentation. These
reclassifications had no effect on previously reported net income, equities and
comprehensive income, or cash flows.
2. RECEIVABLES
Receivables as of August 31, 2002 and 2001 are as follows:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Trade ......................................... $717,888 $682,593
Other ......................................... 49,846 28,864
-------- --------
767,734 711,457
Less allowances for doubtful accounts ......... 26,156 25,317
-------- --------
$741,578 $686,140
======== ========
F-11
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECEIVABLES (CONTINUED)
All international sales are denominated in U.S. dollars. International
sales for the years ended August 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
--------- --------- ---------
(DOLLARS IN MILLIONS)
Africa ................ $ 135 $ 138 $ 191
Asia .................. 407 403 552
Europe ................ 282 255 304
North America ......... 298 317 324
South America ......... 100 101 119
------ ------ ------
$1,222 $1,214 $1,490
====== ====== ======
3. INVENTORIES
Inventories as of August 31, 2002 and 2001 are as follows:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Grain and oilseed ................... $393,095 $237,498
Energy .............................. 229,981 163,710
Feed and farm supplies .............. 91,138 76,570
Processed grain and oilseed ......... 36,264 28,648
Other ............................... 9,185 4,017
-------- --------
$759,663 $510,443
======== ========
As of August 31, 2002, the Company valued approximately 26% of
inventories, primarily related to energy, using the lower of cost, determined
on the LIFO method, or market (28% as of August 31, 2001). If the FIFO method
of accounting for these inventories had been used, inventories would have been
higher than the reported amount by $40.5 million and $34.0 million at August
31, 2002 and 2001, respectively.
4. INVESTMENTS
Investments as of August 31, 2002 and 2001 are as follows:
2002 2001
-------- --------
(DOLLARS IN THOUSANDS)
Cooperatives:
CF Industries, Inc. ............................. $152,996 $152,996
National Bank for Cooperatives (CoBank) ......... 30,069 33,080
Ag Processing, Inc. ............................. 25,797 24,967
Land O'Lakes, Inc. .............................. 26,232 24,604
Joint ventures:
Ventura Foods, LLC .............................. 108,981 101,089
United Country Brands, LLC ...................... 86,175 74,457
Tacoma Export Marketing Company ................. 8,414 11,638
Other ............................................ 57,943 45,122
-------- --------
$496,607 $467,953
======== ========
F-12
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
In March 2000, the Company purchased an additional 10% interest in Ventura
Foods, LLC, its consumer products and packaging joint venture, for $25.6
million, of which $13.8 million was goodwill. The Company has a 50% interest in
this joint venture. The following provides summarized information for Ventura
Foods, LLC, balance sheets as of August 31, 2002 and 2001 and statements of
operations for the twelve months ended August 31, 2002, 2001 and 2000:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Current assets .................. $171,084 $159,062
Non-current assets .............. 231,045 221,000
Current liabilities ............. 133,230 114,883
Non-current liabilities ......... 90,819 104,144
2002 2001 2000
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Net sales ............ $1,013,475 $925,962 $896,941
Gross profit ......... 181,217 161,405 143,394
Net income ........... 75,368 71,148 55,115
Effective January 1, 2000, CHS Cooperatives, Farmland and Land O'Lakes
created Agriliance, a distributor of crop nutrients, crop protection products
and other agronomy inputs and services. At formation, Agriliance managed the
agronomy marketing operations of CHS Cooperatives, Farmland and Land O'Lakes,
with the Company exchanging the right to use its agronomy operations for
26.455% of the results of the jointly managed operations.
In March 2000, the Company sold 1.455% of its economic interest in
Agriliance to Land O'Lakes, resulting in a gain of $7.4 million. On July 31,
2000, the Company exchanged its ownership interest in the Cenex/Land O'Lakes
Agronomy Company and in Agro Distribution, LLC, with a total investment of
$64.7 million, for a 25% equity interest in Agriliance. Agriliance ownership
also includes Farmland (25%) and Land O'Lakes (50%). The interests of the
Company and Farmland are held through equal ownership in United Country Brands,
LLC, a joint venture holding company whose sole operations consist of the
ownership of a 50% interest in Agriliance. Equity in the joint venture was
recorded at historical carrying value of its ownership in Cenex/Land O'Lakes
Agronomy Company and Agro Distribution, LLC and no gain or loss was recorded on
the exchange. In July 2000, Agriliance secured its own financing, which is
without recourse to the Company. Also in July 2000, Agriliance purchased the
net working capital related to agronomy operations from each of its member
owners, consisting primarily of trade accounts receivable and inventories, net
of accounts payable.
The following provide summarized information for Agriliance balance sheets
as of August 31, 2002 and 2001 and statements of operations for the years ended
August 31, 2002 and 2001:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Current assets .................. $922,958 $956,496
Non-current assets .............. 134,247 158,107
Current liabilities ............. 700,903 802,341
Non-current liabilities ......... 107,960 110,964
F-13
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
Net sales ........................ $3,625,849 $4,072,248
Earnings from operations ......... 57,604 50,423
Net income ....................... 47,044 25,053
The Company's contribution of its equity interest in Agriliance occurred
on July 31, 2000, and as such, net sales, gross profits and net income for the
one month ended August 31, 2000 have been excluded from the above summarized
information of statements of operations, as they were not material.
Disclosure of the fair value of financial instruments to which the Company
is a party includes estimates and assumptions which may be subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Financial instruments are carried at
amounts that approximate estimated fair value. Investments in cooperatives and
joint ventures have no quoted market prices and, as such, it is not practicable
to estimate their fair value.
Various agreements with other owners of investee companies and a
majority-owned subsidiary set out parameters whereby CHS Cooperatives may buy
and sell additional interests in those companies, upon the occurrence of
certain events, at fair values determinable as set forth in the specific
agreements.
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of August 31, 2002 and 2001
is as follows:
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Land and land improvements ............................. $ 63,045 $ 55,092
Buildings .............................................. 371,107 348,081
Machinery and equipment ................................ 1,470,475 1,434,598
Office and other ....................................... 62,144 56,740
Construction in progress ............................... 71,540 38,723
---------- ----------
2,038,311 1,933,234
Less accumulated depreciation and amortization ......... 980,890 909,362
---------- ----------
$1,057,421 $1,023,872
========== ==========
In January 2002, the Company formed a limited liability company (LLC) with
Cargill, Incorporated to engage in wheat flour milling and processing. The
Company holds a 24% interest in the entity, which is known as Horizon Milling,
LLC (Horizon). The Company is leasing its wheat milling facilities and related
equipment to Horizon under operating lease agreements. The book value of the
leased milling assets at August 31, 2002 was $104.9 million, net of accumulated
depreciation of $25.3 million.
For the years ended August 31, 2002, 2001 and 2000, the Company
capitalized interest of $2.1 million, $1.2 million and $2.7 million,
respectively, related to long-term construction projects.
F-14
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS
Other assets as of August 31, 2002 and 2001 are as follows:
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Goodwill ............................................................. $ 27,926 $ 29,153
Non-compete covenants, less accumulated amortization of $2,896 and
$1,329, respectively ................................................ 11,204 1,765
Customer lists, less accumulated amortization of $3,511 and $1,946,
respectively ........................................................ 8,447 8,095
Other intangible assets, less accumulated amortization of $2,462 and
$1,513, respectively ................................................ 15,795 239
Prepaid pension and other benefit assets ............................. 54,230 100,727
Deferred tax asset ................................................... 50,544 44,316
Notes receivable ..................................................... 4,822 5,629
Other ................................................................ 4,354 4,534
-------- --------
$177,322 $194,458
======== ========
Intangible assets subject to amortization 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 straight-line method of amortization reflects
an appropriate allocation of the cost of the intangible assets to earnings in
proportion to the amount of economic benefit obtained by the Company in each
reporting period. Amortization expense for the year ended August 31, 2002 was
$4.2 million. The estimated amortization expense related to intangible assets
subject to amortization for the next five years will approximate $4.0 million
annually.
Through Country Energy, LLC, formerly a joint venture with Farmland, the
Company marketed refined petroleum products including gasoline, diesel fuel,
propane and lubricants under the Cenex brand. On November 30, 2001, the Company
purchased the wholesale energy business of Farmland, as well as all interest in
Country Energy, LLC. Based on estimated fair values, $26.4 million of the
purchase price was allocated to intangible assets, primarily trademarks,
tradenames and non-compete agreements. The intangible assets have a
weighted-average life of approximately 12 years. The Company also entered into
an exclusive two-year supply agreement to purchase, at prevailing market
prices, all of the refined fuels production from Farmland's Coffeyville, Kansas
facility.
F-15
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt as of August 31, 2002 and 2001 consisted
of the following:
INTEREST RATES
AT AUGUST 31,
2002 2002 2001
------------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Notes payable (a)(g) .............................. 2.32% to 2.78% $332,514 $ 97,195
======== ========
Long-term debt:
Revolving term loans from cooperative and
other banks, payable in installments through
2009, when the balance is due (b)(c)(g) ......... 2.16% to 13.00% $254,962 $236,611
Private placement, payable in equal
installments beginning in 2008 through
2013 (d)(g) ..................................... 6.81% 225,000 225,000
Private placement, payable in equal
installments beginning in 2005 through
2011 (e)(g) ..................................... 7.43% to 7.90% 80,000 80,000
Industrial Revenue Bonds, payable in
installments through 2011 (f) ................... 5.23% to 12.97% 7,444 12,806
Other notes and contracts ........................ 4.00% to 14.00% 4,718 5,580
-------- --------
Total long-term debt ............................. 572,124 559,997
Less current portion ............................. 89,032 17,754
-------- --------
Long-term portion ................................ $483,092 $542,243
======== ========
Weighted average interest rates at August 31:
2002 2001
---------- ----------
Short-term debt .......... 2.58% 4.18%
Long-term debt ........... 6.38% 6.91%
------------------
(a) The Company finances its working capital needs through short-term lines of
credit with a syndication of banks. The Company has a 364-day credit
facility of $550.0 million, all of which is committed, and of which $332.0
million was outstanding on August 31, 2002. In addition to this short-term
line 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, all of
which is committed, with no amounts outstanding on August 31, 2002. Other
miscellaneous notes payable totaled $0.5 million at August 31, 2002.
(b) The Company established a $200.0 million five-year revolving credit
facility with a syndication of banks. On August 31, 2002, the Company had
an outstanding balance of $75.0 million.
(c) The Company established a long-term credit agreement which committed $200.0
million of long-term borrowing capacity to the Company through May 31,
1999, of which $164.0 million was drawn before the expiration date of that
commitment. On August 31, 2002, $144.3 million was outstanding. NCRA term
loans of $18.0 million are collateralized by NCRA's investment in CoBank.
(d) The Company entered into a private placement with several insurance
companies for long-term debt in the amount of $225.0 million.
(e) In January 2001, the Company entered into a note purchase and private shelf
agreement with Prudential Insurance Company. A long-term note was issued
for $25.0 million. A subsequent note for $55.0 million was issued in March
2001, related to the private shelf facility.
F-16
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
(f) Industrial Revenue Bonds in the amount of $2.7 million are collateralized
by property, plant and equipment, primarily energy refinery equipment,
with a cost of approximately $152.0 million, less accumulated depreciation
of approximately $115.2 million on August 31, 2002.
(g) Restrictive covenants under various agreements have requirements for
maintenance of minimum working capital levels and other financial ratios.
The fair value of long-term debt approximates book value as of August 31,
2002 and 2001.
The aggregate amount of long-term debt payable as of August 31, 2002 is as
follows (dollars in thousands):
2003 ............... $ 89,032
2004 ............... 15,079
2005 ............... 34,511
2006 ............... 34,938
2007 ............... 41,709
Thereafter ......... 356,855
--------
$572,124
========
On October 18, 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. The proceeds were used to pay down the Company's
short-term debt.
8. INCOME TAXES
As a result of the Company's by-law changes during 2001, and the by-law
changes of its majority-owned subsidiary (NCRA) in 2002, to distribute
patronage based on financial statement earnings (see Note 1), the statutory
rate applied to the cumulative differences between financial statement earnings
and tax basis earnings, has been changed. In connection with this change the
Company recorded a deferred tax benefit of $10.9 million as of August 31, 2002
and $34.2 million as of August 31, 2001. The $10.9 million deferred tax benefit
recorded as a result of the change in patronage distribution by NCRA as of
August 31, 2002 has been offset by a $10.9 million NCRA valuation allowance. An
additional $6.2 million of deferred tax benefit generated by NCRA was also
offset by a valuation allowance.
The provision for income taxes for the years ended August 31, 2002, 2001
and 2000 is as follows:
2002 2001 2000
------------ ------------ ---------
(DOLLARS IN THOUSANDS)
Current ..................... $ 14,300 $ 21,025 $4,347
Deferred .................... (12,700) (49,025) (467)
Valuation allowance ......... 17,100 2,400
--------- --------- ------
Income taxes ................ $ 18,700 $ (25,600) $3,880
========= ========= ======
F-17
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of August 31, 2002 and 2001
is as follows:
2002 2001
------------ ----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Accrued expenses and valuation reserves ...................... $ 49,236 $ 42,704
Postretirement health care and deferred compensation ......... 32,671 24,842
Property, plant and equipment ................................ 11,532 9,570
Alternative minimum tax credit and patronage loss
carryforward ................................................ 6,993 4,540
Other ........................................................ 12,439 12,885
--------- --------
Total deferred tax assets ................................... 112,871 94,541
--------- --------
Deferred tax liabilities:
Pension, including minimum liability ......................... 2,635 9,536
Equity method investments .................................... 20,482 27,893
Other ........................................................ 730 1,314
--------- --------
Total deferred tax liabilities ................................ 23,847 38,743
--------- --------
Deferred tax assets valuation reserve ......................... (19,466) (2,400)
--------- --------
Net deferred tax asset ........................................ $ 69,558 $ 53,398
========= ========
As of August 31, 2002, net deferred tax assets of $19.0 million and $50.5
million are included in current assets and other assets, respectively ($9.1
million and $44.3 million, respectively, as of August 31, 2001). At August 31,
2002, NCRA recognized a valuation allowance for the entire tax benefit
associated with its net deferred tax assets, as it is considered more likely
than not, based on the weight of available information, that the future tax
benefits related to these items will not be realized. At August 31, 2002,
NCRA's net deferred tax assets of approximately $19.5 million were comprised of
deferred tax assets of $23.4 million and deferred tax liabilities of $3.9
million. Deferred tax assets are comprised of basis differences related to
inventories, investments, lease obligations, accrued liabilities and certain
federal and state tax credits. NCRA files a separate tax return and, as such,
these items must be assessed independently of the Company's deferred tax assets
when determining recoverability. At August 31, 2001, NCRA also recorded a
valuation allowance of $2.4 million to account for uncertainties regarding the
recoverability of certain state tax credits.
The reconciliation of the statutory federal income tax rate to the
effective tax rate for the years ended August 31, 2002, 2001 and 2000 is as
follows:
2002 2001 2000
---------- ------------ ----------
Statutory federal income tax rate ............................ 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ................................................. 3.9 3.9 3.9
Patronage earnings ........................................... (25.0) (32.8) (37.3)
Tax effect of changes in deferred patronage .................. 4.4
Change in patronage determination ............................ (7.5) (22.4)
Export activities at rates other than the
U.S. statutory rate ......................................... (1.9)
Deferred tax asset valuation allowance ....................... 11.8 1.6
Rate changes on deferred tax assets and liabilities .......... (2.5)
Other ........................................................ (3.4) (2.0) 0.8
----- ----- -----
Effective tax rate ........................................... 12.9% (16.7)% 4.3%
===== ===== =====
F-18
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The principal differences between financial statement income and taxable
income for the years ended August 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
----------- ------------- ------------
(DOLLARS IN THOUSANDS)
Income before income taxes ................... $ 144,838 $ 152,954 $ 91,268
Financial reporting/tax differences: .........
Environmental reserves ...................... 1,939 4,453 (728)
Oil and gas activities, net ................. 1,540 (22,230) 2,600
Energy inventory market reserves ............ (933) (2,441) (19)
Pension and compensation .................... (21,491) 8,981
Investments in other entities ............... 1,898 26,495
Export activities ........................... (7,141)
Other, net .................................. (2,291) 10,038 3,255
Patronage refund provisions ................. (92,900) (128,900) (87,400)
--------- ---------- ---------
Taxable income ............................... $ 25,459 $ 49,350 $ 8,976
========= ========== =========
9. EQUITIES
In accordance with the by-laws and by action of the Board of Directors,
annual net savings from patronage sources are distributed to consenting patrons
following the close of each year, and are based on amounts using financial
statement earnings. The cash portion of the patronage distribution is
determined annually by the Board of Directors, with the balance issued in the
form of capital equity certificates.
Annual net savings from sources other than patronage may be added to the
unallocated capital reserve or, upon action by the Board of Directors,
allocated to members in the form of nonpatronage equity certificates.
Inactive direct members and patrons and active direct members and patrons
age 61 and older on June 1, 1998 are eligible for redemption of their capital
equity certificates at age 72 or death. For other active direct members and
patrons and member cooperatives, equities will be redeemed annually as
determined by the Board of Directors.
On May 31, 1997, the Company completed an offering for the sale of Equity
Participation Units (EPUs) in its Wheat Milling Defined Business Unit and its
Oilseed Processing and Refining Defined Business Unit to qualified subscribers.
Qualified subscribers were identified as Defined Members or representatives of
Defined Members who were persons or associations of producers actually engaged
in the production of agricultural products. Subscribers were allowed to
purchase a portion of their EPUs by exchanging existing patronage certificates.
The purchasers of EPUs had the right and obligation to deliver annually the
number of bushels of wheat or soybeans equal to the number of units held. Unit
holders participated in the net patronage-sourced income from operations of the
applicable Defined Business Unit as patronage refunds. Retirements of patrons'
equities attributable to EPUs, were at the discretion of the Board of
Directors, and it was the Board's goal to retire such equity on a revolving
basis seven years after declaration.
During 2001, the Company's Board of Directors adopted a resolution to
issue, at no charge, to each Defined Member of the Oilseed Processing and
Refining Defined Business Unit an additional 1/4 EPU, for each EPU held, due to
increased crush volume.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Defined Investment Program. The Company redeemed
all of the EPUs and allocated the assets
F-19
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EQUITIES (CONTINUED)
of the Oilseed Processing and Refining and Wheat Milling Defined Business Units
to the Company as provided in the plan. The amounts redeemed to the Oilseed
Processing and Refining and Wheat Milling Defined Member EPU holders were $5.2
million and $9.1 million, respectively. Due to loss carry-forwards incurred by
the Wheat Milling Defined Business Unit, the plan also provided for the
cancellation of all outstanding Preferred Capital Certificates issued to the
Wheat Milling EPU holders, totaling $0.2 million. The plan further provided to
the Oilseed Processing and Refining Defined Member EPU holders for the
redemption of all outstanding Preferred Capital Certificates issued of $0.2
million and a 100% cash distribution during 2002 for the patronage refunds
earned for the fiscal year ended August 31, 2001.
The Board of Directors has authorized the sale and issuance of up to
50,000,000 shares of 8% Preferred Stock at a price of $1.00 per share. The
Company filed a registration statement on Form S-2 with the Securities and
Exchange Commission registering the Preferred Stock. The registration statement
was declared effective on October 31, 2001 and sales of the Preferred Stock
were $9.3 million (9,325,374 shares) through August 31, 2002. Cash dividends
are paid at a rate of 8% per annum per share and are fully cumulative. There is
no sinking fund requirement and the Company may redeem all or any portion of
the preferred stock upon 30 days written notice at $1.00 per share. Expenses
related to the issuance of the Preferred Stock were $3.4 million through the
year ended August 31, 2002 and have been included as a component of unallocated
capital reserve.
10. EMPLOYEE BENEFIT PLANS
The Company has various pension and other defined benefit and defined
contribution plans, in which substantially all employees may participate.
Financial information on changes in benefit obligation and plan assets
funded and balance sheet status as of August 31, 2002 and 2001 is as follows:
PENSION BENEFITS OTHER BENEFITS
------------------------- -----------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of period ......... $ 253,564 $ 258,059 $ 22,667 $ 21,439
Service cost ...................................... 10,443 8,506 557 566
Interest cost ..................................... 18,559 18,487 1,586 1,569
Plan participants contributions ................... 189
Plan amendments ................................... 2,383 6 (1,005)
Transfers ......................................... 3,677 (2,387)
Actuarial loss (gain) ............................. 2,764 (2,842) 1,716 1,902
Assumption change ................................. 2,534 638
Settlements ....................................... 643
Benefits paid ..................................... (22,979) (29,442) (2,438) (1,804)
--------- --------- -------- --------
Benefit obligation at end of period ............... $ 268,411 $ 253,564 $ 24,915 $ 22,667
========= ========= ======== ========
F-20
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
PENSION BENEFITS OTHER BENEFITS
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Change in plan assets:
Fair value of plan assets at beginning of period ..... $ 230,121 $ 266,896
Actual loss on plan assets ........................... (14,810) (16,206)
Company contributions ................................ 5,554 11,669 $ 2,249 $ 1,804
Participants contributions ........................... 189
Net transfers ........................................ 3,677 (2,796)
Benefits paid ........................................ (22,979) (29,442) (2,438) (1,804)
--------- --------- --------- ---------
Fair value of plan assets at end of period ........... $ 201,563 $ 230,121 $ -- $ --
========= ========= ========= =========
Funded status ........................................ $ (66,848) $ (23,443) $ (24,915) $ (22,667)
Employer contributions after measurement date 31,394 1,262 269 264
Unrecognized actuarial loss (gain) ................... 85,082 47,368 (3,505) (6,363)
Unrecognized transition (asset) obligation ........... (708) 10,197 11,133
Unrecognized prior service cost ...................... 10,569 9,639 (1,336) (1,534)
--------- --------- --------- ---------
Prepaid benefit cost (accrued) ....................... $ 60,197 $ 34,118 $ (19,290) $ (19,167)
========= ========= ========= =========
Amounts recognized on balance sheets
consist of:
Prepaid benefit cost ................................. $ 43,918
Accrued benefit liability ............................ $ (23,837) (12,214) $ (19,290) $ (19,167)
Intangible asset ..................................... 7,995 1,055
Minority interests ................................... 6,195
Accumulated other comprehensive loss ................. 69,844 1,359
--------- --------- --------- ---------
Net amounts recognized ............................... $ 60,197 $ 34,118 $ (19,290) $ (19,167)
========= ========= ========= =========
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the year ended August 31,
2002. The rate was assumed to decrease gradually to 6.0% for 2004 and remain at
that level thereafter. Components of net periodic benefit costs for the years
ended August 31, 2002, 2001 and 2000 are as follows:
PENSION BENEFITS OTHER BENEFITS
------------------------------------------ -----------------------------------
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Components of net periodic
benefit cost:
Service cost ............................... $ 10,443 $ 8,506 $ 8,777 $ 557 $ 566 $ 657
Interest cost .............................. 18,559 18,487 18,058 1,586 1,569 1,470
Expected return on assets .................. (21,386) (22,855) (20,485)
Prior service cost amortization ............ 1,314 1,193 1,182 (197) (131) (77)
Actuarial loss (gain) amortization ......... 1,387 375 (530) (505) (538) (604)
Transition amount amortization ............. (708) (861) (1,120) 936 936 936
Other ...................................... (22)
--------- --------- --------- ------ ------ ------
Net periodic benefit cost .................. $ 9,609 $ 4,845 $ 5,882 $2,377 $2,380 $2,382
========= ========= ========= ====== ====== ======
Weighted-average assumptions:
Discount rate .............................. 7.10% 7.30% 7.50% 7.10% 7.30% 7.50%
Expected return on plan assets ............. 9.00% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase .............. 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
F-21
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The aggregate projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were as follows as of August 31, 2002 and
2001:
2002 2001
----------- ----------
(DOLLARS IN THOUSANDS)
Projected benefit obligation ........... $268,411 $23,247
Accumulated benefit obligation ......... 256,795 18,599
Fair value of plan assets .............. 201,563 6,385
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
the assumed health care cost trend rates would have the following effects:
1% POINT 1% POINT
INCREASE DECREASE
---------- -----------
(DOLLARS IN THOUSANDS)
Effect on total of service and interest cost components ......... $ 177 $ (202)
Effect on postretirement benefit obligation ..................... 1,435 (1,210)
The Company provides defined life insurance and health care benefits for
certain retired employees. The plan is contributory based on years of service
and family status, with retiree contributions adjusted annually.
The Company has other contributory defined contribution plans covering
substantially all employees. Total contributions by the Company to these plans
were $11.0 million, $6.1 million and $4.6 million, for the years ended August
31, 2002, 2001 and 2000, respectively.
11. SEGMENT REPORTING
The Company manages five business segments, which are based on products
and services, and are Agronomy, Energy, Country Operations, Grain Marketing,
and Processed Grains and Foods. Reconciling Amounts represent the elimination
of 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.
Segment information for the years ended August 31, 2002, 2001 and 2000 is
as follows:
PROCESSED CORPORATE
COUNTRY GRAIN GRAINS AND AND RECONCILING
AGRONOMY ENERGY OPERATIONS MARKETING FOODS OTHER AMOUNTS TOTAL
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Restated Restated Restated
(Note 16) (Note 16) (Note 16)
(DOLLARS IN THOUSANDS)
For the year ended
August 31, 2002:
Net sales ................ $2,657,689 $1,474,553 $3,281,469 $ 496,084 $ (753,341) $7,156,454
Patronage dividends ...... $ (89) 458 2,572 497 260 $ 187 3,885
Other revenues ........... 6,392 80,789 21,902 (1,469) 1,845 109,459
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(89) 2,664,539 1,557,914 3,303,868 494,875 2,032 (753,341) 7,269,798
Cost of goods sold ....... 2,489,352 1,471,422 3,272,985 457,538 (753,341) 6,937,956
Marketing, general and
administrative .......... 8,957 66,731 47,995 22,213 36,930 4,466 187,292
Interest ................. (1,403) 16,875 13,851 4,807 9,514 (1,189) 42,455
Equity (income) loss from
investments ............. (13,425) 1,166 (283) (4,257) (41,331) (3) (58,133)
Minority interests ....... 14,604 786 15,390
---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes ............ $ 5,782 $ 75,811 $ 24,143 $ 8,120 $ 32,224 $ (1,242) $ -- $ 144,838
========== =========== ========== ========== ========== ========== ========== ==========
F-22
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT REPORTING (CONTINUED)
PROCESSED CORPORATE
COUNTRY GRAIN GRAINS AND AND RECONCILING
AGRONOMY ENERGY OPERATIONS MARKETING FOODS OTHER AMOUNTS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Restated Restated Restated
(Note 16) (Note 16) (Note 16)
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
For the year ended
August 31, 2002:
Goodwill ................ $ 4,059 $ 262 $ 23,605 $ 27,926
========== ========== ========== ==========
Capital expenditures .... $ 54,576 $ 34,305 $ 14,851 $ 35,144 $ 1,293 $ 140,169
========== ========== ========== ========== ========== ==========
Depreciation and
amortization ........... $ 1,247 $ 58,701 $ 21,214 $ 6,235 $ 13,436 $ 3,153 $ 103,986
========== ========== ========== ========== ========== ========== ==========
Total identifiable assets
at August 31, 2002 ..... $ 242,015 $1,305,828 $ 799,711 $ 481,232 $ 439,942 $ 212,999 $3,481,727
========== ========== ========== ========== ========== ========== ==========
For the year ended
August 31, 2001:
Net sales ............... $2,781,243 $1,577,268 $3,416,239 $ 662,726 $ (973,234) $7,464,242
Patronage dividends ..... $ 196 712 3,683 840 339 $ 207 5,977
Other revenues .......... 4,036 80,479 22,964 (238) 9,013 116,254
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
196 2,785,991 1,661,430 3,440,043 662,827 9,220 (973,234) 7,586,473
Cost of goods sold ...... 2,549,099 1,569,884 3,416,500 619,184 (973,234) 7,181,433
Marketing, general and
administrative ......... 8,503 48,432 53,417 22,396 44,870 6,428 184,046
Interest ................ (4,529) 25,097 15,695 8,144 13,026 4,003 61,436
Equity (income) loss from
investments ............ (7,360) 4,081 (246) (4,519) (35,505) 15,055 (28,494)
Minority interests ...... 34,713 385 35,098
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Income (loss) before
income taxes ........... $ 3,582 $ 124,569 $ 22,295 $ (2,478) $ 21,252 $ (16,266) $ -- $ 152,954
========== ========== ========== ========== ========== ========== =========== ==========
Goodwill ................ $ 5,175 $ 373 $ 23,605 $ 29,153
========== ========== ========== ==========
Capital expenditures .... $ 38,984 $ 32,448 $ 3,715 $ 20,485 $ 1,978 $ 97,610
========== ========== ========== ========== ========== ==========
Depreciation and
amortization ........... $ 1,250 $ 55,343 $ 21,738 $ 4,917 $ 22,304 $ 3,628 $ 109,180
========== ========== ========== ========== ========== ========== ==========
Total identifiable assets
at August 31, 2001 ..... $ 230,051 $1,154,036 $ 679,053 $ 345,696 $ 430,871 $ 217,612 $3,057,319
========== ========== ========== ========== ========== ========== ==========
For the year ended
August 31, 2000:
Net sales ............... $ 808,659 $2,959,622 $1,409,892 $3,375,616 $ 584,052 $ (889,428) $8,248,413
Patronage dividends ..... 224 311 3,830 861 100 $ 168 5,494
Other revenues .......... 5,817 2,792 68,436 15,440 (10) 4,996 97,471
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
814,700 2,962,725 1,482,158 3,391,917 584,142 5,164 (889,428) 8,351,378
Cost of goods sold ...... 764,744 2,862,715 1,404,120 3,361,672 547,234 (889,428) 8,051,057
Marketing, general and
administrative ......... 20,832 43,332 44,136 21,412 21,462 4,092 155,266
Interest ................ (3,512) 27,926 12,782 8,701 9,851 1,818 57,566
Equity loss (income) from
investments ............ 4,336 (856) (1,007) (6,452) (24,367) 21 (28,325)
Minority interests ...... 24,443 103 24,546
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Income (loss) before
income taxes ........... $ 28,300 $ 5,165 $ 22,024 $ 6,584 $ 29,962 $ (767) $ -- $ 91,268
========== ========== ========== ========== ========== ========== =========== ==========
Capital expenditures .... $ 65,017 $ 38,514 $ 12,096 $ 36,494 $ 1,675 $ 153,796
========== ========== ========== ========== ========== ==========
Depreciation and
amortization ........... $ 106 $ 52,017 $ 21,717 $ 3,803 $ 11,440 $ 3,616 $ 92,699
========== ========== ========== ========== ========== ========== ==========
12. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL -- The Company is required to comply with various
environmental laws and regulations incidental to its normal business
operations. In order to meet its compliance requirements, the Company
establishes reserves for the future costs of remediation of identified issues,
which are
F-23
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
included in cost of goods sold in the consolidated statements of operations.
Additional costs for matters, which may be identified in the future, cannot be
presently determined. The resolution of any such matters may have an impact on
the Company's consolidated financial results for a particular reporting period;
however, management believes any such matters will not have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
In connection with certain refinery upgrades and enhancements that are
necessary in order to comply with existing environmental regulations, the
Company expects to incur additional capital expenditures of approximately $340
million in relation to these projects over the next four years, primarily at
the NCRA refinery. The Company anticipates funding these projects with a
combination of cash flows from operations and additional indebtedness.
OTHER LITIGATION AND CLAIMS -- The Company is involved as a defendant in
various lawsuits, claims and disputes which are in the normal course of the
Company's business. The resolution of any such matters may have an impact on
the Company's consolidated financial results for a particular reporting period;
however, management believes any resulting liability will not have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
GRAIN STORAGE -- As of August 31, 2002 and 2001, the Company stored grain
and processed grain products for third parties totaling $148.0 million and
$177.0 million, respectively. Such stored commodities and products are not the
property of the Company and therefore are not included in the Company's
inventories.
GUARANTEES -- The Company is a guarantor for lines of credit for related
companies totaling up to $86.2 million, of which $45.1 million was outstanding
as of August 31, 2002. All outstanding loans with respective creditors are
current as of August 31, 2002.
LEASE COMMITMENTS -- The Company leases approximately 1,700 rail cars with
remaining lease terms of one to 10 years. In addition, the Company has
commitments under other operating leases for various refinery, manufacturing
and transportation equipment, vehicles and office space. Some leases include
purchase options at not less than fair market value at the end of the leases.
Total rental expense for all operating leases, net of rail car mileage
credits received from the railroad and sublease income was $30.2 million, $35.5
million and $38.0 million for the years ended August 31, 2002, 2001 and 2000,
respectively. Mileage credits and sublease income were $9.5 million, $11.0
million and $10.6 million for the years ended August 31, 2002, 2001 and 2000,
respectively.
Minimum future lease payments, required under noncancellable operating
leases as of August 31, 2002, are as follows:
EQUIPMENT
RAIL CARS VEHICLES AND OTHER TOTAL
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
2003 ........................................ $ 9,100 $ 9,436 $14,417 $32,953
2004 ........................................ 7,091 6,992 10,116 24,199
2005 ........................................ 5,525 5,183 5,286 15,994
2006 ........................................ 2,018 3,321 3,561 8,900
2007 ........................................ 1,042 1,657 2,433 5,132
Thereafter .................................. 4,025 255 515 4,795
------- ------- ------- -------
Total minimum future lease payments ......... $28,801 $26,844 $36,328 $91,973
======= ======= ======= =======
F-24
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended August 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Net cash paid during the period for:
Interest ......................................... $ 44,231 $ 63,034 $ 57,062
Income taxes ..................................... 27,965 11,709 3,785
Other significant noncash transactions:
(Distributions)/contributions of inventories of
minority interests .............................. (54,399) 54,399
Capital equity certificates issued in exchange for
elevator properties ............................. 1,842 5,481 7,921
Equity Participation Units issued ................ 1,045
Accrual of patronage dividends and equity
retirements payable ............................. (56,510) (72,154) (43,694)
Other comprehensive (loss) income ................ (49,982) 512 (1,257)
14. RELATED PARTIES TRANSACTIONS
As of August 31, 2002, the Company had related party transactions, which
consisted of sales of $550.0 million, purchases of $502.4 million, receivables
of $21.2 million and payables of $18.3 million with its equity investees. These
related party transactions were primarily with Agriliance, CF Industries, Inc.,
Horizon Milling, Tacoma Export Marketing Company and Ventura Foods, LLC.
15. COMPREHENSIVE INCOME
The components of comprehensive income for the years ended August 31,
2002, 2001 and 2000 are as follows:
2002 2001 2000
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Net income .............................................. $ 126,138 $178,554 $ 87,388
Additional minimum pension liability, net of taxes ..... (48,797) (15) 153
Financial instruments, net of taxes .................... (548) 527 (1,410)
Cash flow hedges, net of taxes ......................... (637)
--------- -------- --------
Comprehensive income .................................... $ 76,156 $179,066 $ 86,131
========= ======== ========
The components of accumulated other comprehensive loss as of August 31,
2002 and 2001 are as follows:
2002 2001
---------- ---------
(DOLLARS IN THOUSANDS)
Additional minimum pension liability, net of taxes ......... $50,051 $1,254
Financial instruments, net of taxes ........................ 1,209 661
Cash flow hedges, net of taxes ............................. 637
------- ------
Accumulated other comprehensive loss ....................... $51,897 $1,915
======= ======
F-25
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. NET SALES AND COST OF GOODS SOLD RESTATEMENT:
Recently the Company determined that certain sales and transfers within the
Grain Marketing segment and between the Grain Marketing segment and the
Processed Grains and Foods segment, were not appropriately eliminated. The
appropriate changes have been made to the consolidated statements of operations
and segment reporting (see Note 11). These changes had no effect on the
Company's financial condition or changes in cash flows, and no effect on
reported gross profit or net income for the periods stated.
----------- -----------
As Reported As Restated
----------- -----------
Grain Marketing Net Sales
2002 3,787,322 3,281,469
2001 3,514,314 3,416,239
2000 3,453,807 3,375,616
Grain Marketing Cost of Goods Sold
2002 3,778,838 3,272,985
2001 3,514,575 3,416,500
2000 3,439,863 3,361,672
Reconciling Amounts - Net Sales & Cost of Goods Sold
2002 (683,781) (753,341)
2001 (782,539) (973,234)
2000 (718,182) (889,428)
Net Sales
2002 7,731,867 7,156,454
2001 7,753,012 7,464,242
2000 8,497,850 8,248,413
Cost of Goods Sold
2002 7,513,369 6,937,956
2001 7,470,203 7,181,433
2000 8,300,494 8,051,057
F-26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members and Patrons of
Cenex Harvest States Cooperatives:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of equities and comprehensive income and
of cash flows, after the restatement described in Note 16, present fairly, in
all material respects, the financial position of Cenex Harvest States
Cooperatives and subsidiaries as of August 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 16 to the consolidated financial statements, the Company
has restated its Consolidated Statements of Operations for the years ended
August 31, 2002, 2001 and 2000.
PricewaterhouseCoopers, LLP
October 18, 2002, except for Notes 11 and 16,
which are as of October 31, 2003
Minneapolis, Minnesota
F-27
INDEPENDENT AUDITORS' REPORT
Members Committee
Ventura Foods, LLC
We have audited the accompanying consolidated balance sheets of Ventura
Foods, LLC and subsidiary (the "Company") as of March 31, 2003 and 2002 and the
related consolidated statements of income, members' capital and cash flows for
the years ended March 31, 2003 and 2002, the three months ended March 31, 2001
and the year ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Ventura Foods, LLC and
subsidiary as of March 31, 2003 and 2002 and the results of their operations and
their cash flows for the years ended March 31, 2003 and 2002, the three months
ended March 31, 2001 and the year ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS, effective April 1, 2002.
/s/ Deloitte & Touche LLP
Los Angeles, California
June 16, 2003
F-28
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
2003 2002
------------ ------------
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash and cash equivalents (Note 2) .................................... $ 2,800,000 $ 9,300,000
Trade receivables--net of allowance for doubtful accounts
of $1,909,000 and $1,543,000 at 2003 and 2002, respectively (Notes
2, 4 and 5) ......................................................... 64,313,000 57,139,000
Inventories (Notes 2, 4 and 5) ........................................ 92,366,000 62,799,000
Prepaid expenses and other current assets ............................. 5,922,000 2,283,000
Due from Wilsey Foods, Inc. (Note 5) .................................. 309,000
Derivative contract asset (Notes 2 and 5) ............................. 18,703,000 13,298,000
------------ ------------
Total current assets ................................................ 184,413,000 144,819,000
------------ ------------
PROPERTY (Notes 2 and 4):
Land, buildings and improvements ...................................... 102,768,000 98,840,000
Machinery and equipment ............................................... 139,264,000 129,133,000
Construction-in-progress .............................................. 6,905,000 6,489,000
Other property ........................................................ 10,798,000 10,494,000
------------ ------------
Total ............................................................... 259,735,000 244,956,000
Less accumulated depreciation and amortization .......................... 106,914,000 95,052,000
------------ ------------
Property--net ......................................................... 152,821,000 149,904,000
GOODWILL--Net of amortization of $18,087,000 at 2003 and 2002
(Notes 2, 3 and 8) .................................................... 43,156,000 43,156,000
TRADEMARKS--Net of amortization of $8,526,000 and $8,685,000
at 2003 and 2002 (Notes 2 and 8) ...................................... 19,318,000 19,577,000
DEFERRED COMPENSATION PLAN TRUST (Note 6) ............................... 13,574,000 14,240,000
OTHER ASSETS--Net of amortization of $3,520,000 and $4,310,000
at 2003 and 2002 (Notes 2 and 8) ...................................... 4,673,000 5,293,000
------------ ------------
TOTAL ................................................................... $417,955,000 $376,989,000
============ ============
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable (Note 5) ............................................. $ 58,395,000 $ 52,045,000
Accrued liabilities (Note 5) .......................................... 36,984,000 25,784,000
Dividends payable ..................................................... 5,748,000 9,550,000
Bank lines of credit (Note 4) ......................................... 20,500,000 8,000,000
Current portion of long-term debt (Note 4) ............................ 74,228,000 12,758,000
Current portion of long-term liability--Wilsey Foods, Inc. (Note 1) ... 491,000
Derivative contract liability (Notes 2 and 5) ......................... 12,162,000 4,120,000
------------ ------------
Total current liabilities ........................................... 208,017,000 112,748,000
LONG-TERM DEBT (Note 4) ................................................. 22,950,000 97,178,000
DEFERRED COMPENSATION OBLIGATIONS (Note 6) .............................. 20,496,000 16,347,000
------------ ------------
Total liabilities ................................................... 251,463,000 226,273,000
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
MEMBERS' CAPITAL ........................................................ 166,492,000 150,716,000
------------ ------------
TOTAL ................................................................... $417,955,000 $376,989,000
============ ============
See notes to consolidated financial statements.
F-29
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2003 AND 2002, THE THREE MONTHS ENDED MARCH 31, 2001
AND THE YEAR ENDED DECEMBER 31, 2000
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31, DECEMBER 31,
2003 2002 2001 2000
-------------- -------------- -------------- --------------
NET SALES (Notes 2 and 5) ............. $1,096,425,000 $ 965,521,000 $ 215,158,000 $ 889,775,000
COST OF GOODS SOLD (Notes 2 and 5) .... 912,702,000 791,061,000 177,492,000 743,291,000
-------------- -------------- -------------- --------------
GROSS PROFIT .......................... 183,723,000 174,460,000 37,666,000 146,484,000
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Selling, general and administrative
(Notes 2 and 5) ................... 105,424,000 91,827,000 20,092,000 77,878,000
Amortization of intangibles
(Notes 2 and 8) ................... 223,000 6,227,000 1,581,000 6,431,000
-------------- -------------- -------------- --------------
Total operating expenses .......... 105,647,000 98,054,000 21,673,000 84,309,000
-------------- -------------- -------------- --------------
OPERATING INCOME ...................... 78,076,000 76,406,000 15,993,000 62,175,000
INTEREST EXPENSE--Net (Note 4) ........ 6,785,000 7,474,000 2,071,000 9,585,000
OTHER EXPENSE (INCOME) (Note 7) ....... 733,000 (1,554,000) (446,000) (4,916,000)
-------------- -------------- -------------- --------------
NET INCOME ............................ $ 70,558,000 $ 70,486,000 $ 14,368,000 $ 57,506,000
============== ============== ============== ==============
See notes to consolidated financial statements.
F-30
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
YEARS ENDED MARCH 31, 2003 AND 2002, THE THREE MONTHS ENDED MARCH 31, 2001
AND THE YEAR ENDED DECEMBER 31, 2000
CENEX
HARVEST
WILSEY STATES
FOODS, INC. COOPERATIVES TOTAL
------------- ------------- -------------
BALANCE, JANUARY 1, 2000 ........ $ 67,315,000 $ 44,877,000 $ 112,192,000
Net income .................... 30,593,000 26,913,000 57,506,000
Transfer of interest (Note 1) . (11,775,000) 11,775,000
Dividends ..................... (23,288,000) (20,720,000) (44,008,000)
------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 ...... 62,845,000 62,845,000 125,690,000
Net income .................... 7,184,000 7,184,000 14,368,000
Dividends ..................... (4,157,000) (4,157,000) (8,314,000)
------------- ------------- -------------
BALANCE, MARCH 31, 2001 ......... 65,872,000 65,872,000 131,744,000
Net income .................... 35,243,000 35,243,000 70,486,000
Dividends ..................... (25,757,000) (25,757,000) (51,514,000)
------------- ------------- -------------
BALANCE, MARCH 31, 2002 ......... 75,358,000 75,358,000 150,716,000
Net income .................... 35,279,000 35,279,000 70,558,000
Dividends ..................... (27,391,000) (27,391,000) (54,782,000)
------------- ------------- -------------
BALANCE, MARCH 31, 2003 ......... $ 83,246,000 $ 83,246,000 $ 166,492,000
============= ============= =============
See notes to consolidated financial statements.
F-31
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003 AND 2002, THE THREE MONTHS ENDED MARCH 31, 2001
AND THE YEAR ENDED DECEMBER 31, 2000
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31, DECEMBER 31,
2003 2002 2001 2000
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................... $ 70,558,000 $ 70,486,000 $ 14,368,000 $ 57,506,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................. 12,416,000 12,186,000 2,833,000 10,829,000
Amortization of intangibles ................... 223,000 6,227,000 1,581,000 6,431,000
Deferred rent ................................. 515,000
Loss (gain) on disposal of assets ............. 872,000 324,000 128,000 (139,000)
Derivative contract asset ..................... 2,637,000 (1,803,000) (7,375,000)
Changes in operating assets and liabilities:
Trade receivables ........................... (7,174,000) (771,000) 980,000 (359,000)
Inventories ................................. (29,567,000) 3,881,000 5,089,000 (3,246,000)
Prepaid expenses and other current assets ... (3,639,000) (793,000) 330,000 234,000
Accounts payable ............................ 6,350,000 (4,491,000) (2,943,000) (4,654,000)
Accrued liabilities ......................... 10,685,000 2,893,000 (2,540,000) 2,499,000
Deferred compensation obligations ........... 4,815,000 4,866,000 (1,767,000) 6,747,000
Due from/to affiliates ...................... (309,000) 47,000 1,000 293,000
------------ ------------ ------------ ------------
Net cash provided by operating activities . 68,382,000 93,052,000 10,685,000 76,141,000
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property .......................... (16,062,000) (13,268,000) (4,869,000) (13,037,000)
Proceeds from sale of assets ..................... 1,845,000 69,000 23,000 1,021,000
Acquisitions--net of cash acquired (Note 3) ...... (5,312,000)
Acquisition of trademarks ........................ (47,000)
Investment in rabbi trust ........................ (13,976,000)
Other assets ..................................... (1,332,000) (48,000) 67,000 (201,000)
------------ ------------ ------------ ------------
Net cash used in investing activities ...... (15,549,000) (27,223,000) (4,779,000) (17,576,000)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ...................... (12,758,000) (12,603,000) (554,000) (12,417,000)
Net borrowings from (payments on) line of credit . 12,500,000 3,000,000 5,000,000 (15,000,000)
Payment to Wilsey Foods, Inc. (Note 1) ........... (491,000) (487,000) (487,000)
Dividends paid ................................... (58,584,000) (60,589,000) (38,539,000)
------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities (59,333,000) (70,679,000) 3,959,000 (65,956,000)
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ................................ (6,500,000) (4,850,000) 9,865,000 (7,391,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..... 9,300,000 14,150,000 4,285,000 11,676,000
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........... $ 2,800,000 $ 9,300,000 $ 14,150,000 $ 4,285,000
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--Cash paid during the
period for interest ............................. $ 7,183,000 $ 8,129,000 $ 653,054 $ 10,181,000
============ ============ ============ ============
See notes to consolidated financial statements
F-32
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2003 AND 2002, THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEAR ENDED DECEMBER 31, 2000
1. GENERAL MATTERS
Ventura Foods, LLC and its subsidiary (the "Company") is a processor
and distributor of edible oils used in food preparation and a packager of food
products. The Company sells its products to national and regional restaurant
chains, food wholesalers and retail chains.
The Company was formed pursuant to a Joint Venture Agreement (the
"Agreement") dated August 30, 1996 between Wilsey Foods, Inc. ("Wilsey") and
Cenex Harvest States Cooperatives ("CHS") whereby substantially all the assets
and liabilities of Wilsey and Holsum Foods (a division of CHS) were transferred
and assigned, with certain exclusions, to the Company. Wilsey is a
majority-owned subsidiary of Mitsui & Co., Ltd. From the period of inception
through March 31, 2000, Wilsey and CHS owned 60% and 40%, respectively, of the
Company. On March 31, 2000, Wilsey sold a 10% interest in the Company to CHS.
Accordingly, Wilsey and CHS each own 50% of the Company.
At the formation date, a liability equal to the net deferred income tax
liability of Wilsey at August 30, 1996 was assumed by the Company and was
included in long-term liability--Wilsey Foods, Inc. The amount was payable in
five equal annual installments of $487,000 plus a final installment of $491,000.
The final installment of $491,000 was paid during fiscal 2003.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION--The consolidated
financial statements include the accounts of Ventura Foods, LLC and its
100%-owned subsidiary, Ventura Jets, Inc. All material intercompany transactions
have been eliminated.
FISCAL YEAR END--During 2001, the Company changed its fiscal year end
to March 31. Prior to such change, the Company's fiscal year end had been
December 31.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
INVENTORIES--Inventories consist of the following at March 31:
2003 2002
----------- -----------
Bulk oil ................................... $38,751,000 $17,654,000
Finished goods ............................. 34,119,000 27,696,000
Ingredients and supplies ................... 19,496,000 17,449,000
----------- -----------
Total ...................................... $92,366,000 $62,799,000
=========== ===========
Inventories are accounted for at the lower of cost or market, using the
first-in, first-out method. Cost for inventories produced or modified by the
Company through a manufacturing process includes fixed and variable production
costs and raw materials costs, and in-bound freight costs. Cost for inventories
purchased for resale includes the cost of the product and freight and handling
costs incurred to place the product at the Company's point of sale.
DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is limited to forwards, futures and certain other delivery
contracts as discussed below. The Company enters into these contracts to limit
its exposure to price volatility of various food oils that are critical to its
processing and distribution activities. It is the Company's policy to remain
substantially hedged with respect to edible oil product price risk; derivative
contracts are used to maintain this hedged position. Forward purchase and sales
contracts with established market participants as well as exchange traded
futures contracts are entered into in amounts necessary to protect against price
changes on raw materials needed for the Company's food oil processing and
distribution activities. The Company also enters into purchase and sales
commitments with major suppliers and customers at a specified premium or
discount
F-33
from a future market price ("Basis Contracts"). Additionally, the Company's
policies do not permit speculative trading of such contracts. All of these
qualify as derivatives under Statement of Financial Accounting Standards
("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
and are stated at market value. Changes in market value are recognized in the
consolidated statements of income, through cost of sales, in the periods such
changes occur. The adoption of SFAS No. 133 on January 1, 2001 did not have a
significant impact on the Company's results of operations, as the Company
historically recorded its financial instruments at market value. Prior to the
adoption of SFAS No. 133, the market value of futures contracts, Basis
Contracts, and forward purchase and sales contracts were recorded as a component
of inventory. Beginning with the adoption of SFAS No. 133, the market value of
these contracts is now recorded separately on the consolidated balance sheets as
derivative contract assets or liabilities. These contracts have maturities of
less than one year.
The following summarizes the Company's various derivative contracts
outstanding at March 31, 2003 and 2002 (pounds and dollars in thousands)
NET
UNREALIZED
FORWARD CONTRACTS AND COMMITMENTS POUNDS GAIN (LOSS)
--------------------------------- --------- -----------
MARCH 31, 2003
Forward purchases ..................... 334,100 $ 11,060
Forward sales ......................... 433,300 (6,208)
Basis purchase ........................ 259,800 857
Basis sales ........................... 17,500 (126)
Futures contracts ..................... 146,000 958
--------- -----------
1,190,700 $ 6,541
========= ===========
MARCH 31, 2002
Forward purchases ..................... 490,500 $ 7,873
Forward sales ......................... 454,100 (1,117)
Basis purchase ........................ 390,300 2,304
Basis sales ........................... 62,600 (303)
Futures contracts ..................... 96,100 421
--------- -----------
1,493,600 $ 9,178
========= ===========
The fair value of futures contracts is determined from quotes listed on
the Chicago Board of Trade or other market makers. Forward purchase and sales
contracts are with various counterparties, and the fair values of such
contracts, are determined from the market price of the underlying product.
The Company is exposed to loss in the event of nonperformance by the
other parties to the contracts. However, the Company does not anticipate
nonperformance by counterparties.
PROPERTY AND DEPRECIATION--Property is stated at cost. Depreciation and
amortization are provided for using the straight-line method over the estimated
useful lives of the assets, as follows:
Buildings ......................................................... 40 years
Leasehold improvements ............................................ 3-19 years
Machinery and equipment ........................................... 10-25 years
Other property .................................................... 3-20 years
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company estimates the fair
value of financial instruments using the following methods and assumptions:
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE--The carrying amounts
approximate fair value due to the short maturities of these
instruments.
LINES OF CREDIT--The carrying amounts approximate fair value,
as the interest rates are based upon variable reference rates.
LONG-TERM DEBT--The fair value of long-term fixed rate debt is
estimated based upon prevailing market interest rates available to the
Company. The Company estimates the fair value on the $25,573,000 6.55%
fixed rate debt as of March 31, 2003 to be $27,804,000.
F-34
FUTURES CONTRACTS--The fair value of futures contracts (used for
hedging purposes) is determined from quotes listed principally on the Chicago
Board of Trade.
CONCENTRATION OF CREDIT RISK--During the years ended March 31, 2003 and
2002, the three months ended March 31, 2001 and the year ended December 31,
2000, net sales to one customer were 23%, 22%, 22% and 21% of total net sales,
respectively. This customer represents approximately 23% and 19% of trade
receivables at March 31, 2003 and 2002, respectively. The Company performs
ongoing credit evaluations of its customers and maintains an allowance for
potential credit losses.
The Company maintains cash deposits with various financial
institutions. The Company periodically evaluates the credit standing of these
financial institutions and has not sustained any credit losses relating to such
balances.
MARKETABLE SECURITIES--The Company's marketable securities comprise
equity securities that have been classified as trading securities. The equity
securities are carried at fair market value based upon quoted market prices.
Unrealized gains and losses on equity securities are recognized in net income
and totaled $666,000 and $(264,000) for the years ended March 31, 2003 and 2002,
respectively (see Note 6).
GOODWILL AND TRADEMARKS--The Company adopted SFAS No. 142, GoODWILL AND
OTHER INTANGIBLE ASSETS, effective April 1, 2002, the first day of its 2003
fiscal year. As a result, goodwill and indefinite life intangible assets
("trademarks") are no longer amortized, but reviewed for impairment annually, or
more frequently if certain impairment indicators arise. See Note 8 for the
effect of adopting SFAS No. 142.
Other identifiable intangible assets consist of patents, deferred
financing costs and other assets, which are amortized using the straight-line
method over 5 to 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS--Long-lived assets, including
identifiable intangibles, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, future cash flows
expected to result from the use of the asset and its eventual disposition are
estimated. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recorded under the discounted future cash flow method.
ADVERTISING COSTS--The Company expenses advertising costs in the period
incurred. For the years ended March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000, the Company incurred
advertising expenses of approximately $9,039,000, $7,100,000, $1,300,000 and
$6,100,000, respectively.
INCOME TAXES--The Company is a limited liability company and has no
liability for federal and state income taxes. Income is taxed to the members
based on their allocated share of taxable income or loss. However, certain
states tax the income of limited liability companies. The Company's liability
for such state income taxes is not significant.
REVENUE RECOGNITION--The Company is a processor and distributor of
edible oils used in food preparation and a packager of food products. Revenue is
recognized upon transfer of title to the customer, which occurs generally upon
shipment. In certain instances, title is transferred upon receipt by the
customer, at which time the Company records revenue. Amounts billed to the
customer as part of a sales transaction related to shipping and handling are
included in sales. Revenue is recorded net of discounts, rebates and certain
sales incentives.
USE OF ESTIMATES--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS--Certain reclassifications have been made to the
prior periods' financial statements to conform to the 2003 presentation.
F-35
RECENT ACCOUNTING PRONOUNCEMENTS--In June 2001, 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. As required, the Company will apply the
provisions of SFAS No. 143 prospectively to retirements of tangible long-lived
assets, if any, initiated for fiscal years beginning after June 15, 2002.
In July 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS
OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. This
statement retains the requirements of SFAS No. 121 to (a) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and fair value of the asset, and
establishes a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale. The adoption of
SFAS No. 144 did not have a material impact on the Company's consolidated
financial statements.
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 01-09, ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER OR
RESELLER OF THE VENDOR'S PRODUCTS, which addresses the accounting for
consideration given by a vendor or a reseller of the vendor's products. This new
guidance requires companies to report certain consideration given by a vendor to
a customer as a reduction in revenues rather than as marketing expense. This
consensus was required to be adopted no later than the first quarter of 2002,
and upon adoption, companies were required to retroactively reclassify such
amounts in previously issued financial statements to comply with the income
statement classification requirements of the consensus. The Company adopted the
provisions of EITF Issue No. 01-09 during fiscal 2003. The effect of the
adoption of EITF Issue No. 01-09 was a reduction in both revenues and selling,
general and administrative expenses of $690,000, $207,000, $29,000 and $267,000
for the years ended March 31, 2003 and 2002, the three months ended March 31,
2001 and the year ended December 31, 2000, respectively.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-03, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE
TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN
COSTS INCURRED IN RESTRUCTURING). This statement requires that the fair value of
an initial liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred as opposed to when the entity commits
to an exit plan, thereby eliminating the definition and requirements for
recognition of exit costs. The provisions of SFAS No. 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. As required,
the Company will apply the provisions of SFAS No. 146 prospectively to exit or
disposal activities, if any, initiated after December 31, 2002.
In September 2002, the EITF issued EITF Issue No. 02-16, ACCOUNTING BY
A CUSTOMER (INCLUDING A RESELLER) FOR CERTAIN CONSIDERATION RECEIVED FROM A
VENDOR, which addresses the accounting for consideration received by the
reseller of the vendor's products. This new guidance provides that the
consideration represents a reimbursement of costs incurred by the customer to
sell the vendor's products and is generally presumed to be a reduction of the
cost of the vendor's products and, therefore, should be characterized as a
reduction of cost of sales in the customers' income statement. The Company
adopted EITF Issue No. 02-16 during fiscal 2003. The effect of the adoption of
EITF Issue No. 02-16 was a reduction in cost of goods sold and other income of
$2,987,000, $1,628,000, $256,000 and $991,000 for the years ended March 31, 2003
and 2002, the three months ended March 31, 2001 and the year ended December 31,
2000, respectively.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS.
F-36
FIN 45 elaborates on the disclosures to be made by a guarantor about its
obligations under certain guarantees. FIN 45 also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN 45 specifically
identifies certain obligations that are excluded from the provisions related to
recognizing a liability at inception; however, these guarantees are subject to
the disclosure requirements of FIN 45. The initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements are effective
for all annual periods ending after December 15, 2002. The adoption of FIN 45
did not have a material impact on the Company's consolidated financial
statements.
On April 30, 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group ("DIG") process that effectively required
amendments to SFAS No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Company is
currently assessing, but has not yet determined, the impact this statement will
have on its consolidated financial statements.
3. ACQUISITIONS
During the year ended December 31, 2000, the Company acquired
substantially all the assets and liabilities of Sona and Hollen for $5,740,000.
Sona and Hollen was a portion packing company located in Los Alamitos,
California. The acquisition has been accounted for as a purchase, and
accordingly, the purchase price has been allocated based on the estimated fair
values of the assets acquired. The excess of the purchase price over the fair
value of the assets acquired, approximately $4,276,000, was recorded as
goodwill. Prior to the adoption of SFAS No. 142 on April 1, 2002, goodwill had
been amortized using a 15-year life (see Note 8).
The following is a summary of the assets acquired at estimated fair
market value:
Inventories ...................................................... $ 637,000
Prepaid expenses and other assets ................................ 208,000
Property and equipment ........................................... 600,000
Trademark ........................................................ 19,000
Goodwill ......................................................... 4,276,000
----------
Net assets of business acquired .................................. $5,740,000
==========
4. LINES OF CREDIT AND LONG-TERM DEBT
LINES OF CREDIT--At March 31, 2003, the Company had a revolving
line-of-credit agreement with a banking group to provide for borrowings of up to
an aggregate of $72,000,000. Outstanding borrowings at March 31, 2003 and 2002
were $20,500,000 and $8,000,000, respectively. The applicable interest rates are
based, at the option of the Company, at a London Interbank Offered Rate
("LIBOR") or a term federal funds rate ("TFFR") option. The weighted-average
interest rate at March 31, 2003 and 2002 was 1.72% and 2.24%, respectively. The
lines of credit mature at varying dates between November 2003 and February 2004.
LONG-TERM DEBT--At March 31, 2003 and 2002, balances outstanding on
term loans with a banking group were $71,605,000 and $81,905,000, respectively.
The interest rate applicable to these term loans is based, at the option of the
Company, at a TFFR-based, LIBOR-based or a fixed rate option. The
weighted-average interest rate on such borrowings at March 31, 2003 and 2002 was
6.53% and 6.59%, respectively. The term loans with the banking group mature on
December 23, 2003.
F-37
At March 31, 2003 and 2002, balances outstanding on a term loan with a
bank were $25,573,000 and $28,031,000, respectively. The agreement requires
quarterly principal and interest payments of $1,058,000. The interest rate on
this term loan is fixed at 6.55%. The term loan with the bank matures in October
2011.
The term loans are collateralized by substantially all property,
equipment and intellectual property rights, and the lines of credit are
collateralized by substantially all trade receivables and inventories of the
Company. The lines of credit and term loan agreements contain various covenants,
including compliance with tangible net worth (as defined) and other financial
ratios, restrictions on the payment of dividends, and restrictions on the
incurrence of additional debt.
Annual maturities of long-term debt at March 31, 2003 are as follows:
2004 ............................................................ $74,228,000
2005 ............................................................ 2,799,000
2006 ............................................................ 2,987,000
2007 ............................................................ 3,187,000
2008 ............................................................ 3,401,000
Thereafter ...................................................... 10,576,000
-----------
Total ........................................................... 97,178,000
Less current portion ............................................ 74,228,000
-----------
Long-term debt .................................................. $22,950,000
===========
5. TRANSACTIONS WITH AFFILIATES
At March 31, 2003, the Company had a receivable balance of $309,000 due
from Wilsey for reimbursement of expenses paid by the Company on behalf of
Wilsey.
Included in accounts payable at March 31, 2003 and 2002 were $8,035,000
and $5,976,000, respectively, payable to CHS for purchases of oil. Purchases
from CHS for the years ended March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000 were $66,682,000,
$47,745,000, $8,575,000 and $48,916,000, respectively. Sales to CHS for the
years ended March 31, 2003 and 2002, the three months ended March 31, 2001 and
the year ended December 31, 2000 totaled $1,056,000, $883,000, $109,000 and
$950,000, respectively.
Included in accounts payable at March 31, 2003 and 2002 were $790,000
and $817,000, respectively, payable to Mitsui USA for the Company's
participation in Mitsui USA's insurance plans. During the years ended March 31,
2003 and 2002, the three months ended March 31, 2001 and the year ended December
31, 2000, the Company recorded expenses of $9,402,000, $8,487,000, $1,380,000
and $5,049,000, respectively, in connection with its participation in such
plans.
Included in trade receivables at March 31, 2003 and 2002 were $123,000
and $69,000, respectively, of receivables from Mitsui USA for product sales.
Sales to Mitsui USA for the years ended March 31, 2003 and 2002, the three
months ended March 31, 2001 and the year ended December 31, 2000 totaled
$1,423,000, $1,406,000, $341,000 and $1,569,000, respectively.
Forward purchase contracts as of March 31, 2003 included commitments
for purchases of 86,964,000 pounds of oil from CHS. The Company recognized gains
(losses) of $1,081,000, $934,000, $1,788,000 and $(363,000) on such related
party commitments for the years ended March 31, 2003 and 2002, the three months
ended March 31, 2001 and the year ended December 31, 2000, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company has long-term incentive arrangements for certain key
executives. Benefits under the initial plan were based on earnings over a
three-to-five year period (as defined) from January 1, 1997 through December 31,
2001. An amount equal to the obligation incurred under the plan was contributed
to a rabbi trust that would be available to general creditors in the event of
bankruptcy. The trust holds investments primarily in marketable securities that
are recorded at market value (classified as trading securities). The assets in
the trust are to be distributed to the employees upon retirement. The liability
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under the arrangements was $13,574,000 and $14,240,000 as of March 31, 2003 and
2002, respectively, and is included in deferred compensation obligation in the
accompanying consolidated balance sheets.
On January 1, 2002, the Company established new long-term incentive
arrangements with certain key executives. Under these arrangements, the amount
of additional compensation is based on the attainment of cumulative income-based
or equity-based targets over a two- to three-year period. At the end of the
defined periods, amounts earned by individual executives will be contributed to
a rabbi trust, unless representatives of Wilsey and CHS elect to pay such
amounts directly to the respective key executives. At March 31, 2003 and 2002, a
liability for the plan of $4,702,000 and $439,000, respectively, is classified
as long-term deferred compensation obligation in the accompanying consolidated
balance sheets.
For the years ended March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000, the Company recognized
compensation expense under the long-term incentive arrangements of $4,264,000,
$5,658,000, $750,000 and $5,889,000, respectively.
The Company has a combined 401(k) and defined contribution
profit-sharing plan (the "Plan") covering substantially all employees not
covered by collective bargaining agreements. Under the Plan, employees can make
annual voluntary contributions not to exceed the lesser of an amount equal to
15% of their compensation or limits established by the Internal Revenue Code.
The Company is required, by the Plan, to make certain matching contributions of
up to 4% of each participant's salary and may make discretionary profit-sharing
contributions. The Company also established a 401(k) defined contribution plan
covering employees under certain collective bargaining agreements. Under this
plan, employees can make annual voluntary contributions of up to 15% of their
compensation. Expense for the years ended March 31, 2003 and 2002, the three
months ended March 31, 2001 and the year ended December 31, 2000 was $6,484,000,
$5,855,000, $1,343,000 and $5,139,000, respectively. Certain of the Company's
union employees are participants in multi-employer plans. Payments to
multi-employer pension plans are negotiated in various collective bargaining
agreements and aggregated $2,367,000, $1,162,000, $416,000 and $1,641,000 for
the years ended March 31, 2003 and 2002, the three months ended March 31, 2001
and the year ended December 31, 2000, respectively. The actuarial present value
of accumulated plan benefits and net assets available for benefits to union
employees under these multi-employer pension plans is not available, as the
Company does not administer these plans.
Effective January 1, 1999, the Company established a Supplemental
Executive Retirement Plan for certain of its employees. The projected benefit
obligation as of March 31, 2003 and 2002 was $2,955,000 and $2,049,000,
respectively. A liability of $2,220,000 and $1,668,000 as of March 31, 2003 and
2002, respectively, is included in long-term deferred compensation obligation in
the accompanying consolidated balance sheets. The plan is unfunded. During the
years ended March 31, 2003 and 2002, the three months ended March 31, 2001 and
the year ended December 31, 2000, the Company recorded an expense related to the
plan of $552,000, $111,000, $420,000 and $379,000, respectively.
The assumptions used in the measurement of the Company's benefit
obligation are as follows:
MARCH 31 DECEMBER 31
---------------------- -----------
2003 2002 2001 2000
---- ---- ---- ----
Discount rate .......................... 6.0% 7.0% 7.0% 7.0%
Rate of compensation increase .......... 3.0% 3.0% 3.0% 3.0%
The Company accrues the actuarially determined amount necessary to fund
the participants' benefits in accordance with the requirements of the Employee
Retirement Income Security Act of 1974.
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7. COMMITMENTS AND CONTINGENCIES
Future minimum annual payments under noncancelable operating leases
with lease terms in excess of one year at March 31, 2003 are as follows:
2004 ........................................................... $ 7,263,000
2005 ........................................................... 7,431,000
2006 ........................................................... 5,792,000
2007 ........................................................... 4,217,000
2008 ........................................................... 3,659,000
Thereafter ..................................................... 16,217,000
-------------
Total .......................................................... $ 44,579,000
=============
Under the lease agreements, the Company is obligated to pay certain
property taxes, insurance and maintenance costs. Certain leases contain renewal
and purchase options. Rental expense for the years ended March 31, 2003 and
2002, the three months ended March 31, 2001 and the year ended December 31, 2000
under operating leases totaled $7,138,000, $5,671,000, $1,476,000 and
$5,205,000, respectively.
During the year ended December 31, 2000, the Company received a payment
of approximately $2,400,000 in connection with the settlement of a class action
lawsuit. This amount has been recorded as a component of other income in the
accompanying consolidated statement of income.
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition or results of operations.
8. GOODWILL
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These statements, among other
things, eliminate the pooling-of-interests method of accounting for business
combinations as of June 30, 2001, eliminate the amortization of goodwill and
indefinite life intangible assets for all fiscal years beginning after December
15, 2001, and require that goodwill and indefinite life intangible assets be
reviewed annually for impairment, or more frequently if impairment indicators
arise. The Company adopted SFAS Nos. 141 and 142 with respect to new goodwill as
of July 1, 2001 and adopted SFAS No. 142 with respect to existing goodwill and
indefinite life intangible assets as of April 1, 2002, the first day of its 2003
fiscal year. The adoption of SFAS No. 141 did not impact the Company's financial
condition or results of operations. Upon the adoption of SFAS No. 142, the
Company ceased amortizing existing goodwill and trademarks.
The Company completed the transitional test of goodwill and trademarks
during 2003. Based on the result of the test, the Company determined that there
was no impairment of goodwill and trademarks as of April 1, 2002. Pursuant to
SFAS No. 142, goodwill and trademarks will be tested for impairment at least
annually and more frequently if an event occurs which indicates that goodwill or
trademarks may be impaired. During 2003, the Company abandoned the use of
certain trademarks with a net book value of $100,000.
A reconciliation of net income to the amount adjusted for the exclusion
of goodwill and trademarks amortization follows for the years ended March 31,
2003 and 2002, the three months ended March 31, 2001 and the year ended December
31, 2000:
MARCH 31 DECEMBER 31
----------------------------------------- ------------
2003 2002 2001 2000
----------- ----------- ----------- -----------
Reported net income .... $70,558,000 $70,486,000 $14,368,000 $57,506,000
Add:
Goodwill amortization .. -- 3,972,000 1,036,000 4,001,000
Trademark amortization . -- 1,853,000 421,000 1,684,000
----------- ----------- ----------- -----------
Adjusted net income .... $70,558,000 $76,311,000 $15,825,000 $63,191,000
=========== =========== =========== ===========
Amortization expense for other intangible assets subject to
amortization was $223,000, $402,000, $124,000 and $746,000 for the years ended
March 31, 2003 and 2002, the three months ended March 31,
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2001 and the year ended December 31, 2000, respectively. Estimated annual
amortization for each of the years in the five-year period ending March 31, 2008
is $180,000.
9. QUARTERLY INFORMATION (UNAUDITED)
As discussed in Note 2, the Company changed its fiscal year end to
March 31. Audited financial information for the three months ended March 31,
2001 has been included herein. For comparison purposes, selected unaudited
financial information for the three months ended March 31, 2000 is as follows:
Sales ............................................... $211,815,000
Cost of goods sold .................................. 172,818,000
Net income .......................................... 17,123,000
Total assets ........................................ 362,382,000
Total liabilities ................................... 231,789,000
Members' capital .................................... 130,593,000
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