ITEM 1: BUSINESS
SF Services, Inc. is a farm supply cooperative which was organized under the laws of the State of Arkansas in 1945. As of January 27, 1998 it was made up of 124 local member cooperatives in Arkansas, Louisiana, Mississippi, Alabama, Oklahoma, and Texas. The local member cooperatives are owned and controlled by individual farmers. SF Services, Inc. is a basic manufacturer of agricultural and pet feeds, a production contractor and distributor of seeds in the rice, cotton, soybean and wheat production areas of the midsouth and a basic wholesaler of a wide variety of farm supply, tires, batteries and automotive ("TBA"), chemical, petroleum and fertilizer products to its members and other customers.
SF Services, Inc. attempts, through pooling of resources and sharing risks, to secure farm input products of the best quality and price, to cooperatively achieve economies in the manufacturing and procurement of goods and supplies, and to render service to its local member cooperatives. SF Services, Inc. has 15 operating and service divisions: Farm and Ranch; Petroleum; TBA; Fertilizer; Chemical; Seed; Feed; Animal Health; Catfish Processing and Marketing; Warehouse and Transportation; Field Services; Corporate Services; Information Services; Credit and Financial Analysis; and General Corporate.
SF Services, Inc. also controls eight subsidiaries which are included in the consolidated financial reports of SF Services, Inc. The eight subsidiaries are Cloverleaf Cooperative; SFA, Inc.; Deep South Farmers Supply, Inc.; Professional Technologies, Inc.; AgGrow Finance, Inc.; Southern Farm Fish Processors, Inc.; SF Technical Services, Inc.; and Northeast Arkansas Oil Company, LLC ("NEA Oil Company"). SFA, Inc. conducts retail farm supply sales and services. AgGrow Finance, Inc. provides financing to individual farmers of member cooperatives for crop production and equipment purchases. Southern Farm Fish Processors, Inc. operates a catfish processing plant. SF Technical Services, Inc., provides environmental and regulatory compliance services and crop consulting services. The remaining subsidiary, NEA Oil Company, is a wholesale and retail fuel business.
In the first quarter of 1997, the Company purchased substantially all of the assets of Matthews of Monette, Inc., a wholesale and retail fuel business located in Arkansas, for approximately $9.4 million. This acquisition is expected to add approximately $45 million in annual sales. This business operates under the name "Northeast Arkansas Oil Company, LLC" a newly formed wholly-owned subsidiary. The purchase was financed as follows, $2.25 million in promissory notes issued by the Company, $2.13 million in capital leases and other debt assumed from the seller, and the remainder in borrowings from CoBank.
In the first quarter of 1995, pursuant to a plan and agreement of merger by and between Delta Purchasing Federation (AAL) ("DPF") and the Company, DPF was merged into the Company in a statutory merger. In the merger, DPF shareholders received an equity interest in the Company with value equal to net book value of DPF's assets plus $500,000. The acquisition has been accounted for as a purchase by recording the assets and liabilities of DPF based on their respective fair market values at acquisition date under the plan and agreement of merger. The Company's sales for 1995 increased approximately $21 million due to the merger.
In the first quarter of 1993, SF Services, Inc., through a newly formed wholly-owned subsidiary, Southern Farm Fish Processors, Inc., purchased the assets of Arkansas Prime Fish Processors by the assumption of debt in a non-cash transaction.
SF Services, Inc. and its subsidiaries employ approximately 1,310 persons.
Division sales, savings (loss) before income taxes and identifiable assets for each of the last three fiscal periods are presented below:
Year Ended Year Ended Year Ended October 31, October 31, October 31, 1997 1996 1995 ------------ ------------ ------------ SALES BY DIVISION Feed and animal health $113,240,365 $122,397,413 $101,249,886 Fertilizer 119,486,518 129,557,273 120,596,538 Seed 37,922,154 33,028,271 27,246,492 Chemicals 111,763,122 121,382,784 136,743,532 Farm and ranch 30,069,407 35,919,700 39,067,528 Petroleum 103,605,683 70,216,528 37,750,042 Tires, batteries and automotive 18,970,375 19,659,706 20,322,532 Subsidiary's retail farm supply sales, net of eliminations 14,142,897 21,694,459 10,012,504 Subsidiary's catfish processing and wholesale sales, net of eliminations 31,752,577 36,624,223 37,831,922 Subsidiary's technical services sales, net of eliminations 233,801 Subsidiary's retail and wholesale petroleum sales, net of eliminations 41,680,545 ------------ ------------ ------------ $622,867,444 $590,480,357 $530,820,976 ============ ============ ============
Year Ended Year Ended Year Ended October 31, October 31, October 31, 1997 1996 1995 ----------- ---------- ----------- SAVINGS (LOSS) BEFORE INCOME TAXES BY DIVISION* Feed and animal health $ (2,844,090) $(3,489,573) $ 797,252 Fertilizer (5,065,882) 16,838,293 5,635,474 Seed (931,389) (19,325) (93,310) Chemicals (1,449,878) (249,797) 992,824 Farm and ranch (1,284,712) (139,819) 183,850 Petroleum (150,923) 388,710 40,506 Tires, batteries and automotive (858,243) (6,050) 238,917 Subsidiary's retail operations, net of eliminations (5,495,660) (1,341,332) (561,194) Subsidiary's finance operations, net of eliminations (15,497) 85,817 38,244 Subsidiary's catfish processing and wholesale sales, net of eliminations (922,584) (6,316,888) (2,374,939) Subsidiary's retail and wholesale petroleum operations, net of eliminations (155,775) ----------- ----------- ----------- $(19,174,633) $ 5,750,036 $ 4,897,624 =========== =========== =========== *After allocation of general and administrative expenses, interest expense and other income (expense).
October 31, October 31, October 31, 1997 1996 1995 ----------- ----------- ----------- PROPERTY AND EQUIPMENT (NET) Feed and animal health $ 8,865,929 $ 9,426,682 $13,100,196 Fertilizer 12,865,116 11,278,166 6,294,171 Seed 522,703 476,914 530,319 Chemicals 1,993,661 2,047,747 1,930,296 Farm and ranch 167 199 628 Tires, batteries and automotive 83,190 89,402 102,062 Petroleum 140,060 95,845 77,914 Warehouse, transportation and general corporate 10,080,580 7,934,825 5,771,259 Subsidiary's retail operations 1,814,071 1,393,864 1,013,762 Subsidiary's finance operations 0 360 1,151 Subsidiary's catfish processing wholesale sales 2,795,661 2,912,675 4,654,797 Subsidiary's retail and wholesale petroleum operations 7,600,438 ----------- ----------- ----------- $46,761,576 $35,656,679 $33,476,555 =========== =========== ===========
The seasonal nature of SF Services, Inc.'s core business requires the maintenance of significant inventory levels. The Fertilizer, Chemical and Seed Divisions have peak activity in the spring planting season and again during the fall harvest and winter planting season. The geographical spread of trade areas from south to north makes these peaks fairly long in duration. However, the Fertilizer, Chemical, and Seed Divisions do experience lower levels of inventory in the late winter and late summer months.
SF Services, Inc.'s Feed Division is also subject to seasonal variance with its slow periods being experienced during the late spring and summer months when pasture is generally available. This is mitigated somewhat by the dairy feed business which is more year round in nature and by catfish feed sales which occur during the late spring through early fall period.
These seasonal patterns generally call for higher inventory levels because products must be stored during the slow period for delivery during the peak season. The requirements for competitive pricing has also made it necessary in a variety of products to purchase in truck, rail and barge lots which also adds to holding cost. This is especially true in the Farm and Ranch and TBA Divisions in the purchase of steel products, tires, and lubricants in truckload lots and Fertilizer and Seed Divisions in barge and rail quantities.
SF Services, Inc. is not dependent upon any one customer for a significant portion of its business. However, because of the cooperative ownership, it is dependent upon its local member cooperatives with whom it did 55% of its business in the fiscal year ending October 31, 1997. SF Services, Inc. is very price conscious because of the competitive environment in its trade area. Competitors include other regional cooperatives such as MFA, Inc., Farmland Industries, and Gold Kist as well as major privately-owned agri-business systems such as Helena Chemical, Terra International, and Conagra.
OPERATING DIVISIONS
Farm and Ranch
The Farm and Ranch Division makes available to the local member stores a wide range of products necessary for the timely schedule of crop and livestock production. Such products include garden tools, field sprayers, combine parts, disc blades, baler twine, fencing material, and a full line of livestock handling equipment. SF Services, Inc. attempts to maintain a relationship with major manufacturers of these products in order to guarantee a consistent supply of quality products for its local members.
Petroleum
This division provides petroleum products, including gasoline and diesel fuel, to its member stores. SF Services, Inc. believes that it has a good relationship with suppliers having strong domestic crude sources, and that this will help SF Services, Inc. maintain a competitive position in the agricultural petroleum market.
Tires, Batteries and Automotive
The TBA Division supplies tires, batteries and other automotive accessories such as antifreeze and lubricants to the member stores. Products supplied by the TBA Division are for use in both farm equipment and personal vehicles. The division operates truck routes out of North Little Rock, Arkansas to place and service batteries. Farm lubricants are sold in both small containers as well as bulk containers.
Chemical
The Chemical Division provides to the local member stores various herbicides, crop protection chemicals, crop soil surfactants and other adjuvants for use in the production of such crops as rice, cotton, soybeans, wheat and sugar cane. The products are also utilized in the development and protection of pasture land. The products are delivered in a full range of packaging including the delivery of bulk reusable containers. This division also markets a full line of small package lawn and garden products.
The Chemical Division also disseminates information to the local member stores concerning proper use of crop protection products. This includes information concerning container disposal, proper storage and application, contingency planning as well as compliance with state and federal environmental regulations.
Fertilizer
The Fertilizer Division provides a full range of fertilizer products, services and marketing programs. The fertilizer products handled by the Fertilizer Division include all nitrogen products as well as phosphate, potash and sulfur. In addition to fertilizer storage, the division has the capability to receive and unload barge loads of fertilizer products. The division also has mixing and blending capabilities at its North Little Rock, Arkansas facility.
Seed
The Seed Division is responsible for marketing and distributing agricultural seed to SF Services, Inc.'s membership. The division operates three seed processing and cleaning plants located in Blytheville, North Little Rock and Forrest City, Arkansas. Through these plants, the division contracts for the production of both public and proprietary brands of seed which is cleaned, processed and bagged at the plants following harvest.
Feed
The Feed Division is a basic manufacturer of livestock, aquaculture, horse and pet feeds. A wide variety of specialized formulas are provided to meet the various needs of the dairy, livestock, catfish, horse and pet industries. The division operates six feed mills located in North Little Rock and Fayetteville, Arkansas; Shreveport, Louisiana; and Lumberton, Greenville and Macon, Mississippi.
Animal Health
The Animal Health Division is responsible for the marketing and distribution of a full line of livestock pharmaceuticals and related products for the care of livestock. This division compliments the Feed Division by providing health related products to the same customers using livestock, aquaculture, horse and pet feeds.
Warehouse and Transportation
The Warehouse and Transportation Division operates the primary product distribution center located in North Little Rock, Arkansas. This division is responsible for the warehousing and delivery of SF Services, Inc.'s products sold to its customers. The division maintains a fleet of truck tractors and trailers for its delivery function.
Field Services
The Field Services Division includes the departments of Field Sales and Communications. The Field Sales department promotes SF Services, Inc.'s programs and product lines at the local store level. This department emphasizes expansion of the SF Services, Inc.'s market area and prepares and presents information to educate local cooperatives in a variety of areas including products and practices, cooperative development and member services.
The Communications department includes the functions of member and public relations, advertising coordination and program development. The advertising coordination function provides direct support to the member cooperatives when requested. This support includes ad slicks, mail stuffers, and other advertising material. The member and public relations function is responsible for the planning and coordination of all SF Services, Inc.'s meetings held for the local cooperatives. This includes the SF Services, Inc.'s annual meeting, the summer cooperative managers' meeting and the annual product shows. This division also represents SF Services, Inc. and the local member cooperatives in the development, promotion and coordination of state and regional cooperative activities.
Corporate Services; Information Services; Credit and Financial Analysis; and General Corporate
These divisions encompass a variety of functions which are primarily administrative in nature. The functions include finance, accounting, credit, strategic planning, facility and property management, risk management, employee benefits administration, and management support.
The Corporate Services Division also administers the SF Services, Inc.'s health plan and 401(k) retirement plan. These are multi-employer plans in which many of the local member cooperatives participate. The division's risk management group is responsible for placing and servicing liability and casualty insurance for SF Services, Inc. and for many of the local member cooperatives.
Technical Services
Technical Services is responsible for research. Research may be either exploratory or for the scientific procurement of information. This department is responsible for the development and administration of the Technical Assistance Joint Venture Program and Tech Service program. These programs encompass agronomic and economic recommendations to be used by local cooperatives and membership and coordination of marketing planning for both regional and local cooperative management. In addition, the department administers and disseminates information regarding government regulatory agencies relating to environmental matters, OSHA and the Department of Transportation as may be applied to the operations of SF Services, Inc. and member cooperatives. Assistance is given to testing and remediation of environmental problems when required.
Catfish Processing and Marketing
Catfish processing and marketing is located in Eudora, Arkansas. Live catfish for processing are purchased from local farmer producers located in Arkansas, Mississippi and Louisiana. Approximately 32.7 million pounds of live fish are purchased annually at a conversion rate of about 45.3% yield resulting in approximately 14.9 million pounds of finished product. Sales consist of frozen and fresh ice pack whole and fillet product with about 60% frozen and 40% fresh. Primarily sales are made through brokers to restaurant and grocery concerns.
NEA Oil Company
NEA Oil Company is a wholesale and retail fuel operation which was acquired during the first quarter of 1997. This wholly- owned subsidiary operates approximately 18 convenience stores and sells wholesale fuel to non-member customers, primarily in northeastern Arkansas.
ITEM 2:
ITEM 2: PROPERTIES
The principal offices of SF Services, Inc. are located in North Little Rock, Arkansas. SF Services, Inc.'s other facilities can be divided into two categories - distribution and processing. The major distribution warehouse in North Little Rock, Arkansas is on a concrete tilt-up slab construction (280,000 square feet). This centralized distribution warehouse serves SF Services Inc.'s Chemical; Farm Supply; TBA; Feed; Animal Health; and Seed divisions. The North Little Rock warehouse is supported by in-season product storage warehouses at Blytheville, Arkansas; Forrest City, Arkansas; Bunkie, Louisiana (a leased facility); Evergreen, Louisiana; and Greenwood, Mississippi. These metal warehouses are placed for quick product movement and could handle up to 50% more product in season.
The Fertilizer Division distributes dry fertilizer products from two warehouses in North Little Rock and one warehouse in Jonesboro, Arkansas, which have combined storage capacities of approximately 80,000 tons. These wood and treated metal warehouses provide off-season and in-season storage. In addition, approximately 50,000 tons of liquid fertilizer is distributed through equipment owned by the Company at six locations throughout Arkansas, Mississippi, and Louisiana, and approximately 55,000 tons through eleven leased facilities located in Arkansas, Louisiana, Mississippi, and Texas. The fertilizer bagging facility in the North Little Rock, Arkansas warehouse can increase its production to supply additional demand. All distribution warehouses are kept in good operating condition with an ongoing repair and maintenance program.
During 1997 the Company completed construction on two fertilizer river terminals located in Memphis, Tennessee and Greenville, Mississippi. The Memphis terminal has a storage capacity 60,000 tons and the Greenville terminal has a storage capacity 43,000 tons.
SF Services, Inc. operates six feed processing plants located in North Little Rock, Arkansas (80,000 tons at 89% capacity); Fayetteville, Arkansas (70,000 tons at 32% capacity); Shreveport, Louisiana (70,000 tons at 43% capacity); Macon, Mississippi (110,000 tons at 96% capacity); Lumberton, Mississippi (100,000 tons at 100% capacity) and Greenville, Mississippi (90,000 tons at 84% capacity). The facilities at Fayetteville, Arkansas; Shreveport, Louisiana; Lumberton, Mississippi; and Greenville, Mississippi are concrete mills, and the ones at North Little Rock, Arkansas; and Macon, Mississippi are of steel construction. All mills are in good operating condition and are capable of running 100% of capacity without materially changing or adding additional equipment.
During the year ended October 31, 1997, the Seed Division operated three seed plants located in Blytheville (600,000 bushel capacity), North Little Rock (160,000 bushel capacity) and Forrest City (800,000 bushel capacity), Arkansas. Each plant has up-to-date cleaning equipment with adequate bulk and flat storage. The seed plant at North Little Rock, Arkansas operated on an as needed basis with nominal production for the fiscal year ended October 31, 1997. The production of the Blytheville and Forrest City plants ran at approximately 60% of capacity.
SF Services, Inc. acquired a manually operated catfish processing plant in December, 1992 located in Eudora, Arkansas. The facility is constructed of concrete foundation and flooring with a metal building having offices, processing area, ice pack cooler storage and freezer storage. Following the acquisition, the plant was upgraded to an automated operation through the addition of automated processing equipment and the installation of an ammonia freezing system and expanded freezer storage. The operating capacity of the Eudora Facility is 40 million live weight pounds annually using the current freezing and storage facility.
SF Services, Inc. has numerous other miscellaneous properties which are leased to member cooperatives, subsidiaries, and unrelated third parties, as well as several tracts of undeveloped land. Some of the properties are used in subsidiary operations, some are used by member cooperatives, and others were acquired through foreclosures.
A listing of the locations of such properties by state and town follows:
Louisiana Mississippi Arkansas - ------------ -------------------------- ---------- Evergreen Belden New Albany Wynne Eunice Natchez Raymond Stuttgart Winnsboro Inverness Collins Augusta Minden Sumner Vicksburg El Dorado Iowa Wiggins Mer Rouge Moreauville Farmerville
All of the facilities and properties listed in the above table are held in fee by SF Services, Inc.
SF Services, Inc. believes that its facilities and properties are adequate for its current needs and for any anticipated future needs.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
None
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE AND SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5:
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No market exists for trading of shares of SF Services, Inc.'s common stock. SF Services, Inc.'s common stock cannot be transferred by the holders thereof without prior approval of the Board of Directors and then only to persons meeting the requirements to be a shareholder as specified in the bylaws. No dividends may be paid on SF Services, Inc.'s common stock.
The number of shareholders of record for SF Services, Inc.'s common stock as of January 27, 1998 was 124.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The following is a summary of selected historical financial data of SF Services, Inc. as of and for the years ended October 31, 1997, 1996, 1995, 1994 and 1993. The financial data has been derived from the "Consolidated Financial Statements of SF Services, Inc.," which have been audited by Baird, Kurtz & Dobson, independent certified public accountants. The financial data should be read in conjunction with the "Consolidated Financial Statements and Footnotes" included elsewhere herein. Particular attention is directed to Footnote "Acquisitions."
Year Ended Year Ended Year Ended Year Ended Year Ended October 31, October 31, October 31, October 31, October 31, 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (Thousand Dollars)
NET SALES $622,867 $590,480 $530,821 $439,171 $382,545
SAVINGS (LOSS) BEFORE EXTRA- ORDINARY ITEM $(17,740) $ 2,072 $ 2,703 $ 3,954 $ 2,263
AT PERIOD END:
TOTAL ASSETS $188,795 $192,122 $199,662 $159,527 $143,777
LONG-TERM NOTES PAYABLE, NET OF CURRENT MATURITIES $ 33,031 $ 22,309 $ 19,843 $ 27,805 $ 30,986
TOTAL LONG-TERM OBLIGATIONS $ 33,200 $ 22,477 $ 20,072 $ 29,437 $ 32,221
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The primary products sold by SF Services, Inc., include processed catfish, farm supply products, animal and fish feeds, agricultural fertilizers, seeds and chemicals, and petroleum products. These products are sold primarily to 124 local cooperative retail stores serving the individual farmer producer, and other non-member customers. Weather, federal farm programs, and commodity prices impact the unit demand for the products sold by SF Services, Inc. Primarily the seed, fertilizer, chemical and animal feed
divisions may be impacted by seasonal changes, as well as variations in ingredient prices which create changes in the dollar volume of sales. SF Services, Inc.'s business cycle is highly seasonal and can be advanced or delayed by wet, dry, hot, or cold weather conditions.
Total 1997 sales increased approximately 5.5% over the previous year. Increased sales were realized in Animal Health, Seed, and Petroleum, while decreases in sales were realized in Feed, Farm and Ranch, Fertilizer, Chemicals, TBA, and Catfish Processing. Further analysis of departmental sales is included under the comparative analysis between fiscal years which follows.
Cost of sales were 93.6% of sales in 1997 compared to 94.2% in the previous year. Further analysis of cost of sales by department is included under the comparative analysis between fiscal years which follows.
As a result of the factors described in the two preceding paragraphs, gross profit for the year ended October 31, 1997 increased approximately $5.1 million (15%). Further analysis of gross profit is included under the comparative analysis between fiscal years which follows.
Net savings decreased $19.8 million. This decrease was due primarily to increased operating expenses and increased interest costs. Also, there was $17.9 million gain on sales of stock in the prior year.
On August 22, 1994, Mississippi Chemical Corporation ("MCC"), formerly a Cooperative, became a public entity and the Company's investment in common stock and allocated equities of MCC were converted to common stock in the new entity. Effective July 1, 1994, the Company ceased to receive patronage refunds from MCC on business done with MCC subsequent to July 1, 1994.
During 1996, the Company sold 1,525,720 shares of MCC stock. The sales resulted in a gain of $17,863,024 on proceeds of $34,027,573.
Subsequent Events
During the first quarter of 1998, the Company sold seven convenience store locations through a sale/leaseback transaction. No gain or loss resulted from this transaction. Proceeds of $2.68 million were used to pay down term debt with CoBank.
Comparative Analysis of the Fiscal Year Ended October 31, 1997 to the Fiscal Year Ended October 31, 1996
Net sales for the fiscal year ended October 31, 1997 increased approximately 5.5% over the prior year. This increase was attributable to the following factors:
Farm and Ranch sales decreased approximately 16% due primarily to a $3 million decline in sales of steel products and a $2 million decline in sales of agronomy equipment. Gross margin declined to 7.6% of sales compared to 9.1% in the prior year. This decrease was primarily the result of the continuing shift to more direct sales, which carry a lower gross profit percent.
Feed sales decreased approximately 10% due to a 30,000 ton decline in beef feeds and a 20,000 ton decline in dairy feeds. These declines were due to lower livestock numbers in the trade area and a mild winter season. Gross profit decreased $1.3 million due to the decline in sales , unfavorable ingredient prices early in the year which were not passed on the customers, and higher per ton manufacturing costs.
Animal Health sales increased approximately 2% due to improved market conditions and the producers focus on herd health. Gross profit as a percent of sales decreased from approximately 10% in 1996 to 7% in 1997. This decrease was due to competitive situations in the market.
TBA sales decreased 3.5% due to some loss of market share and the compressed spring season caused by wet weather conditions. Gross profit as a percent of sales decreased from 13.9% in 1996 to 12.5% in 1997. This decrease was due to increased tire adjustment costs and lower commissions from vendors.
Petroleum sales increased approximately 48% due to increased brokered sales to non-member customers. Gross profit as a percent of sales decreased to 1.5% from 2% in the previous year. This decrease in gross profit as a percent of sales was due to the increase in non-member brokered sales, which carry a lower percent gross profit.
Fertilizer sales decreased approximately 8% due to lower per unit sales prices. Total tons sold increased approximately 11,000 tons (1%). Gross profit as a percent of sales decreased to approximately 4% from 5% in the previous year. This decrease was due primarily to the decline in nitrogen fertilizer prices during the year.
Chemical sales decreased 8% due to the use of more transgenic crops, which displace a portion of the agricultural chemical sales. Also, there were increased sales of generic products, which sell at lower per unit prices. Gross profit as a percent of sales increased to approximately 7% from 6% in the previous year due to higher commission income.
Seed sales increased 15% due to increased sales of Roundup Ready soybeans. Gross profit as a percent of sales decreased 0.50% due to the poor wheat crop as a result of unfavorable weather conditions in the trade area.
Processed catfish sales decreased approximately 13% due to fewer sales of processed fish purchases from other processors for resale ("outside fish"). Total units processed remained at approximately the same level as experienced during the prior year period. Gross margin improved approximately $3.6 million due to lower prices paid for live fish and improved processing efficiency.
NEA Oil Company sales were approximately $41.7 million in 1997 compared to zero in the prior year. Gross profit as a percent of sales was approximately 9.6% in 1997.
Operating expenses increased approximately 24% over the previous year. This increase was due to the following factors.
* $1.4 million in increased expenses associated with the full year of operating costs at the Greenville and Memphis fertilizer terminals, including $400,000 of additional payroll and related expenses, $258,000 of additional depreciation, and $387,000 of additional maintenance and repair costs.
* $1 million in increased expenses associated with the new computer system, including $98,000 in additional telecommunication costs, $381,000 in costs for outsource services, $237,000 of additional lease cost, and $157,000 of additional depreciation.
* $719,000 in increased expenses associated with increased operations at the Blytheville and Forrest City seed plants, including $335,000 of additional payroll and related costs, $34,000 of additional maintenance and repairs, and $14,000 of additional utilities, and $63,000 of additional storage costs.
* $672,000 for additional severance pay and related expenses associated with the closing of 10 company owned retail stores and work force reductions in other areas of the Company.
* $877,000 for an asset value adjustment associated with the write-off of a computerized product guide.
* $2.2 million in provision for bad debts, including approximately $870,000 associated with the closing of 10 company owned retail stores.
Comparative Analysis of the Fiscal Year Ended October 31, 1996 to the Fiscal Year Ended October 31, 1995
Net sales for the fiscal year ended October 31, 1996 increased approximately 11.2% over the prior year. This increase was attributable to the following factors:
Farm and Ranch sales decreased approximately 8% due to the severe decline in the price of beef cattle, which caused producers to reduce their purchases. Gross margin increased to 9.4% of sales compared to 9.1% in the prior year. This increase was mainly due to better purchasing and product positioning.
Feed sales increased approximately 27% over the previous year due primarily to increased feed prices caused by the higher cost of ingredients. Total tons sold increased approximately 25,000 tons (5.6%) due to a gain in market share. Gross margin decreased approximately $926,000 due to higher ingredient costs which were not passed on to the customer.
Animal Health sales decreased approximately 4% due to the lower livestock prices, which caused producers to reduce their purchases. The lower livestock prices also caused significant liquidation of cow/calf units in the trade area. Gross margin as a percent of sales decreased to 10.25% from 10.5% in the previous year. This decrease was due to competitive pressure for the fewer livestock units in the market.
TBA sales decreased approximately 3% due to the late passing of the Farm Bill which caused producers to reduce purchases. The decrease was also caused by some loss of market share due to strong competitive pricing from tire manufacturers. Gross margin as a percent of sales remained approximately the same as experienced in the previous year.
Petroleum sales increased approximately 86%. This increase was due to a gain in market share which was lost in previous years because of competitive pricing and a lack of sufficient transportation. Also, sales of diesel fuel used in irrigation wells realized a strong increase due to the dry summer weather. Total gallons sold increased approximately 65% to 115 million gallons. Gross margin as a percent of sales decreased to 2.0% from 2.7% in the previous year. This decrease was due to changes in suppliers' volume rebate purchase programs.
Fertilizer sales increased approximately 7% due to a gain in market share. Total tons sold increased approximately 104,000 tons (13%). Gross margin as a percent of sales was 5.1% compared to 2.6% in the previous year. This increase was due to more favorable market conditions than were experienced in the previous year. Also, more product was sold through the Company's facilities, which generates a higher margin.
Chemical sales decreased approximately 11% due to changes in cropping patterns in the trade area. More corn acres were planted, replacing cotton acreage, which requires more chemical applications. Gross margin as a percent of sales increased to 6.3% from 5.9% in the previous year. This increase was due to an effort to increase margins to offset the decline in sales volume.
Seed sales increased approximately 21% because of cotton being replaced by corn, which has a higher unit value than cotton. Also, sales of soybean and wheat seed increased. Gross margin as a percent of sales increased to 10.0% from 9.1% in the previous year. This increase was due to increased proprietary seed sales, which carry a higher margin than public variety products. The introduction of biotechnology seed products also provided the opportunity to increase margins.
Processed catfish sales decreased approximately 3% due to lower processing levels caused by a lack of quality fish available for processing. Gross margin decreased approximately $2.1 million due to higher live fish cost caused by the inadequate supply of quality fish, and a higher per unit processing cost caused by the inefficiency of lower processing levels.
Operating expenses increased approximately 49.2% over the previous year. This increase was due to the following factors.
* $826,000 of increased expenses due to the addition of two additional retail locations, including $370,000 of additional payroll and related costs, $129,000 of additional rent expenses, $81,000 of additional maintenance costs, $36,000 of additional vehicle costs, and $44,000 in additional depreciation.
* $1.5 million of increases at existing retail locations including $391,000 of additional payroll and related costs, $221,000 of additional rent expenses, $85,000 of additional maintenance costs, and $344,000 of increased bad debt expense.
* $1.1 million of increased expenses associated with the implementation of a new computer system, including $320,000 of additional payroll and related costs for additional analysts, $90,000 of additional rent expense, $70,000 of additional employee training costs, $100,000 of additional telecommunications costs, and $310,000 for a computer maintenance and operating contract with an outside firm.
* $1.1 million associated with new fertilizer terminal operations, including $300,000 of additional payroll and related costs, $284,000 of additional demurrage and storage costs, $20,000 of additional rent expense, $64,000 of additional maintenance costs, and additional utilities of $50,000, and $25,000 of additional insurance expense.
* $487,000 of increased costs due to additional petroleum transportation operations which added six units, including $220,000 of payroll and related costs, $80,000 of fuel costs, and $56,000 in rent costs.
* $273,000 of increased costs due to the addition of a new office building, including $98,000 of additional maintenance costs, and $100,000 in additional utilities.
* $5.5 million of increased costs due to asset impairment adjustments as more fully described in Note 19 to the Financial Statements.
During 1996, the Company recognized expenses of approximately $5.0 million to reduce the carrying value of the Eudora, Arkansas catfish processing plant and the Greenville, Mississippi feed mill, the values of which have been impaired due to continued losses resulting from excessive operating costs. Also, during 1996 the Company recognized expenses of approximately $516,000 to reduce the carrying value of various abandoned properties. The amount of the impairments were estimated based on appraisals performed during the year and expected future cash flows. These estimates could change materially in the future.
Liquidity and Capital Resources
Cash provided by operating activities was approximately $5.8 million in 1997 compared to approximately $28.5 million used in the previous year. This increase in cash provided by operating activities is due to the reduction of inventory, primarily fertilizer. Cash used in investing activities was approximately $10.2 million in 1997 compared to approximately $24.5 million provided by investing activities in the prior year. This increase in cash used by investing activities was due to increased investment in fixed assets, and there were $34 million of MCC stock sales in the prior year. Cash provided by financing activities was approximately $6 million in 1997 compared to approximately $6.6 million in the previous year. This decrease was due to an increase in bank debt offset by a reduction in patrons' deposits.
The allowance for doubtful accounts increased to $3,241,948 from $950,000. Analysis of the current accounts and a review of collection history does not indicate that losses would be expected to exceed the current reserve balance.
Historically, most of SF Services, Inc.'s financing has been with CoBank. CoBank has provided the Company with an $80 million seasonal line of credit , of which approximately $76.5 million was used at October 31, 1997. The Company also has $29.5 million in term loans with CoBank with annual payments of $2.98 million. During 1997, the Company obtained a formal waiver from CoBank with respect to covenant violations concerning capitalized leases, working capital, and capitalization ratios (see Note 7 to the Financial Statements). The Company is currently making plans to improve operations and return to profitability. These plans include closing or selling unprofitable operations, creating joint ventures and distribution alliances with other supply companies, and increasing direct shipment sales, which will reduce warehouse inventory levels. Management believes that as these plans are realized, the current line of credit will provide sufficient liquidity for current and future operating levels.
Year 2000 Issue
During 1997 the Company completed the implementation of a new computer system. The software used by this new system can be upgraded to be year 2000 compliant, therefore, the Company does not expect any material expenses relating to its primary operating software. In addition, the Company is in the process of forming a task force to examine other areas in and outside the Company which may be required to be updated to be year 2000 compliant, or which may otherwise affect the Company.
Reorganization and Operating Outlook
Management recognizes that operating margins have been low across all business segments of the Company and operating costs have been increasing significantly. A new president and CEO was employed by the board of directors in October 1996 and plans for restructuring the Company operations have been developed for implementation beginning in January 1998.
The Company is restructuring the field sales force from one that was product specific to one that covers all products in a geographic area. This reduced number of field sales staff will be supported by a centralized group of technical and product specialists. The total number of sales and technical personnel will be significantly reduced.
Accounting personnel which were assigned to operating divisions have been centralized into a single corporate accounting function. This change was made possible following implementation of the new integrated computer system, and will result in a significant reduction in clerical accounting positions.
Product specific operating divisions have been consolidated into three major areas; livestock production, crop production, and general farm supplies, to more efficiently support the operating business units.
The number of employees in the Technical Services division was reduced by closing unprofitable sites.
Transportation and warehouse functions were consolidated across the Company. One-half of the truck fleet has been sold, maintenance shops are being closed, and the North Little Rock warehouse will cease being used as a major distribution point during March, 1998. The Company has switched to third party contract and brokered hauling at a substantially lower cost. Additionally, three Arkansas chemical warehouses are being consolidated into one location.
While exiting the warehouse and distribution service, the Company is replacing the purchasing and storing of inventory by making alliances with major suppliers of products in Animal Health, Farm and Ranch, TBA, and small package seed and chemical products. The alliances with major suppliers provide for the products to be delivered directly from the supplier's warehouse to our customer. The Company takes the order and invoices the customer, and then places the orders with the supplier. The Company is entering into a joint venture arrangement with a major agricultural chemical distributor to handle all of the agricultural chemical business. The joint venture would provide the Company an ownership interest that would increase the earning potential for this business segment while relieving the Company of carrying inventory and accounts receivable relating to agricultural chemicals.
In January 1998, the company closed ten (10) unprofitable retail stores located in Mississippi, Arkansas, and Louisiana. The stores had a history of losses and were requiring working capital and management attention needed in other areas of the Company. Fourteen (14) retail locations remain following these closings.
The results of these plans will eliminate more than 150 employees, reduce annual operating expenses approximately $15 million, and reduce inventory and accounts receivable by approximately $44 million.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS
SF Services, Inc.
Accountants' Report and Financial Statements
October 31, 1997 and 1996
Independent Accountants' Report
Board of Directors SF Services, Inc. North Little Rock, Arkansas
We have audited the accompanying consolidated balance sheets of SF SERVICES, INC. as of October 31, 1997 and 1996, and the related consolidated statements of operations, changes in members' equity and cash flows for each of the three years in the period ended October 31, 1997 and the financial statement schedule included in Item 14(a)(2). These financial statements and schedule are the responsibility of the Cooperative's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SF SERVICES, INC. as of October 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. Also, In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in Note 19 to the consolidated financial statements, in 1996 the Cooperative adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Baird, Kurtz, & Dobson
Little Rock, Arkansas January 16, 1998
SF SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
ASSETS
1997 1996 CURRENT ASSETS Cash $ 4,809,079 $ 3,214,419 Accounts receivable, less allowance for doubtful accounts; 1997 - $3,241,948, 1996 - $950,000 43,456,434 40,268,809 Accounts receivable - other 6,299,366 6,287,292 Income taxes receivable 3,128,485 Note receivable - current portion 2,707,173 2,184,287 Inventories 62,903,882 84,215,934 Patronage distributions receivable 197,319 168,147 Deferred income taxes - current 834,738 Other 1,329,435 1,253,263 ----------- ----------- Total Current Assets 124,831,173 138,426,889 ----------- -----------
INVESTMENTS AND LONG-TERM RECEIVABLES Notes receivable 2,921,728 3,154,281 Investments in other cooperatives 13,549,277 12,974,801 Deferred income taxes - long term 1,145,844 ----------- ----------- 16,471,005 17,274,926 ----------- ----------- PROPERTY AND EQUIPMENT, At Cost Land and improvements 6,187,878 3,594,565 Buildings 26,208,590 19,236,628 Machinery and equipment 27,109,855 20,438,434 Automobiles and trucks 1,714,562 1,478,513 Furniture and fixtures 5,182,286 4,636,169 Leasehold interests 2,106,038 Construction in progress 3,161,855 8,269,079 ----------- ----------- 71,671,064 57,653,388 Less accumulated depreciation 24,909,488 21,996,709 ----------- ----------- 46,761,576 35,656,679 ----------- -----------
OTHER ASSETS 731,662 763,565 ----------- -----------
$188,795,416 $192,122,059 =========== ===========
LIABILITIES AND MEMBERS' EQUITY
1997 1996 CURRENT LIABILITIES Note payable $ 76,518,530 $ 65,582,931 Interest payable 1,315,553 222,015 Debentures 1,223,000 1,342,009 Current maturities of long-term debt 4,801,464 3,013,819 Accounts payable 28,130,453 29,094,690 Patrons' deposits 4,010,610 14,175,462 Accrued expenses 6,236,470 4,287,813 Income taxes payable 739,683 ----------- ----------- Total Current Liabilities 122,236,080 118,458,422 ----------- -----------
LONG-TERM DEBT 33,031,344 22,309,220 ----------- -----------
OTHER LIABILITIES 168,934 168,200 ----------- -----------
MEMBERS' EQUITY Capital stock Class "A" preferred 2,047,100 2,079,600 Class "B" convertible preferred 676,400 676,400 Common stock 125,000 125,000 Capital certificates 102,709 157,399 Retained earnings (deficit) (5,674,214) 309,478 Allocated equities 36,082,063 47,838,340 ----------- ----------- 33,359,058 51,186,217 ----------- ----------- $188,795,416 $192,122,059 =========== ===========
SF SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
NET SALES $622,867,444 $590,480,357 $530,820,976
COST OF GOODS SOLD 583,275,706 556,030,450 500,731,715 ----------- ----------- ----------- GROSS PROFIT 39,591,738 34,449,907 30,089,261
OTHER OPERATING REVENUE 1,420,305 1,957,519 542,926 ----------- ----------- ----------- GROSS MARGIN AND OTHER OPERATING REVENUE 41,012,043 36,407,426 30,632,187
OPERATING EXPENSES 54,655,649 44,958,673 30,131,789
----------- ----------- ----------- INCOME (LOSS) FROM OPERATIONS (13,643,606) (8,551,247) 500,398 ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest income 2,147,412 1,592,666 1,526,514 Interest expense (8,617,116) (5,939,801) (6,396,350) Dividend income 123,154 530,037 Miscellaneous 938,677 662,240 146,070 Gain on sale of MCC stock 17,863,024 8,590,955 ----------- ----------- ----------- (5,531,027) 14,301,283 4,397,226 ----------- ----------- -----------
SAVINGS (LOSS) BEFORE INCOME TAXES (19,174,633) 5,750,036 4,897,624
PROVISION (CREDIT) FOR INCOME TAXES (1,434,664) 3,677,875 2,194,361 ----------- ----------- ----------- NET SAVINGS (LOSS) $(17,739,969) $ 2,072,161 $ 2,703,263 =========== =========== =========== NET SAVINGS (LOSS) APPLIED TO: Allocated equities Capital equity credits $(11,756,277) $ $ Cash 1,699,111 ----------- ----------- ----------- (11,756,277) 1,699,111 Retained earnings (5,983,692) 2,072,161 1,004,152 ----------- ----------- ----------- $(17,739,969) $ 2,072,161 $ 2,703,263 =========== =========== ===========
SF SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
Convertible Preferred Preferred Preferred Stock Stock Stock Class "A" Class "B" Class "D" ----------- ----------- ----------- BALANCE, OCTOBER 31, 1994 $ 2,189,300 $ 676,400 $ 1,562,580
ISSUANCE OF STOCK
NET SAVINGS
CAPITAL EQUITY CREDITS ISSUED AS PATRONAGE DISTRIBUTIONS
MERGER WITH DELTA PURCHASING FEDERATION (AAL)
CAPITAL EQUITY CREDITS PAID
RETIREMENT OF COMMON STOCK
DIVIDENDS ON PREFERRED STOCK
RETIREMENT OF PREFERRED STOCK (49,900) (1,562,580)
RETIREMENT OF ALLOCATED EQUITIES
CHANGE IN UNREALIZED GAIN OR LOSSES ----------- ----------- ----------- BALANCE, OCTOBER 31, 1995 $ 2,139,400 $ 676,400 $ -0- =========== =========== ===========
ISSUANCE OF STOCK
NET SAVINGS
RETIREMENT OF COMMON STOCK
DIVIDENDS ON PREFERRED STOCK
RETIREMENT OF PREFERRED STOCK (59,800)
RETIREMENT OF ALLOCATED EQUITIES
OFFSET AGAINST ACCOUNTS RECEIVABLE
CHANGE IN UNREALIZED GAIN ON SECURITIES ----------- ----------- ----------- BALANCE, OCTOBER 31, 1996 $ 2,079,600 $ 676,400 $ -0- =========== =========== =========== NET SAVINGS(LOSS)
CAPITAL EQUITY CREDITS PAID
RETIREMENT OF PREFERRED STOCK (32,500) ----------- ----------- ----------- BALANCE, OCTOBER 31, 1997 $ 2,047,100 $ 676,400 $ -0- =========== =========== ===========
Retained Common Capital Earnings Stock Certificates (Deficit) ----------- ----------- ----------- BALANCE, OCTOBER 31, 1994 $ 123,000 $ 157,399 $ (2,501,778)
ISSUANCE OF STOCK 7,000
NET SAVINGS 2,703,263
CAPITAL EQUITY CREDITS ISSUED AS PATRONAGE DISTRIBUTIONS (1,699,111)
MERGER WITH DELTA PURCHASING FEDERATION (AAL)
CAPITAL EQUITY CREDITS PAID
RETIREMENT OF COMMON STOCK (3,000)
DIVIDENDS ON PREFERRED STOCK (134,021)
RETIREMENT OF PREFERRED STOCK
RETIREMENT OF ALLOCATED EQUITIES
CHANGE IN UNREALIZED GAIN OR LOSSES ----------- ----------- ----------- BALANCE, OCTOBER 31, 1995 $ 127,000 $ 157,399 $ (1,631,647) =========== =========== =========== ISSUANCE OF STOCK 2,000
NET SAVINGS 2,072,161
RETIREMENT OF COMMON STOCK (4,000)
DIVIDENDS ON PREFERRED STOCK (131,036)
RETIREMENT OF PREFERRED STOCK
RETIREMENT OF ALLOCATED EQUITIES
OFFSET AGAINST ACCOUNTS RECEIVABLE
CHANGE IN UNREALIZED GAIN ON SECURITIES ----------- ----------- ----------- BALANCE, OCTOBER 31, 1996 $ 125,000 $ 157,399 $ 309,478 =========== =========== =========== NET SAVINGS(LOSS) (5,983,692)
CAPITAL EQUITY CREDITS PAID (54,690)
RETIREMENT OF PREFERRED STOCK ----------- ----------- ----------- BALANCE, OCTOBER 31, 1997 $ 125,000 $ 102,709 $ (5,674,214) =========== =========== ===========
Unrealized Gain on Securities Allocated Reported at Equities Fair Value Total ----------- ----------- -----------
BALANCE, OCTOBER 31, 1994 $ 45,046,212 $ 8,936,166 $ 56,189,279
ISSUANCE OF STOCK 7,000
NET SAVINGS 2,703,263
CAPITAL EQUITY CREDITS ISSUED AS PATRONAGE DISTRIBUTIONS 1,699,111
MERGER WITH DELTA PURCHASING FEDERATION (AAL) 4,498,888 4,498,888
CAPITAL EQUITY CREDITS PAID (1,699,111) (1,699,111)
RETIREMENT OF COMMON STOCK (3,000)
DIVIDENDS ON PREFERRED STOCK (134,021)
RETIREMENT OF PREFERRED STOCK 1,110,456 (502,024)
RETIREMENT OF ALLOCATED EQUITIES (2,300,889) (2,300,889)
CHANGE IN UNREALIZED GAIN OR LOSSES 2,119,466 2,119,466 ----------- ----------- ----------- BALANCE, OCTOBER 31, 1995 $ 48,354,667 $ 11,055,632 $ 60,878,851 =========== =========== =========== ISSUANCE OF STOCK 2,000
NET SAVINGS 2,072,161
RETIREMENT OF COMMON STOCK (4,000)
DIVIDENDS ON PREFERRED STOCK (131,036)
RETIREMENT OF PREFERRED STOCK (59,800)
RETIREMENT OF ALLOCATED EQUITIES (418,836) (418,836)
OFFSET AGAINST ACCOUNTS RECEIVABLE (97,491) (97,491)
CHANGE IN UNREALIZED GAIN ON SECURITIES (11,055,632) (11,055,632) ----------- ----------- ----------- BALANCE, OCTOBER 31, 1996 $ 47,838,340 $ -0- $ 51,186,217 =========== =========== =========== NET SAVINGS(LOSS) (11,756,277) (17,739,969)
CAPITAL EQUITY CREDITS PAID (54,690)
RETIREMENT OF PREFERRED STOCK (32,500) ----------- ----------- ----------- BALANCE, OCTOBER 31, 1997 $ 36,082,063 $ -0- $ 33,359,058 =========== =========== ===========
SF SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES Net savings (loss) $ (17,739,969) $ 2,072,161 $ 2,703,263 Items not requiring (providing) cash: Depreciation and amortization 3,571,355 2,239,498 2,951,534 Non-cash portion of patronage dividends received from cooperatives (801,549) (1,614,598) (1,284,542) (Gain) loss on sale of fixed assets (251,413) (67,348) (202,182) Gain on sale of investment (17,863,024) (8,590,955) Deferred income taxes 1,980,582 (3,392,985) 1,412,403 Writedown of fixed assets for impairment 877,040 5,497,348
Changes in operating assets and liabilities, net of effects from acquisition of Delta Purchasing Federation (AAL) assets: Accounts payable 916,188 1,833,597 (2,580,816) Accrued expenses 1,948,657 1,548,535 104,653 Accounts and notes receivable from customers (2,459,947) 2,384,932 (7,840,391) Income taxes receivable (3,128,485)
Inventories 21,972,529 (16,938,041) (11,918,494) Other current assets 409,798 570,208 1,329,734 Accounts receivable - other (798,961) (3,730,846) (903,365) Due from broker 131,868 Patronage distributions receivable (29,172) (49,740) (11,349) Income taxes payable (739,683) (42,275) 749,636 Other assets 31,903 (928,551) 828,656 Other liabilities 734 (61,206) (144,804) ----------- ----------- ----------- Net cash provided by (used in) operating activities 5,759,607 (28,542,335) (23,265,151) ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (11,242,951) (10,449,820) (13,465,151) Proceeds from sale of property and equipment 805,955 600,198 2,578,737 Net cash received in the acquisition of Delta Purchasing Federation (AAL) assets 977,428 Net cash received in the acquisition of Matthews of Monette, Inc. assets 13,055 Proceeds from investment redemption and sale 227,073 34,329,962 18,455,358 ----------- ----------- ----------- Net cash provided by
(used in) investing activities (10,196,868) 24,480,340 8,546,372 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock $ $ 2,000 $ 7,000 Dividends on preferred stock (131,036) (134,021) Patronage dividends paid and retirement of preferred stock (32,500) (59,800) (4,428,170) Retirement of capital certificates (54,690) Repurchase of common stock (4,000) (3,000) Retirement of allocated equities (418,836) Proceeds from borrowings 183,886,118 191,317,056 197,981,565 Repayment of borrowings (167,602,155) (188,547,986) (176,528,060) Net change in deposits (10,164,852) 4,473,637 (2,714,022) ----------- ----------- ----------- Net cash provided by financing activities 6,031,921 6,631,035 14,181,292 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,594,660 2,569,040 (537,487)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,214,419 645,379 1,182,866 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,809,079 $ 3,214,419 $ 645,379 =========== =========== ===========
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
SF Services, Inc. and subsidiaries sell seed, feed, fertilizer, chemicals, petroleum, lubricants, tires, batteries, accessories, and farm supplies and provide related services to members and patrons of the Cooperative and its subsidiaries. One subsidiary processes and markets catfish purchased from area producers and another subsidiary operates convenience stores and sells petroleum on a wholesale basis.
The Cooperative and its subsidiaries sell to members, patrons and wholesale entities in Alabama, Arkansas, Louisiana, Kansas, Mississippi, Texas, Oklahoma and Missouri on an unsecured credit basis.
Principles of Consolidation
The consolidated financial statements include the accounts of the Cooperative and its wholly-owned subsidiaries, AgGrow Finance, Inc., SFA, Inc., SF Technical Services, Inc., Southern Farm Fish Processors, Inc. and Northeast Arkansas Oil Co., LLC. Included with SFA, Inc., are its wholly-owned subsidiaries SFA of Louisiana, Inc., and SFA of Mississippi, Inc., which were formed on April 22, 1995 for retail operations in the respective states. All significant intercompany accounts and transactions have been eliminated in consolidation.
Inventories
Grains, seed and petroleum inventories are stated at the lower of market or cost, weighted average method. To reduce price risk caused by market fluctuations, the Cooperative follows a policy of hedging a portion of its production requirements and sales commitments using readily marketable exchange traded futures contracts and forward contracts (see Note 18). The changes in market value of such contracts have a high correlation to the price changes of the hedged commodity. Losses, if any, on unhedged sales commitments are recognized based on current market prices of ingredients. Gains or losses arising from open and closed hedging transactions are included in inventories as a cost of the commodities and reflected in the statements of earnings when the product is sold.
The remaining inventories are stated at the lower of market or cost, weighted average method.
A summary of inventories follows:
1997 1996
Purchased items held for resale $ 57,222,122 $ 78,816,793 Manufactured feed and feed ingredients 3,554,592 3,174,337 Processed catfish 2,127,168 2,224,804 ----------- ----------- $ 62,903,882 $ 84,215,934 =========== ===========
Property and Equipment
Depreciation is provided for primarily by the straight-line method using the following estimated useful lives:
Useful Lives
Buildings and improvements 5 - 33 years Machinery and equipment 2 - 20 years Automobiles and trucks 3 - 5 years Furniture and fixtures 5 - 15 years
Patrons' Equities
In accordance with its bylaws, the Cooperative allocates net savings to its patrons, based on income determined for financial reporting purposes, in cash, and certificates of equity in proportions determined by its Board of Directors.
New members are issued one share of common stock. At any time a member ceases to be active, such shares are redeemed at par value.
The Cooperative capitalizes interest costs as a component of construction in progress, based on the weighted average rates paid for long-term borrowings. Total interest incurred (net of patronage refunds) was:
1997 1996 1995
Interest costs capitalized $ 217,329 $ 479,943 $ Interest costs charged to expense 8,617,116 5,939,801 6,396,350 ----------- ----------- ----------- Total interest incurred $ 8,834,445 $ 6,419,744 $ 6,396,350 =========== =========== ===========
Income Taxes
The Cooperative, as a non-exempt cooperative, is taxed on non-patronage margins and any patronage margins not paid or allocated to patrons. Consistent with industry practice, deferred income taxes are not provided for temporary tax differences associated with patronage earnings. The Cooperative's subsidiaries are not required to pay or allocate margins to patrons and, therefore, are taxed on applicable margins and are able to retain all tax benefits related to losses to the extent such benefits are recoverable from prior taxes paid.
Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities related to non-patronage margins and unrealized gain on marketable securities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
Temporary tax differences relate principally to non-qualified patronage distributions received from other cooperatives, inventories, depreciation on property and equipment, valuation of property and equipment, accrued expenses, and market value over tax basis of marketable securities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2: ACCOUNTS RECEIVABLE
Provision for doubtful accounts:
1997 1996 1995
$ 3,653,000 $ 1,362,000 $ 127,397
Accounts receivable - other:
1997 1996
Vendor rebates $ 5,068,599 $ 2,322,396 Other 1,230,767 1,855,896 Proceeds from new leases 2,109,000 ----------- ----------- $ 6,299,366 $ 6,287,292 =========== ===========
NOTE 3: MARKETABLE SECURITIES
On August 22, 1994, Mississippi Chemical Corporation (MCC), formerly a Cooperative, became a public entity and the Cooperative's investment in common stock and allocated equities of MCC were converted to common stock in the new entity. The Cooperative sold its converted common stock during the years ended October 31 as follows:
1996 1995
Shares sold 1,525,720 875,000 =========== ===========
Proceeds $ 34,027,573 $ 17,812,493 =========== ===========
Gain on sale $ 17,863,024 $ 8,590,955 =========== ===========
The average cost method was used to determine cost basis on these sales.
NOTE 4: ACCRUED EXPENSES
Accrued expenses consisted of the following:
1997 1996
Accrued taxes payable, other than income taxes $ 1,598,427 $ 1,368,468 Accrued leave 1,507,369 1,365,115 Accrued payroll 1,996,299 757,222 Miscellaneous accruals 1,134,375 797,008 ----------- ----------- $ 6,236,470 $ 4,287,813 =========== ===========
NOTE 5: INVESTMENTS IN OTHER COOPERATIVES
The Cooperative invests in other cooperatives with which it does business. Investments in those other cooperatives were as follows:
1997 1996
CoBank $ 7,890,414 $ 7,705,494
Farmland Industries, Inc. 2,933,225 2,491,005 Universal Cooperatives, Inc. 2,030,883 2,023,627 AG Processing 552,111 491,805 Other 142,644 262,870 ----------- ----------- $ 13,549,277 $ 12,974,801 =========== ===========
These investments consist of common stock, at cost, and the Cooperative's share of allocated equities. Allocated equities are valued at face amount as determined by the issuing entity and are redeemable by the entity at its discretion at an amount determined annually. Patronage refunds, which consist of cash and non-cash equity allocations, are credited to cost of goods sold, with the exception of patronage refunds from CoBank, which are credited to interest expense.
The amount of allocated equities previously allocated to SF Services, Inc., to be retired during 1997 and 1996 has been included in patronage distributions receivable at October 31, 1997 and 1996.
Patronage distributions received for the years ending October 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 Amount credited to cost of goods sold $ 1,566,432 $ 1,482,570 $ 341,061 Amount credited to interest expense 740,077 677,675 707,538 ----------- ----------- ----------- $ 2,306,509 $ 2,160,245 $ 1,048,599 =========== =========== ===========
NOTE 6: NOTE PAYABLE
1997 1996 1995 Note payable CoBank $ 76,518,530 $ 65,582,931 $ 65,432,437 =========== =========== =========== Average interest rate during the period* 7.95% 7.19% 7.64% =========== =========== =========== Average during the period $ 72,016,720 $ 57,366,013 $ 48,570,883 =========== =========== =========== Average interest rate during the period* 7.06% 6.87% 7.96% =========== =========== ===========
Maximum amount of notes - payable at any month-end during the period $ 83,322,971 $ 71,169,873 $ 65,432,347 =========== =========== ===========
*Weighted average interest rate is computed by dividing the average monthly face amount of notes payable into the related interest expense.
The Cooperative had a committed line-of-credit with CoBank totalling $80,000,000 for the years ended October 31, 1997 and 1996. The line-of-credit is secured by substantially all assets of the Cooperative. This line-of-credit bears interest at a fluctuating rate based on the cost of money to CoBank and expires May 1, 1998.
NOTE 7: LONG-TERM DEBT
1997 1996
Notes payable - CoBank (A) $ 25,715,500 $ 22,182,750 Notes payable - CoBank (B) 405,000 495,000 Notes payable - CoBank (C) 3,387,867 Notes payable - Municipal (D) 500,000 500,000 Notes payable - Finance Corporation (E) 100,000 100,000 Notes payable - Industrial Revenue Bonds (F) 1,180,000 1,375,000 Notes payable - certificates of indebtedness (G) 210,314 210,414 Notes payable - Farmers Supply (H) 404,805 449,805 Notes payable - Individual (I) 2,250,000 Capital lease obligations (J) 3,405,643 Notes payable - other 273,679 10,070 ----------- ----------- 37,832,808 25,323,039 Less current maturities 4,801,464 3,013,819 ----------- ----------- $ 33,031,344 $ 22,309,220 =========== ===========
Aggregate annual maturities of long-term debt and payments on capital lease obligations at October 31, 1997 are:
Long-term Debt Capital Lease (excl. Leases) Obligations
1998 $ 4,462,455 $ 549,310 1999 3,655,655 578,363 2000 3,671,852 600,973 2001 3,688,110 593,441 2002 3,659,435 416,829 Thereafter 15,289,658 2,619,193 ----------- ----------- $ 34,427,165 5,358,109 =========== Less amount representing interest 1,952,466 ----------- Present value of future minimum lease payments 3,405,643
Less current maturities 339,009 ----------- Noncurrent portion $ 3,066,634 ===========
(A) Due 1997 through 2004, with annual installments of $2,572,500 plus interest at fluctuating rates based on the cost of money to CoBank (average rate of 8.04% at October 31, 1997); secured by substantially all assets of the Cooperative. The agreement requires maintenance of $20,000,000 working capital, a maximum ratio of CoBank term debt to the value of Mississippi Chemical Stock owned plus the net book value of assets owned of not more than 60%, a current ratio of 1.2% and requires CoBank approval if distributions to members exceed 50% of patronage based income or the Cooperative retires greater than $60,000 of preferred stock in any fiscal year. A formal waiver of working capital, capitalization, and capital lease borrowings was obtained for 1997, and a formal waiver was obtained during 1996 on working capital and the current ratio. The agreement requires the Cooperative to invest in stock of CoBank in amounts determined by the bank.
(B) Due 1997 through 2002 at $7,500 monthly plus interest at 8.25%; cross-collateralized with (A) above.
(C) Due 1997 through 2004; with annual installments varying from $317,362 to $704,734; interest at 8.50%; cross- collateralized with (A) above.
(D) Due at various times through 2002; interest at 7%; maturities of principal are deferred until Southern Farm Fish Processors, Inc., obtains various equity and working capital levels; secured by property and equipment.
(E) Due at various times through 2002; interest at 6%; maturities of principal are deferred until Southern Farm Processors, Inc., obtains various equity and working capital levels; secured by property and equipment.
(F) Due 1997 through 2002 with annual installments of principal plus interest at rates of 6% to 6.5%; secured by property and equipment.
(G) Due 1997 with annual installments of principal plus interest at interest rates of 8% and 10%; unsecured.
(H) Due in annual installments of $44,980 including interest, uncollateralized.
(I) Due 2001; interest at 7.5%; secured by property.
(J) Capital leases include leases covering various equipment and buildings for 3 to 12 years expiring from 2000 through 2009.
Property and equipment include the following property under capital leases:
Land and buildings $ 2,056,025 Equipment 1,601,745 ----------- 3,657,770 Less accumulated depreciation $ 135,482 ----------- $ 3,522,288 ===========
NOTE 8: DEBENTURES
The outstanding debentures mature in 1998. Interest rates vary from 7% to 12%.
1997 1996
Debentures $ 1,223,000 $ 1,348,409 Less current maturities 1,223,000 1,342,009 ----------- ----------- Included in other liabilities $ -0- $ 6,400 ----------- -----------
NOTE 9: INCOME TAXES
The provision for income taxes includes these components:
1997 1996 1995
Taxes currently payable (receivable) $ (3,128,485) $ 7,070,860 $ 781,958 Deferred income taxes 1,693,821 (3,392,985) 1,412,403 ----------- ----------- ----------- $ (1,434,664) $ 3,677,875 $ 2,194,361
The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:
1997 1996
Deferred tax assets: Allowance for doubtful accounts $ 616,551 $ 403,515 Inventory capitalization 547,869 372,178 Accrued expenses not deductible until paid 286,044 295,722 Writedown of fixed assets 1,991,026 1,971,917 Other 36,504 ----------- ----------- 3,477,994 3,043,332 ----------- ----------- Deferred tax liabilities Accumulated depreciation 735,127 370,150 ----------- -----------
Net deferred tax asset (liability) before valuation allowance 2,742,867 2,673,182 ----------- ----------- Valuation allowance: Beginning balance (692,600) (Increase) during the year (2,050,267) (692,600) ----------- ----------- Ending balance (2,742,867) (692,600) ----------- ----------- Net deferred tax asset $ -0- $ 1,980,582 =========== ===========
The above net deferred tax asset (liability) is presented on the balance sheets as follows:
1997 1996
Deferred tax asset - current $ $ 834,738 Deferred tax asset - long term 1,145,844 ----------- ----------- $ -0- $ 1,980,582 =========== ===========
A reconciliation of income tax expense at the statutory rate to income tax expense at the Cooperative's effective rate is shown below:
1997 1996 1995
Expected provision (34%) $ (6,539,903) $ 1,955,012 $ 1,665,192 Tax effect of net savings (loss) applied to allocated equities 3,304,594 355,086 (577,698) Excess of benefits of allocated equity over taxable income 446,535 State income taxes (249,622) 675,177 660,332 Change in deferred tax asset valuation allowance 2,050,267 692,600 ----------- ----------- ----------- $ (1,434,664) $ 3,677,875 $ 2,194,361 =========== =========== ===========
As of October 31, 1997, the Cooperative had approximately $200,000 of alternative minimum tax credits available to offset future patronage based federal income taxes.
In setting the valuation allowance for realization of deferred tax assets, management uses a tax planning strategy that recognizes the benefits of impairment losses deductible in the future based on available refunds of previously paid tax.
NOTE 10: BENEFIT PLANS
The Cooperative has a combination salary deferral/profit- sharing defined contribution plan. The plan covers substantially all full-time employees aged twenty-one or older with at least one year of service. Participants must contribute a minimum of 2% of their compensation and may contribute up to the maximum permitted by applicable regulations. The Cooperative will match employee contributions up to a maximum of 4% of the participants' compensation. The matching percentage and additional profit-sharing contributions are determined on a discretionary basis by the Board of Directors. Participant interests in discretionary contributions are vested over a five-year period. The Cooperative contributed $484,282, and $683,158 to the plan during the years ended October 31, 1997 and 1996, respectively.
The Cooperative and its member cooperatives adopted a non-qualified defined contribution plan for managers of the member cooperatives. The amount of annual contribution to the plan for each participant is based on member cooperatives' purchases and the profitability of SF Services, Inc. The participants begin vesting after 14 years of service to the member cooperative and are 100% vested after 19 years. The Cooperative incurred expenses of $241,898 and $120,382 related to this plan for the years ended October 31, 1997 and 1996, respectively.
NOTE 11: RELATED PARTY TRANSACTIONS
The Cooperative owned 7% of the outstanding stock of Mississippi Chemical Corporation (MCC) at October 31, 1995 and the President of the Cooperative during that year was a director of MCC. Following are the material transactions with MCC during the year ended October 31, 1995:
Fertilizer purchases $ 32,587,243
MCC paid the Cooperative dividends of $123,154 in 1996 and $530,037 during 1995.
NOTE 12: LEASES
Noncancellable operating leases for feed mill buildings and equipment, other machinery and equipment and trucks expire in various years through 2013. These leases generally contain renewal options for periods ranging from one to five years and require the Cooperative to pay all executory costs (property taxes, maintenance and insurance).
Future minimum lease payments at October 31, 1997, were:
1998 $ 4,292,019 1999 3,643,866 2000 2,326,373 2001 1,078,065 2002 523,804 Later years 3,890,692 ----------- Future minimum lease payments $ 15,754,819 ===========
Rental expense for all operating leases amounted to the following:
1997 1996 1995
$ 4,437,471 $ 4,574,356 $ 4,208,848 =========== =========== ===========
NOTE 13: ACQUISITION
On December 31, 1996, the Cooperative acquired, through a newly-formed wholly-owned subsidiary, Northeast Arkansas Oil Co., LLC, substantially all the assets of Matthews of Monette, Inc., a company which operated convenience stores and sold wholesale petroleum. The acquisition was financed by assuming liabilities of the acquiree. The acquisition has been accounted for as a purchase by recording the assets and liabilities acquired at their estimated fair values at the acquisition date. The operation of the Cooperative includes the operations of the acquiree from the acquisition date. Unaudited pro-forma operations, assuming the purchase was made at the beginning of each year, are as follows:
1997 1996 1995
Net Sales $629,630,927 $634,596,337 $564,693,283 Net Savings(Loss) (17,845,172) 1,556,926 3,490,354
A summary of the assets acquired is presented below.
Land $ 372,508 Buildings and Improvements 4,346,678
Equipment 1,086,670 Leasehold Interests 1,901,231 Inventory 660,477 Accounts Receivable 1,018,011 Cash on hand 13,055 ----------- $ 9,398,630 ===========
On December 1, 1994, the Cooperative acquired all the assets of and assumed all liabilities of Delta Purchasing Federation (AAL) ("DPF") as follows.
Current assets $ 14,421,424 Other assets 3,490,231 ----------- 17,911,655 -----------
Current liabilities 11,814,255 Other liabilities 1,598,512 ----------- 13,412,767 ----------- Equities allocated $ 4,498,888 ===========
The total consideration delivered to DPF shareholders was equity interest of $4,998,888, or $500,000 in addition to the net assets received as carried by DPF before the transaction. The acquisition has been accounted for as a purchase by recording the assets and liabilities of DPF at estimated fair value at the acquisition date. The consolidated operations of the Cooperative include the operations of DPF from the acquisition date.
NOTE 14: CAPITAL STOCK
Liquidation Shares and Authorized Redemption Issued and Class of Stock Shares Par Value Preference Outstanding - -------------- ---------- --------- ----------- ----------- Class "A" preferred (1) 150,000 $ 1 $ 100 20,471
Class "B" convertible preferred (2) 15,000 $ 100 6,764
Common 500 $ 1,000 125
(1) Non-voting; non-cumulative dividends not to exceed 8 1/2% of liquidation and redemption preference if earned and when declared by the Board of Directors with preference over any other dividend or distributions declared in any year.
(2) Non-voting; non-cumulative dividends not to exceed 4% of liquidation and redemption preference if earned and when declared by the Board of Directors with preference over any other dividend, except Class A preferred stock, or distributions declared in any year. At the discretion of the Board of Directors, the Class B preferred stock shall become convertible, at the option of the holder, at its liquidation and redemption preference value into capital certificates.
Capital certificates may be surrendered upon termination of membership or expiration of ten years from the date of the certificate, whichever event shall be last to occur, for Class A Preferred Stock with a liquidation and redemption preference equal to the stated amount of the capital certificate. The certificates are subordinate to all debt and have no voting rights.
NOTE 15: NOTES RECEIVABLE
The Cooperative has provided long-term financing to certain members by transferring amounts owed by the members for purchases to long-term notes receivable pursuant to agreements with CoBank wherein CoBank provides seasonal financing directly to such members.
NOTE 16: BUSINESS SEGMENTS
The Cooperative operates in three industries (1) distribution of seed, feed, fertilizer, chemicals, petroleum, lubricants, tires, batteries, accessories, farm supplies and related services; (2) catfish processing and sales and (3) convenience store operations and wholesale petroleum sales. Sales between segments are not material. Net sales, operating income, identifiable assets, capital expenditures, and depreciation are as follows:
Convenience Stores and Distribution Catfish Wholesale October 31, 1997 Activities Processing Petroleum Total - ---------------- ------------ ---------- ----------- ----------- Net sales $549,434,322 $ 31,752,577 $ 41,680,545 $622,867,444
Operating income (loss) $(13,335,190) $ (561,992) $ 253,576 $(13,643,606)
Identifiable assets $167,357,182 $ 8,955,373 $ 12,482,861 $188,795,416
Capital expenditures $ 10,725,269 $ 281,045 $ 236,637 $ 11,242,951
Depreciation $ 2,783,054 $ 345,953 $ 442,348 $ 3,571,355
Distribution Catfish October 31, 1996 Activities Processing Total - ---------------- ------------ ---------- ----------- Net sales $553,856,134 $ 36,624,223 $590,480,357
Operating (loss) $ (2,768,125) $ (5,783,122) $ (8,551,247)
Identifiable assets $182,953,280 $ 9,168,779 $192,122,059
Capital expenditures $ 10,139,662 $ 310,158 $ 10,449,820
Depreciation $ 1,866,517 $ 372,981 $ 2,239,498
Distribution Catfish October 31, 1995 Activities Processing Total - ---------------- ------------ ---------- ----------- Net sales $492,989,054 $ 37,831,922 $530,820,976
Operating income (loss) $ 3,116,147 $ (2,615,749) $ 500,398
Identifiable assets $188,582,330 $ 11,079,559 $199,661,889
Capital expenditures $ 11,772,778 $ 1,692,373 $ 13,465,151
Depreciation $ 2,544,970 $ 406,564 $ 2,951,534
For purposes of business segment disclosure, all activities related to other cooperatives are included in distribution activities.
NOTE 17: ADDITIONAL CASH FLOW INFORMATION
1997 1996 1995
Interest paid (net of patronage dividends and interest capitalized) $ 8,025,028 $ 6,307,994 $ 6,629,921
Income taxes paid (received) $ (131,219) $ 7,431,000 $ 32,322
Noncash investing transactions:
Purchase of Assets of Matthews of Monette, Inc. Fair value of assets $ 9,385,575 Liabilities assumed (9,398,630) ----------- Cash received $ (13,055) =========== Capital leases entered into $ 3,657,770
Fixed assets transferred to assets held for sale $ 485,970
Acquisition of Delta Purchasing Federation (AAL) Fair value of assets received $ 16,938,948 Liabilities assumed (13,412,767) Equities allocated (4,503,609) ----------- Cash received $ (977,428) =========== Accrued interest paid with advance on seasonal line of credit $ 1,475,000
Class "D" stock redeemed with allocated equities $ 1,109,456
Trade receivable transferred to note receivable $ 200,000
NOTE 18: COMMITMENTS
Purchase Agreements
At October 31, 1997, SF Services, Inc. had commitments (open contracts) to purchase 127,760 tons of feed ingredients for $20,046,637 and to sell 148,444 tons of feed for $33,077,514.
The Company presells feed from March through October on an annual basis. During this period, the Company attempts to obtain commitments for as much as 100% ingredients for presells. The Company does not overcommit on purchases of ingredients. At October 31, 1997, the Company had commitments to sell cattle feed of 38,625 tons for $6,131,083 and catfish feed of 109,519 tons for $26,946,431. The Cooperative also had commitments to purchase cattle feed ingredients of 34,025 tons at a cost of $3,255,347 and catfish feed ingredients of 93,735 tons at a cost of $16,791,290.
Loan Guarantees
The Cooperative has guaranteed $335,000 in loans to CoBank for member cooperatives. The Cooperative has a second mortgage related to these guarantees.
NOTE 19: IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Cooperative adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Cooperative, as a result of adopting the new standard, recognized expenses of $4,981,000 to reduce the carrying value of the Southern Farm Fish Processors, Inc. plant and the Greenville feed mill, the values of which have been impaired due to continued losses resulting from excessive operating costs. Also, during the fourth quarter of fiscal 1996, the Cooperative recognized expenses of $516,000, to reduce the carrying value of various abandoned properties. During the fourth quarter of fiscal 1997, management recognized $877,000 of expense related to the abandonment of a computerized product guide. The amount of the impairments were estimated based on appraisals performed during the year and expected future cash flows. The amount of recognized expense is included in operating expenses in the consolidated statements of operations.
NOTE 20: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Investments in Associated Enterprises
Investments in other cooperative's equities are carried at cost, plus the Cooperative's share of allocated equities, less cash patronage refunds and allocations. There is no market for these investments since the securities are redeemable only by the issuing cooperative at an established contract value. Because of the lack of marketability, the Cooperative believes it is not practicable to estimate the fair value of investments in associated enterprises.
Notes Receivable
Carrying amount is a reasonable estimate of fair value.
Long-Term Debt
Fair value is estimated based on the CoBank National Variable Rate at October 31, 1997.
October 31, 1997
Carrying Fair Amount Value
CoBank - term $ 29,508,367 $ 29,510,000 CoBank - seasonal 76,518,530 76,503,500 Other 8,324,441 8,304,367 ----------- ----------- $114,351,338 $114,317,867 =========== ===========
NOTE 21: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following:
Major Lender
The Cooperative obtains most of its financing from CoBank. The Cooperative's line of credit of $80,000,000, which expires May 1, 1998, has not yet been renewed.
Income Tax Assessment
During 1996, the Internal Revenue Service (IRS) completed its examination of the Cooperative's federal income tax returns for the years ended October 31, 1991, 1992 and 1993, and has proposed certain adjustments which relate principally to the Cooperative's method of computing patronage allocations during those years. As a result, the IRS has proposed additional taxes of $589,823 for 1991 and $447,961 for 1992, plus interest to date of payment. This issue involves an Industry Coordinated Issue which the cooperative industry, and the Cooperative, are vigorously contesting. The Cooperative has filed its protest with the Appellate Division of the IRS. No accrual has been made for losses, if any, that may result, pending the outcome of the Cooperative's appeal.
Contingent Liabilities
In the course of business, the Cooperative has become engaged in various litigation matters. In the opinion of management based on the currently known facts, the litigation outstanding will not materially impact future financial position and results of operations; however, circumstances may change which would require reassessment and revisions of the estimates of the risk of future litigation losses.
NOTE 22: PATRONS' DEPOSITS
Patrons' deposits are monies on deposit from member cooperatives. The cooperative pays interest on these deposits at CoBank's seasonal rate.
NOTE 23: MANAGEMENT PLANS
Management's plan to improve operations and return to profitability include: 1)selling or closing unprofitable subsidiary operations (see note 24); 2)creating joint ventures with other farm supply companies; 3)increasing direct shipment sales, thereby reducing inventory handling costs and 4)reducing administrative costs (see note 24 ) including a reduction in workforce.
NOTE 24: UNUSUAL ITEMS
The Cooperative decided during the year ended October 31, 1997, to close ten of its retail operations during the year ended October 31, 1998. The Cooperative estimates that it will incur costs of $1,900,000 to close these stores including bad debts and reduced inventory realization. Additionally, management intends to reduce the workforce. Severance pay and related expenses are estimated to be approximately $672,000, associated with this work force reduction. These estimated expenses are included in operating expenses in the 1997 statement of operations and were recorded in the fourth quarter. In addition, during the fourth quarter the Cooperative recorded approximately $1,500,000 of expense to reduce inventories to net realizable value. It is reasonable possible that the actual costs of implementing these plans could exceed the estimates reflected in these financial statements.
NOTE 25: SUBSEQUENT EVENT
On November 6, 1997, the Cooperative sold seven convenience store locations through a sale/leaseback transaction. No gain or loss resulted from this transaction.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following table sets forth certain information concerning the current directors of SF Services, Inc.:
Name Age Principal Occupation Director Since
Johnny H. Wilson 62 Farming 1974 Doyle Yarbrough 66 Farming 1976 Daniel Viator 53 Farming, Agriculture 1987 Consultant, Real Estate Developer Robert Little 46 Co-op Manager 1995 Gene Bruick 67 Co-op Manager 1992 Jerry Conerly 64 Dairy Farmer 1992 John M. Evans 55 Farming 1992 Jim Gipson 62 Farming 1992 Steven Henderson 41 Farming 1992 John C. Jay, Jr. 59 Farming, City Mayor 1992 W. B. Madden, Jr. 65 Co-op Manager 1992 Thomas H. Gist, Jr. 63 Farming 1994 W. S. Patrick 57 Farming 1992 Michael Simon 55 Farming 1992 Charlie Starks, Jr. 64 Farming 1992 Joe Wilder 56 Farming 1992 Frederick Branch 50 Farming 1995 Mike Sturdivant 46 Farming 1995 Floyd Trammel 43 Co-op Manager 1996 Travis Burchfield 30 Farming 1997
All persons have been engaged in the occupation identified in the foregoing table for at least five years.
Executive Officers
The following table sets forth certain information concerning the current executive officers of SF Services, Inc.:
Principal Office Name Age Occupation Held Since
Michael P. Sadler (1) 47 President 10/96 John A. Gaston 59 Vice-President 3/91 Lehi German (2) 45 Vice-President 4/97 Larry M. Fortner 43 Vice-President 1/87 Joe LaCour (3) 54 Vice-President 10/97 Joe May (4) 47 Vice-President 10/97 Wayne McDaniel (5) 50 Vice-President 10/97 William C. Mosley 44 Vice-President 3/92
(1) Mr. Sadler previously served as vice president for Farmland Industries for seven years.
(2) Mr. German previously served as Director of Petroleum Operations and Planning for Farmland Industries for ten years.
(3) Mr. LaCour joined the Company in 1973, serving in various capacities. Most recently Mr. LaCour served as a Marketing Specialist for various product lines.
(4) Mr. May joined the Company in 1993 serving as Regional Sales Manager.
(5) Mr. McDaniel joined the Company in 1987 serving as Regional Sales Manager.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth, for the fiscal years indicated, the compensation provided by SF Services, Inc. to the Chief Executive Officer and each of the executive officers of SF Services, Inc. whose compensation exceeded $100,000 for the most recent fiscal year.
SUMMARY COMPENSATION TABLE
Annual Compensation ------------------------------------- (a) (b) (c) (d) (e) Other Name Annual and Compen- Principal sation Position Year Salary ($) Bonus ($) ($)
Michael P. 1997 $419,880 $175,000 $ --- Sadler 1996 $ 12,531 $ --- $ --- (CEO)
John 1997 $116,408 $ --- $ --- Gaston 1996 $110,281 $ --- $ --- (Vice- 1995 $106,358 $ --- $ --- President)
Lehi 1997 $111,538 $15,395 $ --- German (Vice- President)
Long-Term Compensation --------------------------------- Awards Payouts --------------------- -------- (a) (b) (f) (g) (h) (i)
Name Restricted Securities All Other and Stock Underlying LTIP Compen- Principal Awards Options/ Payouts sation Position Year ($) SARs(#) ($) ($)
Michael P. 1997 $ --- $ --- $ --- $ 85,994 (1) Sadler 1996 $ --- $ --- $ --- $ --- (CEO)
John 1997 $ --- $ --- $ --- $ 4,568 (2) Gaston 1996 $ --- $ --- $ --- $ 4,411 (Vice- 1995 $ --- $ --- $ --- $ 5,070 President)
Lehi 1997 $ --- $ --- $ --- $126,360 (3) German (Vice- President)
(1)Amount represents contribution to SF Services, Inc.'s 401(k) and deferred compensation plan of $5,012 on behalf of the named individual, 47,260 for relocation expenses, and $33,722 premium paid on a life insurance policy of named individual.
(2)Amount represents contributions to SF Services, Inc's 401(k) and deferred compensation plan on behalf of named individual.
(3)Amount represents $125,000 for the equity in the employee's home which was purchased by the Company as per the employee's employment agreement, and $1,360 premium paid on a life insurance policy of named individual.
Director Compensation
The members of the Board receive per diem compensation of $250 for each meeting for their services as members of the Board, and reimbursement to cover expenses while engaged in the business of SF Services, Inc. The Chairman receives one (1) additional per diem compensation of $250 for each meeting for his services as Chairman. Except for the additional compensation paid the Chairman, no director has any contract, arrangement, or agreement not accorded other directors on equal terms. The amount of the per diem compensation is fixed by the Board.
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
The Company has entered into an agreement effective September 26, 1996, with Michael P. Sadler to serve as President and Chief Executive Officer. In addition to normal compensation, the agreement provides for a guaranteed bonus of $175,000 the first year, and annual bonuses of up to $300,000 per year thereafter. The agreement also provides for an employer furnished automobile, reimbursed business related expenses, and life insurance benefits payable to Mr. Sadler's designated beneficiary. This agreement continues through October 31, 2001; however, the Company may, under certain circumstances, terminate Mr. Sadler's employment for cause, as defined in the agreement.
The Company has entered into an agreement effective April 7, 1997, with Lehi German to serve as Vice President. In addition to normal compensation, the agreement provides for a guaranteed annual bonus of $30,000 the first year, and $15,000 the second year. The agreement also provides for life insurance payable to the employee's designated beneficiary, and the purchase of the employee's home in Kansas City, Missouri, for $550,000. This agreement continues through March 14, 2000; however, the Company may, under certain circumstances, terminate Mr. German's employment for cause, as defined in the agreement.
Compensation Committee Interlocks and Insider Participation
Decisions on compensation of SF Services, Inc.'s executives are made by the Executive Committee of the Board of Directors. The members of the Executive Committee are Johnny Wilson, Doyle Yarbrough, and John Evans. No interlocks exist with respect to the Executive Committee of the Board of Directors.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No individual or "group" (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) owns more than five percent (5%) of the voting stock of SF Services, Inc.
No director or officer of SF Services, Inc. beneficially owns any "equity security" (as that term is defined in Rule 13d-1(d) of the Rules promulgated under the Securities and Exchange Act of 1934, as amended) of SF Services, Inc.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements are included in Part II, Item 8:
Independent Accountants' Report
Financial Statements:
Consolidated Balance Sheets, October 31, 1997 and 1996
Consolidated Statements of Operations, Years Ended October 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Members' Equity, Years Ended October 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows, Years Ended October 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) The following financial schedules are submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) The following exhibits indicated by an asterisk are filed herewith. The balance of the exhibits have heretofore been filed with the Commission and are incorporated herein by reference as indicated:
3(i)- Amended and Restated Articles of Incorporation, as amended (Exhibit 3(a) to Form 10-K for the fiscal year ended October 31, 1991 in 33-38051)
* 3(ii)- By-Laws
10(i) - Employment Contract of Michael P. Sadler (Exhibit 10(a) to Form 10-K for the fiscal year ended October 31, 1996 in 33-38051)
* 10(ii) - Employment Contract of Lehi German
11 - Statement Re: Computation of earnings per share (Comparative per share data for SF Services, Inc. is not presented because the nature of cooperative associations is such that earnings per share information is of little or no significance. Net savings of a cooperative are not distributed to its shareholders based on their respective percentages of share ownership, but rather on the basis of each shareholder's patronage to the entity.)
* 21 - Subsidiaries of the Registrant
* 27 - Financial Data Schedule
Listed below are the only management contracts required to be identified pursuant to Item 14 (a)(3).
Employment contract of Michael P. Sadler Employment contract of Lehi German
(b) Reports on Form 8-K
None
SF SERVICES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Thousand Dollars)
Balance at Charged to Balance at beginning costs and Deductions- end of Description of period expenses describe (a) period - ----------- ---------- ---------- ----------- ------------
OCTOBER 31, 1997
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 950 $ 3,653 $ 1,361 $ 3,242
DEFERRED TAX ASSET VALUATION ALLOWANCE $ 693 $ 2,050 $ -0- $ 2,743
OCTOBER 31, 1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 295 $ 1,362 $ 707 $ 950
DEFERRED TAX ASSET VALUATION ALLOWANCE $ -0- $ 693 $ -0- $ 693
OCTOBER 31, 1995
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 532 $ 127 $ 364 $ 295
(a) Accounts receivable charge-offs net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SF SERVICES, INC. (Registrant)
/s/ Michael P. Sadler -------------------- By: Michael P. Sadler, President (Principal Executive Officer)
Date: February 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Johnny W. Wilson Chairman & Director February 11, 1998 ------------------- Johnny W. Wilson
/s/ Doyle Yarbrough Vice-Chairman & Director February 11, 1998 ------------------- Doyle Yarbrough
/s/ John M. Evans Secretary & Director February 11, 1998 ------------------- John M. Evans
/s/ Frederick Branch Director February 11, 1998 ------------------- Frederick Branch
/s/ Gene Bruick Director February 11, 1998 ------------------- Gene Bruick
/s/ Jerry Conerly Director February 11, 1998 ------------------- Jerry Conerly
/s/ John A. Gaston Senior Vice-President February 11, 1998 ------------------- (Principal Financial and John A. Gaston Accounting Officer)
/s/ Jim Gipson Director February 11, 1998 ------------------- Jim Gipson
/s/ Thomas H. Gist, Jr. Director February 11, 1998 ------------------- Thomas H. Gist, Jr.
/s/ Steven Henderson Director February 11, 1998 ------------------- Steven Henderson
/s/ John C. Jay, Jr. Director February 11, 1998 ------------------- John C. Jay, Jr.
/s/ Robert Little Director February 11, 1998 ------------------- Robert Little
/s/ W. B. Madden, Jr. Director February 11, 1998 ------------------- W. B. Madden, Jr.
/s/ W. S. Patrick Director February 11, 1998 ------------------- W. S. Patrick
/s/ Travis Burchfield Director February 11, 1998 ------------------- Travis Burchfield
/s/ Charlie Starks, Jr. Director February 11, 1998 ------------------- Charlie Starks, Jr.
/s/ Director ------------------- Mike Sturdivant
/s/ Floyd Trammel Director February 11, 1998 ------------------- Floyd Trammel
/s/ Director -------------------- Daniel Viator
/s/ Joe Wilder Director February 11, 1998 ------------------- Joe Wilder
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
Registrant, subsequent to the filing of this Annual Report on Form 10-K, intends to furnish its shareholders with an Annual Report covering the fiscal year ended October 31, 1997. Registrant shall furnish four copies of such Annual Report to the Commission when it is sent to shareholders.
Registrant has not provided and will not provide proxy soliciting material to its shareholders.
EXHIBIT INDEX
The following exhibits indicated by an asterisk are filed herewith. The balance of the exhibits have heretofore been filed with the Commission and are incorporated herein by reference as indicated:
Number in Exhibit Table Exhibit - -------------- ------- 3(i) Amended and Restated Articles of Incorporation, as amended (Exhibit 3(a) to Form 10-K for the fiscal year ended October 31, 1991 in 33-38051)
* 3(ii) By-Laws
10(i) Employment Contract of Michael P. Sadler (Exhibit 10(a) to Form 10-K for the fiscal year ended October 31, 1997 in 33-38051)
* 10(ii) Employment Contract of Lehi German
11 Statement Re: Computation of earnings per share (Comparative per share data for SF Services, Inc. is not presented because the nature of cooperative associations is such that earnings per share information is of little or no significance. Net savings of a cooperative are not distributed to its shareholders based on their respective percentages of share ownership, but rather on the basis of each shareholder's patronage to the entity.)
* 21 Subsidiaries of the Registrant
* 27 Financial Data Schedule
EXHIBIT 21
LIST OF SUBSIDIARIES:
NAME STATE OF INCORPORATION - ------------------------ ----------------------
Cloverleaf Cooperative Mississippi SFA, Inc. Arkansas Deep South Farmers Supply, Inc. Louisiana Professional Technologies, Inc. Arkansas AgGrow Finance, Inc. Arkansas Southern Farm Fish Processors, Inc. Arkansas SF Technical Services, Inc. Arkansas Northeast Arkansas Oil Company, LLC Arkansas