UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 31, 1997
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------------
COMMISSION FILE NUMBER 33-99834
--------------------
DAKOTA GROWERS PASTA COMPANY
(Exact name of registrant as specified in its charter)
NORTH DAKOTA
(State or other jurisdiction of
incorporation or organization)
ONE PASTA AVENUE
CARRINGTON, NORTH DAKOTA
(Address of principal executive offices)
45-0423511
(IRS Employer Identification Number)
58421
(Zip Code)
(701) 652-2855
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No
The number of shares outstanding of the issuer's classes of common
stock was 1,086 shares of membership stock, par value $125.00, and 7,356,059
shares of equity stock, par value $2.50, outstanding as of December 7, 1997.
<PAGE> 2
FINANCIAL STATEMENTS
DAKOTA GROWERS PASTA COMPANY
BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
October 31,
1997 July 31,
(Unaudited) 1997
----------- -----------
<C> <C>
<S>
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 2,157 $ 5
Trade accounts receivable, less allowance for
cash discounts and doubtful accounts of
$206 and $218 ................................ 7,642 8,048
Accounts receivable from growers ............... 1,138 49
Other receivables .............................. 270 190
----------- -----------
Total receivables .............................. 9,050 8,292
Inventories .................................... 9,612 8,700
Prepaid expenses ............................... 2,096 536
----------- -----------
Total current assets ........................ 22,915 17,528
Property and equipment
In service ..................................... 58,322 51,380
Construction in process ........................ 957 5,709
Accumulated depreciation ....................... ( 9,451) ( 8,617)
----------- -----------
Net property and equipment .................. 49,828 48,472
Investment in St. Paul Bank for Cooperatives ...... 1,804 1,804
Other assets ...................................... 1,119 935
----------- -----------
Total assets ................................ $75,666 $68,739
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
DAKOTA GROWERS PASTA COMPANY
BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
October 31,
1997 July 31,
(Unaudited) 1997
----------- -----------
<C> <C>
<S>
LIABILITIES AND MEMBERS' INVESTMENT
Current liabilities:
Notes payable and current portion of long-term
debt ......................................... $ 3,944 $ 2,634
Accounts payable ............................... 5,089 3,432
Excess outstanding checks over cash on deposit . 2,457
Accrued grower payments ........................ 1,369 1,116
Dividends payable .............................. 4,745
Accrued liabilities ............................ 1,466 1,560
----------- -----------
Total current liabilities ................... 16,613 11,199
Long-term debt, net of current portion ............ 29,407 27,131
----------- -----------
Total liabilities ........................... 46,020 38,330
----------- -----------
Redeemable preferred stock:
Series A, 6%, $100 par value, issued 2,500
shares at October 31, 1997 and 3,000 shares
at July 31, 1997 ............................. 250 300
Series B, 2% non-cumulative, $100 par value,
issued 1,525 shares .......................... 153 153
----------- -----------
Total redeemable preferred stock ............ 403 453
----------- -----------
Members' investment:
Membership stock, $125 par value, issued 1,086
shares at October 31, 1997 and 1,084 shares
at July 31, 1997 ............................. 135 135
Equity stock, $2.50 par value, issued 7,356,059
shares at October 31, 1997, and $3.85 par
value, issued 4,904,034 at July 31, 1997...... 18,391 18,881
Additional paid in capital ..................... 4,100 3,610
Accumulated allocated earnings ................. 2,914 413
Accumulated unallocated earnings ............... 3,703 6,917
----------- -----------
Total members' investment ................... 29,243 29,956
----------- -----------
Total liabilities and members' investment ... $75,666 $68,739
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(Unaudited)
-----------------------
<C> <C>
<S>
1997 1996
----------- -----------
Net revenues (net of discounts and allowances of
$2,034 and $1,741 for 1997 and 1996,
respectively) .................................. $22,510 $16,872
Cost of product sold .............................. 17,553 15,003
----------- -----------
Gross proceeds .............................. 4,957 1,869
Marketing and general and administrative expenses . 400 305
----------- -----------
Operating proceeds .......................... 4,557 1,564
Other income (expense):
Interest and other income ...................... 36 22
Interest expense, net .......................... ( 556) ( 313)
----------- -----------
Income before income taxes ........................ 4,037 1,273
Income taxes expense ..............................
----------- -----------
Net income from patronage and non-patronage
business ....................................... 4,037 1,273
Dividends on preferred stock ...................... 5 13
----------- -----------
Earnings from patronage and non-patronage business
available for members ........................... $ 4,032 $ 1,260
=========== ===========
Average equity shares outstanding ................. 7,356 4,904
Earnings from patronage and non-patronage
business per average equity share outstanding... $ .55 $ .26
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(Unaudited)
-----------------------
<C> <C>
<S>
1997 1996
----------- -----------
Cash flows from operating activities:
Net income ..................................... $ 4,037 $ 1,273
Add (deduct) non-cash items:
Depreciation and amortization ................ 877 593
Non-cash portion of patronage dividend ....... ( 36) ( 48)
Interest capitalized ......................... ( 77) ( 82)
Changes in assets and liabilities:
Trade receivables ............................ 406 (1,475)
Accounts receivable from growers ............. (1,089) ( 14)
Other receivables ............................ ( 80) ( 13)
Inventories .................................. ( 912) (2,124)
Prepaid expenses and other assets ............ (1,560) 11
Accounts payable ............................. 1,657 312
Excess outstanding checks over cash on deposit (2,457) 3,051
Grower payables .............................. 253 ( 472)
Other accrued liabilities .................... ( 94) 431
----------- -----------
Net cash from operating activities .......... 925 1,443
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ............ (2,113) (4,412)
Lease improvements, packaging development and
purchase of other assets (191)
----------- -----------
Net cash used in investing activities ........ (2,304) (4,412)
Cash flows from financing activities:
Payments of short-term debt .................... (2,200)
Issuance of long-term debt ..................... 5,800 1,650
Payments on long-term debt ..................... ( 14) ( 9)
Preferred stock retired ........................ ( 50) ( 100)
Dividends on preferred stock ................... ( 5) ( 21)
Membership stock issued (net)................... 1
----------- -----------
Net cash from financing activities .......... 3,531 1,521
----------- -----------
Net increase (decrease) in cash and cash
equivalents ..................................... 2,152 (1,448)
Cash and cash equivalents, beginning of period .... 5 1,448
----------- -----------
Cash and cash equivalents, end of period .......... $ 2,157 $
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DAKOTA GROWERS PASTA COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION - Dakota Growers Pasta Company ("the Company" or "the
Cooperative") was formed on December 16, 1991, and commenced operation on
January 1, 1994. The Company is organized as a farmers= cooperative for
purposes of manufacturing food for human consumption from durum and other
grain products.
The ownership of membership stock, which signifies membership in the
Cooperative, is restricted to producers of agricultural products. The
ownership of equity stock is restricted to members of the Cooperative.
Preferred stock may be held by persons who are not members of the Cooperative.
Net proceeds are allocated to patrons who are members on the basis of their
participation in the Cooperative. Equity requirements, as determined by the
Board of Directors, may be retained from amounts due to patrons and credited
to members= investments in the form of unit retains or undistributed allocated
patronage.
The Cooperative reserves the right to acquire any of its stock offered for
sale and the right to recall the stock of any stockholder. In the event this
right is exercised, the consideration paid for such stock shall be the fair
market value at that point in time.
NOTE 2. FINANCIAL STATEMENT PRESENTATION - The financial information
included herein as at October 31, 1997, and for the three month periods ended
October 31, 1997 and 1996, is unaudited and, in the opinion of the Company,
reflects all adjustments (which include only normal recurring accruals)
necessary for a fair presentation of the financial position as of those dates
and the results of operations for those periods. The information in the
Balance Sheet at July 31, 1997, was derived from the Company's audited annual
report for 1997. Reclassifications may have been made consistent with current
presentation. Such reclassifications have no effect of the net result of
operations.
NOTE 3. INVENTORIES - Inventories of $9,612,000 at October 31, 1997,
include raw materials of $3,076,000 and finished goods and by-products of
$6,536,000. At July 31, 1997, inventories of $8,700,000 included raw
materials of $2,804,000 and finished goods and by-products of $5,896,000.
NOTE 4. PATRONAGE BUSINESS - The Company's business is conducted on a
cooperative basis. The Company calculates income from patronage sources based
on income derived from bushels of durum delivered by members. Non-patronage
income is derived from the resale of spring wheat flour purchased from non-
members and blended with other flours, the resale of pasta purchased from non-
members, the resale of semolina purchased from non-members, interest income on
invested funds and any income taxes assessed on non-member business. For the
three months ended October 31, 1997 and 1996, net income allocable to
patronage business was $4,091,000 and $1,318,000, respectively, while non-
member business experienced losses of $54,000 and $45,000 respectively.
NOTE 5. EARNINGS AND DIVIDENDS - The Company allocates its patronage
earnings and patronage distributions based on patronage business (bushels of
durum delivered, which approximates one bushel of durum per equity share).
For presentation purposes, it has calculated net income per share by dividing
earnings from patronage and non-patronage business available for members (net
income less preferred dividends) by the weighted average number of equity
6
<PAGE> 7
shares outstanding during the period. The weighted average number of equity
shares was 7,356,059 for the three months ended October 31, 1997, and
4,904,034 for the three months ended October 31, 1996.
In July, 1997 the Board of Directors voted to split the outstanding equity
stock on a three for two basis, such split to be effective August 1, 1997.
The Board of Directors also voted to adjust the par value per share to $2.50.
Each member of record as of that date received three shares of equity stock,
par value $2.50, in exchange for each two shares of equity stock owned as of
August 1, 1997, par value $3.85. With said stock split, the Company has the
above mentioned 7,356,059 shares of equity stock outstanding.
A qualified patronage allocation of $4,745,000, $1.00 per bushel, was
authorized by the Board of Directors in October 1997 and distributed in
November 1997. Additionally, $2,501,000, $.527 per bushel, was allocated to
the members but neither distributed nor qualified for income tax purposes.
A qualified patronage allocation of $1,800,000, $.50 per bushel, was
authorized by the Board of Directors and distributed to members in November
1996.
NOTE 6. INCOME TAXES - The Company is a non-exempt cooperative as defined
by Section 1381 (a)(2) of the Internal Revenue Code. Accordingly, net margins
from business transacted with member patrons which are allocated, qualified
and paid as prescribed in Section 1382 of the code will be taxable to the
members and not to the Company. Net margins and member allocations are
determined on the basis of accounting used for financial reporting purposes.
To the extent that net margins are not allocated and paid as stated above or
arise from business done with non-members, the Company shall have taxable
income subject to corporate income tax rates. Cooperative organizations have
8 1/2 months after their fiscal year-end to make such allocations in the form
of written notices of allocation or cash.
The Company has not established any provision for income taxes for the three
months ended October 31, 1997.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company is a North Dakota agricultural cooperative and has 1,086
members at October 31, 1997. Membership in the Company is limited to
agricultural producers whose operations are located within the states of North
Dakota, Minnesota or Montana. The Company mills durum wheat into semolina,
which is sold or used for the manufacture of the Company's pasta products.
The pasta products are then marketed and sold by the Company. The Company
also sells by-products of the milling process.
The Company competes in all segments of the dry pasta market: retail
(primarily private label, but also through its branded labels Pasta Growers,
Zia Briosa and Pasta Sanita), foodservice (primarily as a private label
supplier) and ingredient. The Company's facilities are inspected semi-
annually by the American Institute of Baking ("AIB") for sanitation and food
safety, and has achieved a "superior" rating, the highest awarded by the AIB.
Beginning late in fiscal year 1996, the Company began an expansion project
which doubled its milling and pasta manufacturing capacities. The Company's
second mill became operational in late December 1996. The first of two new
pasta lines began operation in May 1997, and the second new pasta production
line began operation in October 1997, bringing total annual pasta production
capacity to 240 million pounds.
In July, 1997 the Company entered into agreements to purchase a seventh
pasta line, a short goods line with capacity up to 30 million pounds. This
line is expected to begin production in June, 1998.
The cost of durum, ingredients, packaging and freight constitute a major
portion of the cost of product sold. These costs will increase or decrease
with changes in sales volumes. The cost of production is also significantly
impacted by changes in durum wheat prices. Such durum wheat prices are
influenced by the quantity of milling quality durum available as well as the
export practices of Canada. The Company is able to partially offset this risk
through sales agreements which allow for price adjustments with fluctuations
in the durum/flour markets.
The 1997 durum wheat harvest was the fourth smallest in the last 15 years.
In anticipation of this, the Company was successful in arranging for the
procurement of adequate durum supplies prior to the harvest at favorable
rates. This effort had a significant positive impact on the first quarter of
fiscal year 1998's results. Subsequent higher durum prices are anticipated
for the remainder of the year.
QUARTER ENDED OCTOBER 31, 1997 COMPARED TO QUARTER ENDED OCTOBER 31, 1996
Net revenues increased by $5.6 million, or 33%, as pasta volume sold
increased by 41%.
Retail sales increased 34% over the same quarter last year and represented
49% of total sales, down from 54% last year. The increase was due to the
addition of two new retail customers and one co-pack customer as well as an
increase in government bid sales over the same quarter last year. The Company
anticipates this segment will increase as a percentage of pasta sales over the
year as it continues to add to its customer base and its existing customers
continue the growth trends of the last year.
8
<PAGE> 9
Foodservice sales represented 35% of the quarter sales compared to 29% last
year. Foodservice sales volumes were up 61% with the addition of two
significant new accounts and sales growth in several others.
Ingredient sales increased by 26% for the quarter and remained relatively
constant as a percentage of total sales at 16%.
Overall, revenues were up by approximately $8.1 million due to pasta sales
volume increases. Lower average revenue per pound of pasta reduced revenues
by almost $1 million.
In the by-products sales, offsetting a significant increase in semolina
sales volumes was a reduction in pricing for semolina sales, which decreased
corresponding with the durum price decline. Increased mill feed sales volumes
were similarly offset by pricing reductions.
Cost of product sold was up $2.6 million primarily due to a 37% increase in
pasta produced and purchased. The volume change represented $5.6 million of
the increase. Pricing on packaging, freight, ingredients and purchased pasta
decreased from the same period last year, reducing expense by $1.8 million.
The average cost of durum was down $1.19 per bushel from last year, reducing
expense by $1.1 million.
Marketing and general and administrative expenses were up $94,000,
predominantly due to increased marketing staffing and activities and increased
information technology expenditures.
Interest expense increased $226,000 due to an $11.6 million increase in
average borrowings, the result of borrowing for construction activity,
partially offset by a .83% reduction in the average interest rate. The
Company capitalized $77,000 of interest to the major expansion projects during
the quarter.
As a result of the above, net income for the quarter was $4,037,000
compared to $1,273,000 last year.
LIQUIDITY AND CAPITAL RESOURCES
Operations generated $925,000 in positive cash flow in the first quarter of
fiscal year 1998. This amount reflects reductions in cash flows associated
with increased receivables, inventories and prepaid expenses, together with a
decrease in payables. The Company's $5.0 million seasonal line of credit is
anticipated to be more than adequate to fund its working capital requirements.
For the three months ended October 31, 1997, purchases of property and
equipment totaled $2.1 million. The Company anticipates expending an
additional $2.0 million completing the 1997 pasta production expansion
projects.
The Company added $3.6 million in outstanding debt during the quarter, and
in late October 1997, locked up a significant portion of its 3 to 7-year debt
maturities at interest rates, after anticipated patronage credits, ranging
from 7.6% to 7.9%. The Company's construction term loan agreement with the
St. Paul Bank for Cooperatives provides $18,000,000 in construction financing
for the 1997 expansion projects; $14.5 million is outstanding as of the date
of this filing.
9
<PAGE> 10
Part II
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
(b) Reports on Form 8-K
None
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dakota Growers Pasta Company
<TABLE>
<S> <C>
Date: December 7, 1997 /s/ Timothy J. Dodd
---------------- ----------------------------------
Timothy J. Dodd (President and
General Manager, and Principal
Executive Officer)
Date: December 7, 1997 /s/ Thomas P. Friezen
---------------- ----------------------------------
Thomas P. Friezen (Vice President,
Finance and Principal Financial
and Accounting Officer)
11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON
FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 2,157
<SECURITIES> 0
<RECEIVABLES> 9,256
<ALLOWANCES> 206
<INVENTORY> 9,612
<CURRENT-ASSETS> 22,915
<PP&E> 59,279
<DEPRECIATION> 9,451
<TOTAL-ASSETS> 75,666
<CURRENT-LIABILITIES> 16,613
<BONDS> 29,407
250
153
<COMMON> 18,526
<OTHER-SE> 10,717
<TOTAL-LIABILITY-AND-EQUITY> 75,666
<SALES> 22,510
<TOTAL-REVENUES> 22,510
<CGS> 17,553
<TOTAL-COSTS> 17,553
<OTHER-EXPENSES> 400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 520
<INCOME-PRETAX> 4,037
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,037
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
