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 January 31, 1998
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
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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 1,087 shares of membership stock, par value $125.00, and 7,356,059
shares of equity stock, par value $2.50, outstanding as of March 13, 1998.
<PAGE> 2
FINANCIAL STATEMENTS
DAKOTA GROWERS PASTA COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
1998 July 31,
(Unaudited) 1997
----------- -----------
<C> <C>
(000's omitted)
<S>
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 5 $ 5
Trade accounts receivable, less allowance for
cash discounts and doubtful accounts of
$241,000 and $218,000......................... 9,481 8,048
Accounts receivable from growers ............... 198 49
Other receivables .............................. 164 190
----------- -----------
Total receivables .............................. 9,843 8,292
Inventories .................................... 15,370 8,700
Prepaid expenses ............................... 2,734 536
----------- -----------
Total current assets ........................ 27,952 17,528
Property and equipment
In service ..................................... 60,053 51,380
Construction in process ........................ 933 5,709
Accumulated depreciation ....................... (10,401) ( 8,617)
----------- -----------
Net property and equipment .................. 50,585 48,472
Investment in St. Paul Bank for Cooperatives ...... 1,804 1,804
Other assets ...................................... 1,152 935
----------- -----------
Total assets ................................ $81,493 $68,739
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
DAKOTA GROWERS PASTA COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
1998 July 31,
(Unaudited) 1997
----------- -----------
<C> <C>
(000's omitted)
<S>
LIABILITIES AND MEMBERS' INVESTMENT
Current liabilities:
Notes payable and current portion of long-term
debt ......................................... $ 8,295 $ 2,634
Accounts payable ............................... 4,817 3,432
Excess outstanding checks over cash on deposit . 3,343 2,457
Accrued grower payments ........................ 999 1,116
Dividends payable ..............................
Accrued liabilities ............................ 1,218 1,560
----------- -----------
Total current liabilities ................... 18,672 11,199
Long-term debt, net of current portion ............ 30,878 27,131
----------- -----------
Total liabilities ........................... 49,550 38,330
----------- -----------
Redeemable preferred stock:
Series A, 6%, $100 par value, issued 2,000
shares at January 31, 1998 and 3,000 shares
at July 31, 1997 ............................. 200 300
Series B, 2% non-cumulative, $100 par value,
issued 1,525 shares .......................... 153 153
----------- -----------
Total redeemable preferred stock ............ 353 453
----------- -----------
Members' investment:
Membership stock, $125 par value, issued 1,087
shares at January 31, 1998 and 1,084 shares
at July 31, 1997 ............................. 136 135
Equity stock, $2.50 par value, issued 7,356,059
shares at January 31, 1998, 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 ............... 6,049 6,917
----------- -----------
Total members' investment ................... 31,590 29,956
----------- -----------
Total liabilities and members' investment ... $81,493 $68,739
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
January 31,
(Unaudited)
-----------------------
(000's omitted)
1998 1997
----------- -----------
<C> <C>
<S>
Net revenues (net of discounts and allowances of
$2,332,000 and $1,752,000 for 1998 and 1997,
respectively) .................................. $27,604 $15,985
Cost of product sold .............................. 23,567 13,152
----------- -----------
Gross proceeds .............................. 4,037 2,833
Marketing and general and administrative expenses . 1,062 473
----------- -----------
Operating proceeds .......................... 2,975 2,360
Other income (expense):
Interest and other income ...................... 16 6
Interest expense, net .......................... ( 641) ( 356)
----------- -----------
Income before income taxes ........................ 2,350 2,010
Income taxes expense ..............................
----------- -----------
Net income from patronage and non-patronage
business ....................................... 2,350 2,010
Dividends on preferred stock ...................... 3 6
----------- -----------
Earnings from patronage and non-patronage business
available for members ........................... $ 2,347 $ 2,004
=========== ===========
Average equity shares outstanding ................. 7,356 4,904
Earnings from patronage and non-patronage
business per average equity share outstanding... $ .32 $ .41
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
January 31,
(Unaudited)
-----------------------
(000's omitted)
1998 1997
----------- -----------
<C> <C>
<S>
Net revenues (net of discounts and allowances of
$4,366,000 and $3,422,000 for 1998 and 1997,
respectively) .................................. $50,114 $32,857
Cost of product sold .............................. 41,120 28,155
----------- -----------
Gross proceeds .............................. 8,994 4,702
Marketing and general and administrative expenses . 1,462 778
----------- -----------
Operating proceeds .......................... 7,532 3,924
Other income (expense):
Interest and other income ...................... 52 28
Interest expense, net .......................... ( 1,197) ( 669)
----------- -----------
Income before income taxes ........................ 6,387 3,283
Income tax expense ................................
----------- -----------
Net income from patronage and non-patronage
business ....................................... 6,387 3,283
Dividends on preferred stock ...................... 8 19
----------- -----------
Earnings from patronage and non-patronage business
available for members ........................... $ 6,379 $ 3,264
=========== ===========
Average equity shares outstanding ................. 7,356 4,904
Earnings from patronage and non-patronage
business per average equity share outstanding... $ .87 $ .67
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION.
Six Months Ended
January 31,
(Unaudited)
-----------------------
(000's omitted)
1998 1997
----------- -----------
<C> <C>
<S>
Cash flows from operating activities:
Net income ..................................... $ 6,387 $ 3,283
Add (deduct) non-cash items:
Depreciation and amortization ................ 1,886 1,248
Non-cash portion of patronage dividend ....... ( 128) ( 102)
Interest capitalized ......................... ( 92) ( 163)
Changes in assets and liabilities:
Trade receivables ............................ (1,433) (1,497)
Accounts receivable from growers ............. ( 149) ( 81)
Other receivables ............................ 26 ( 36)
Inventories .................................. (6,670) (2,300)
Prepaid expenses and other assets ............ (2,198) ( 48)
Accounts payable ............................. 1,385 ( 4)
Excess outstanding checks over cash on deposit 886 1,763
Grower payables .............................. ( 117) (1,079)
Other accrued liabilities .................... ( 342) 366
----------- -----------
Net cash from (used in) operating activities ( 559) 1,446
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ............ (3,805) (6,772)
Lease improvements, packaging development and
purchase of other assets ..................... ( 191)
---------- -----------
Net cash used in investing activities ........ (3,996) (6,772)
Cash flows from financing activities:
Net issuance of short-term debt ................ 2,935 1,105
Issuance of long-term debt ..................... 6,500 4,770
Payments on long-term debt ..................... ( 27) ( 21)
Preferred stock retired ........................ ( 100) ( 150)
Dividends on preferred stock ................... ( 8) ( 27)
Membership stock issued (net)................... 1
Patronage distributions ........................ (4,745) (1,800)
----------- -----------
Net cash from financing activities .......... 4,555 3,878
----------- -----------
Net increase (decrease) in cash and cash
equivalents ..................................... (1,448)
Cash and cash equivalents, beginning of period .... 5 1,448
----------- -----------
Cash and cash equivalents, end of period .......... $ 5 $
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DAKOTA GROWERS PASTA COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION - Dakota Growers Pasta Company ("the Company" or
"the Cooperative") is organized as a farmers' cooperative for purposes of
manufacturing food for human consumption from durum and other grain products.
Net proceeds are allocated to patrons who are members on the basis of their
participation in the cooperative.
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.
NOTE 2. FINANCIAL STATEMENT PRESENTATION - The financial information
included herein as at January 31, 1998, and for the six and three month
periods ended January 31, 1998 and 1997, 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 $15,370,000 at January 31, 1998,
include raw materials of $3,556,000 and finished goods and by-products
$11,814,000. 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
six months ended January 31, 1998, net income allocable to patronage business
was $6,790,000 compared to $3,523,000 for the comparable period in 1997, while
non-member business experienced losses of $403,000 and $240,000 respectively.
For the three months ended January 31, 1998 and 1997, net income allocable to
patronage business was $2,699,000 and $2,205,000, 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
shares outstanding during the period. The weighted average number of equity
shares was 7,356,059 for the six and three months ended January 31, 1998,
following the three for two equity stock split effective August 1, 1997, and
4,904,034 for the six and three months ended January 31, 1997.
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.
7
<PAGE> 8
A qualified patronage allocation of $1,800,000, $.50 per bushel, was
authorized by the Board of Directors in October 1996 and was distributed in
November 1996. Additionally, $413,000, $.115 per bushel, was allocated to the
members but not distributed, or qualified for income tax purposes.
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 six
months ended January 31, 1998.
NOTE 7. SUBSEQUENT EVENT - On February 23, 1998, Dakota Growers Pasta
Company acquired 100% of the outstanding stock of Primo Piatto, Inc. (Primo),
a Minnesota-based pasta manufacturer, for cash and convertible preferred stock.
Primo's physical assets consist of two pasta production facilities and a
distribution center located in the Minneapolis, Minnesota metropolitan area.
Primo produces a range of pasta products for distribution under a variety of
retail private labels.
The shares of Primo were acquired for an aggregate consideration consisting
of a cash payment of $11,000,000 and the issuance of 30,000 shares of Dakota
Growers convertible preferred stock. The acquisition was funded by a loan
from the St. Paul Bank for Cooperatives, in a total amount of approximately
$29,000,000. In addition to use of the proceeds of that loan to pay the cash
consideration mentioned above, Dakota Growers used approximately $14,000,000
to refinance certain debt arrangements to which Primo was a party. The
remaining portion of the loan proceeds was used for other Company purposes,
including capital expenditures at the original pasta production plant in
Carrington, North Dakota. The loan arrangement carries quarterly debt
payment and a seven year repayment term. The interest rate on the loan is
variable but may be fixed by Dakota Growers in its discretion; the interest
rate is currently 8.14% per annum.
8
<PAGE>9
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 1,087
members at January 31, 1998. 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.
An expansion project began in fiscal year 1996, resulting in increasing
total annual pasta production capacity to 240 million pounds. The Company's
second mill became operational in late December 1996. Two new production
lines began operation in May 1997 and October 1997.
In July, 1997, the Company entered into agreement 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.
QUARTER ENDED JANUARY 31, 1998 COMPARED TO QUARTER ENDED JANUARY 31, 1997
Revenues increased by $11,619,000, as total pasta volume sold increased by
43%.
Most of the pasta increase was experienced in the retail segment. Sales
in this segment, which increased by 42%, represented 54% of pasta sales for the
quarter. The increase was primarily due to the roll out of six significant
new private label programs, and one co-pack customer. The Company also
experienced increasing sales in government bid sales. While pricing in the
retail segment remains competitive, the average sales price decreased slightly
from last year.
The ingredient segment experienced a 21% increase in pasta volumes, while
the foodservice segment increased 43% from the same quarter last year. The
increase in the ingredient segment was predominantly driven by expanding sales
to one customer which was in the roll out phase last year. The foodservice
sales increase can be attributed to two significant new accounts and sales
growth in several others including government bid sales.
Semolina sales volumes declined as the Company used a greater percentage
of its mill capacity for its internal pasta manufacturing.
Cost of product sold was up $10,415,000. The volume increase in pasta
produced and purchased represented $9.0 million of the increase. Price
decreases for packaging and freight reduced the cost of product sold by
$456,000 while ingredient and warehouse cost rose by $333,000. The average
cost of durum for the quarter increased $.35 per bushel from last year,
increasing expense by $338,000.
Marketing and general and administrative expenses increased $589,000 due
to increased marketing costs and administrative personnel changes.
9
<PAGE> 10
Interest expense increased $318,000 due to a $16.2 million increase in
average borrowings, the result of the borrowings to complete the 1996
production expansion program. The Company capitalized $81,000 of interest to
the major expansion projects during the quarter.
As a result of the above, net income for the quarter was $2,350,000
compared to $2,010,000 last year.
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1997
Revenues increased by $17,257,000, as total pasta volume sold increased by
42%. Sales in the retail pasta segment increased 32%, while ingredient sales
rose 24% and foodservice sales increased 53%. The retail increase was due to
the addition of six significant new retail programs and one new co-pack
customer as well as an increase in government bid sales over the same period
last year. Volumes for most existing private label programs increased as
well. Retail sales continue to make up over 50% of total pasta sales, at 52%
for the period compared to 54% last year.
Most of the increase in ingredient sales continued to be to one significant
customer added last year, but sales to most large ingredient customers also
rose over last year. Foodservice sales increased to 33% of pasta sales
compared to 29% for the period last year. The increase is attributed to the
addition of two new significant accounts and growth in several others,
including increased government sales for the period.
For the year, mill feed and second clear flour prices have decreased, while
average semolina prices are up. Sales volumes in all by-product areas have
increased significantly, with overall sales volumes more than doubling.
Cost of product sold was up $12,965,000. The increased volume in pasta
produced and purchased accounted for $14.1 million of the increase. Price
decreases for packaging, ingredients and freight reduced expense by $1.6
million. The year to date average cost of durum is increasing but remains
less than last year, reducing expenses by $739,000.
Marketing and general and administrative expenses increased $684,000,
primarily due to increased marketing costs. The Company has also added
administration personnel as a result of the increased sales volume.
Interest expense increased $640,000 due to a $12.3 million increase in
average borrowings. Average interest rates increased .86% from last year.
The Company has capitalized $92,000 of interest to the major expansion
projects this year.
As a result of the above, net income increased $3.1 million, more than
doubling from $3,283,000 last year to $6,387,000 for the six months ended
January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was negative as the Company significantly
increased inventory with the roll out of new private label programs. In
addition to the new programs, the Company has increased its inventories for
its existing customers to maintain service levels during the new roll outs.
The Company's seasonal line of credit was increased by the St. Paul Bank of
10
<PAGE> 11
Cooperatives to $11,000,000 in January 1998; this is anticipated to be more
than adequate to fund working capital increases.
For the six months ended January 31, 1998, purchases of property and
equipment totaled $3.9 million. The Company's construction loan with the St.
Paul Bank for Cooperatives provides $18,000,000 in construction financing for
expansion projects, of which $15.8 million is outstanding as of January 31,
1997.
11
<PAGE> 12
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
ACQUISITION OF PRIMO PIATTO, INC. - On February 23, 1998, Dakota
Growers Pasta Company acquired 100% of the outstanding stock of
Primo Piatto, Inc., a Minnesota-based pasta manufacturer, for cash
and convertible preferred stock. The Form 8-K detailing this
transaction and the related debt financing was submitted
electronically to the Securities and Exchange Commission on March
10, 1998.
12
<PAGE> 13
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
Date: March 17, 1998 /s/ Timothy J. Dodd
---------------- ----------------------------------
Timothy J. Dodd (President and
General Manager, and Principal
Executive Officer)
Date: March 17, 1998 /s/ Thomas P. Friezen
---------------- ----------------------------------
Thomas P. Friezen (Vice President,
Finance and Principal Financial
and Accounting Officer)
13
<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> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1998
<PERIOD-START> NOV-01-1997 AUG-01-1997
<PERIOD-END> JAN-31-1998 JAN-31-1998
<CASH> 5 5
<SECURITIES> 0 0
<RECEIVABLES> 10,084 10,084
<ALLOWANCES> 241 241
<INVENTORY> 15,370 15,370
<CURRENT-ASSETS> 27,952 27,952
<PP&E> 60,986 60,986
<DEPRECIATION> 10,401 10,401
<TOTAL-ASSETS> 81,493 81,493
<CURRENT-LIABILITIES> 18,672 18,672
<BONDS> 30,878 30,878
200 200
153 153
<COMMON> 18,527 18,527
<OTHER-SE> 13,063 13,063
<TOTAL-LIABILITY-AND-EQUITY> 81,493 81,493
<SALES> 27,604 50,114
<TOTAL-REVENUES> 27,604 50,114
<CGS> 23,567 41,120
<TOTAL-COSTS> 23,567 41,120
<OTHER-EXPENSES> 1,062 1,462
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 641 1,197
<INCOME-PRETAX> 2,350 6,387
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2,350 6,387
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,350 6,387
<EPS-PRIMARY> .32 .87
<EPS-DILUTED> .32 .87
</TABLE>
