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 April 30, 1999
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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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 1,147 shares of membership stock, par value $125.00, and 11,097,409
shares of equity stock, par value $2.50, outstanding as of June 14, 1999.
FINANCIAL STATEMENTS
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
April 30, July 31,
1999 1998
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................... $11,131 $ 182
Restricted cash (Note 4)........................ 437
Trade accounts receivable ...................... 12,004 12,404
Other receivables .............................. 957 742
----------- -----------
Total receivables .............................. 12,961 13,146
Inventories .................................... 21,651 21,935
Prepaid expenses ............................... 3,543 3,915
----------- -----------
Total current assets ........................ 49,723 39,178
Property and equipment
In service ..................................... 96,176 89,030
Construction in process ........................ 10,107 5,463
Accumulated depreciation ....................... (18,448) (13,518)
----------- -----------
Net property and equipment .................. 87,835 80,975
Investment in St. Paul Bank for Cooperatives
(Note 7) .................................... 1,953 2,086
Other assets ...................................... 1,752 2,298
----------- -----------
Total assets ................................ $141,263 $124,537
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
April 30, July 31,
1999 1998
----------- -----------
(unaudited)
LIABILITIES AND MEMBERS' INVESTMENT
Current liabilities:
Notes payable and current portion of long-term
debt ......................................... $ 4,461 $ 4,033
Accounts payable ............................... 4,687 5,748
Excess outstanding checks over cash on deposit . 2,336
Accrued grower payments ........................ 1,123 1,354
Accrued liabilities ............................ 6,558 2,894
----------- -----------
Total current liabilities ................... 16,146 16,365
Commitments and contingencies .....................
Long-term debt, net of current portion ............ 62,559 66,056
Deferred income taxes ............................. 4,988 4,988
----------- -----------
Total liabilities ........................... 84,376 87,409
----------- -----------
Preferred stock:
Redeemable preferred stock:
Series A, 6%, cumulative $100 par value,
issued 0 and 1,000 shares, respectively .... 100
Series B, 2% non-cumulative, $100 par value,
issued 525 and 1,525, respectively ......... 53 153
----------- -----------
Total preferred stock ....................... 53 253
----------- -----------
Members' investment:
Convertible preferred stock:
Series D, 6% non-cumulative, $100 par value,
issued 0 and 23,038 shares, respectively ..... 2,304
Membership stock, $125 par value, issued 1,147
and 1,101 shares, respectively ............... 143 137
Equity stock, $2.50 par value, issued 11,097,409
and 7,356,059 shares, respectively............ 27,743 18,390
Additional paid in capital ..................... 21,999 4,101
Accumulated allocated earnings ................. 4,895 2,914
Accumulated unallocated earnings ............... 2,054 9,029
----------- -----------
Total members' investment ................... 56,834 36,875
----------- -----------
Total liabilities and members' investment ... $141,263 $124,537
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Three Months Ended
April 30,
1999 1998
----------- -----------
(unaudited)
Net revenues ...................................... $31,907 $34,694
Cost of product sold .............................. 27,325 29,188
----------- -----------
Gross proceeds .............................. 4,582 5,506
Marketing, general and administrative expenses .... 1,910 1,877
----------- -----------
Operating proceeds .......................... 2,672 3,629
Other income (expense):
Interest and other income ...................... 286 4
Interest expense, net .......................... (1,111) ( 967)
Patronage adjustment (Note 7) .................. ( 597)
----------- -----------
Income before income taxes ........................ 1,250 2,666
Income taxes expense ..............................
----------- -----------
Net income business ............................... 1,250 2,666
Dividends on preferred stock ...................... 78 3
----------- -----------
Earnings .......................................... $ 1,172 $ 2,663
=========== ===========
Average equity shares outstanding ................. 8,603 7,356
Fully diluted average equity shares outstanding ... 8,857 7,620
Earnings per average equity share outstanding:
Basic, before cumulative effect of change in
accounting principle ......................... $ .14 $ .36
=========== ===========
Fully diluted, before cumulative effect of
change in accounting principle ............... $ .14 $ .35
=========== ===========
Pro forma amounts assuming the new inventory
valuation method is applied retroactively
(Note 3):
Earnings ..................................... $ 1,172 $ 2,129
=========== ===========
Earnings per average equity share outstanding:
Basic ...................................... $ .14 $ .29
=========== ===========
Fully diluted .............................. $ .14 $ .28
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Nine Months Ended
April 30,
1999 1998
----------- -----------
(unaudited)
Net revenues ...................................... $93,340 $85,166
Cost of product sold .............................. 76,891 69,776
----------- -----------
Gross proceeds .............................. 16,449 15,390
Marketing, general and administrative expenses .... 6,621 4,229
----------- -----------
Operating proceeds .......................... 9,828 11,161
Other income (expense):
Interest and other income ...................... 331 56
Interest expense, net .......................... (3,646) (2,164)
Patronage adjustment (Note 7) .................. ( 597)
----------- -----------
Income before income taxes ........................ 5,916 9,053
Income tax expense ................................
----------- -----------
Net income before cumulative effect of a change
in accounting principle ......................... 5,916 9,053
Cumulative effect on prior years (to July 31, 1998)
of changing to a different inventory valuation
method (Note 3) ................................. (3,429)
----------- -----------
Net income ........................................ 2,487 9,053
Dividends on preferred stock ...................... 143 11
----------- -----------
Earnings .......................................... $ 2,344 $ 9,042
=========== ===========
Average equity shares outstanding ................. 7,772 7,356
Fully diluted average equity shares outstanding ... 8,083 7,485
Earnings per average equity share outstanding:
Basic, before cumulative effect of accounting
change ....................................... $ .74 $ 1.23
Cumulative effect of accounting change ......... ( .44)
=========== ===========
Basic .......................................... $ .30 $ 1.23
=========== ===========
Fully diluted, before cumulative effect of
accounting change............................. $ .71 $ 1.21
Cumulative effect of accounting change ......... ( .42)
=========== ===========
Fully diluted .................................. $ .29 $ 1.21
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS continued
(in thousands)
Nine Months Ended
April 30,
1999 1998
----------- -----------
(unaudited)
Pro forma amounts assuming the new inventory
valuation method is applied retroactively
(Note 3):
Earnings ..................................... $ 5,773 $ 6,414
=========== ===========
Earnings per average equity share outstanding:
Basic ...................................... $ .74 $ .87
=========== ===========
Fully diluted .............................. $ .71 $ .85
=========== ===========
The accompanying notes are an integral part of these financial statements.
6
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
April 30,
1999 1998
----------- -----------
(unaudited)
Cash flows from operating activities:
Net income ..................................... $ 2,487 $ 9,053
Add (deduct) non-cash items:
Depreciation and amortization ................ 5,303 3,262
Non-cash portion of patronage dividend ....... 288 ( 289)
Interest capitalized ......................... ( 306) ( 122)
Changes in assets and liabilities:
Trade receivables ............................ 400 ( 242)
Accounts receivable from growers ............. ( 205)
Other receivables ............................ ( 215) 122
Inventories .................................. 284 (10,543)
Prepaid expenses and other assets ............ 372 (2,513)
Accounts payable ............................. (1,061) (1,015)
Excess outstanding checks over cash on deposit (2,336) (2,366)
Grower payables .............................. ( 231) 779
Other accrued liabilities .................... 3,664 ( 687)
----------- -----------
Net cash from (used in) operating activities 8,649 (4,766)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ............ (11,484) (5,835)
Purchase of Primo Piatto net of cash acquired .. (8,011)
Lease improvements, packaging development and
purchase disposition of other assets ......... 18 ( 757)
---------- -----------
Net cash used in investing activities ........ (11,466) (14,603)
Cash flows from financing activities:
Net issuance of short-term debt ................ 7,974
Issuance of long-term debt ..................... 17,677
Payments on long-term debt ..................... (3,069) (1,311)
Preferred stock retired ........................ (2,792) ( 150)
Dividends on preferred stock ................... ( 143) ( 11)
Membership stock issued (net)................... 6 2
Equity stock issued ............................ 27,539
Patronage distributions ........................ (7,338) (4,745)
----------- -----------
Net cash from financing activities .......... 14,203 19,436
----------- -----------
Net increase (decrease) in cash and cash
equivalents ..................................... 11,386 67
Cash and cash equivalents, beginning of period .... 182 5
----------- -----------
Cash and cash equivalents, end of period .......... $11,568 $ 72
=========== ===========
The accompanying notes are an integral part of these financial statements.
7
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS continued
(in thousands)
Nine Months Ended
April 30,
1999 1998
----------- -----------
(unaudited)
Non-cash investing and financing activities:
Acquisition of Primo Piatto, Inc.
Working capital other than cash .............. $ 1,439
Property and equipment, net .................. 27,721
Deferred income taxes ........................ ( 4,988)
Long-term debt assumed ....................... (13,857)
Preferred stock issued ....................... ( 2,304)
-----------
Cash paid to acquire Primo Piatto, Inc. ...... $ 8,011
===========
The accompanying notes are an integral part of these financial statements.
8
DAKOTA GROWERS PASTA COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
The following notes should be read in conjunction with the notes to financial
statements for the year ended July 31, 1998, as filed in the Company's form
10-K.
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 April 30, 1999, and for the three and nine month periods
ended April 30, 1999 and 1998, 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, 1998, was derived from the Company's audited annual report for
1998. Reclassifications may have been made consistent with current
presentation. Such reclassifications have no effect of the net result of
operations.
The financial information included herein as of April 30, 1999 and July 31, 1998
and for the three and nine month periods ended April 30, 1999 include the
consolidated balances and results of operations of Dakota Growers and its
wholly-owned subsidiary, which was acquired on February 23, 1998. The Company
has accounted for this acquisition by the purchase method, thus, the results of
operations for the nine month period ended April 30, 1998 do not include any of
the results of Primo Piatto, Inc. prior to the date of acquisition. The details
of the acquisition are more fully described in the Company's Form 10-K for the
year ended July 31, 1998. The Company has eliminated intercompany balances, and
intercompany sales and purchases, from the consolidated balances and results of
operations.
NOTE 3. CHANGE IN INVENTORY VALUATION METHOD - In the third quarter of
fiscal year 1999, the method of computing inventory valuations was changed from
the net realizable value method used in prior years to the lower of cost or
market. The impact of this change on prior years (to July 31, 1998) of
$3,429,000 is included as a charge against income for the nine months ended
April 31, 1999. The effect of the change on the three months ended April 30,
1999 was to increase net income $707,000 ($.08 per average share - basic);
the effect of the change on the nine months ended April 30, 1999 was to
increase net income before the cumulative effect of the change in accounting
principle $972,000 ($.13 per average share - basic), and reduce net income
$2,457,000 ($.32 per average share - basic). The effect of the change on the
first and second quarters of fiscal year 1999 is as follows:
9
Three Months Ended
October 31, January 31,
1998 1999
----------- -----------
Net income as originally reported ................. $ 2,001 $ 2,400
Effect of change in inventory valuation method .... 781 ( 516)
----------- -----------
Net income before cumulative effect of change in
inventory valuation method ...................... 2,782 1,884
Cumulative effect on prior years (to July 31, 1998)
of changing to a different inventory valuation
method .......................................... (3,429)
----------- -----------
Net income as restated ............................ $( 647) $ 1,884
Per share amounts - basic:
Net earnings as originally reported ............. $ .26 $ .33
Effect of change in inventory valuation method .. .11 ( .07)
----------- -----------
Net earnings before cumulative effect of change
in inventory valuation method ................. .37 .26
Cumulative effect on prior years (to July 31,
1998) of changing to a different inventory
valuation method .............................. ( .47)
----------- -----------
Net earnings as restated ........................ $( .10) $ .26
=========== ===========
NOTE 4. CASH AND EQUIVALENTS AND RESTRICTED CASH - Cash and cash equivalents
include cash on hand and in financial institutions, and investments with
maturities of less than 90 days. Restricted cash represents certificates of
deposit which are pledged as security for loans made by a financial institution
to officers of the Company to exercise stock options.
NOTE 5. TRADE ACCOUNTS RECEIVABLE AND REVENUE - Trade accounts receivable
are presented net of allowances for cash discounts and doubtful accounts which
totaled $260,000 at April 30, 1999 and $174,000 as of July 31, 1998.
The Company presents its revenues net of discounts and allowances. Such
discounts and allowances totaled $14,195,000 and $6,448,000 for the nine months
ended April 30, 1999 and 1998, respectively. For the three months ended April
30, 1999, discounts and allowances totaled $4,672,000 compared with $2,972,000
for the three months ended April 30, 1998. Reclassifications have been made to
the 1998 results to classify payments made to brokers as a marketing expense
instead of as a reduction in revenues.
NOTE 6. INVENTORIES - Inventories of $21,651,000 at April 30, 1999, include
raw materials of $5,043,000 and finished goods and by-products $16,608,000. At
July 31, 1998, inventories of $21,935,000 included raw materials of $4,120,000
and finished goods and by-products of $17,815,000. The inventories as of April
30, 1999 have been valued using the lower of cost or market methodology, while
inventories as of July 31, 1998 are stated at net realizable value. The pro
forma impact on July 31, 1998 inventories assuming the new inventory valuation
method is applied retroactively is a $3,429,000 reduction of finished goods and
by-products inventory to $14,386,000.
NOTE 7. PATRONAGE ADJUSTMENT - In the third quarter of fiscal year 1999, the
Company was notified of a deterioration in the loan portfolio of the St. Paul
Bank for Cooperatives (the Bank). This deterioration resulted in a
significantly lower patronage refund of interest for calender year 1998 than was
originally
10
estimated by the Company. Additionally, with the pending merger of the Bank
into CoBank, which will be effective July 1, 1999, the Company estimated the
deterioration in the Bank's loan portfolio will reduce the value of its
investment in the Bank upon merger. In the three months ended April 30, 1999,
the Company has recorded an adjustment of its estimated patronage refund and a
write down of the value of its investment in St. Paul Bank for Cooperatives,
totaling $597,000.
NOTE 8. STOCK OFFERING - The Company sold 3,624,782 shares of equity stock
in its stock offering completed February 28, 1999, receiving $27,026,000 in
proceeds, net of $137,000 of costs of the offering. The shares were effective
to participate in the Company's patronage business on April 1, 1999. $2,592,000
of the proceeds were paid to selling preferred shareholders (see Note 10).
NOTE 9. STOCK OPTIONS - The Company's officers exercised options on 4,857
shares of Class C convertible preferred stock, and, meeting the requirements for
membership, converted the preferred stock into 116,568 shares of equity stock.
Such shares were effective to participate in the Company's patronage business on
April 1, 1999. The Company realized proceeds of $513,000 from the exercise of
these options.
NOTE 10. CONVERTIBLE PREFERRED STOCK - On March 1, 1999, the Company
recorded the conversion of its Series D preferred stock into equity stock, and
recorded the payment of $2,592,000 of the proceeds from the stock offering due
the selling shareholders. See the Company's Form S-1/A dated November 19, 1998,
filed with the Securities and Exchange Commission, for details of the agreement
with the selling stockholders.
NOTE 11. 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 nine
months ended April 30, 1999.
NOTE 12. 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, rental income from Company assets and any income taxes assessed
on non-member business. For the nine months ended April 30, 1999, earnings
allocable to patronage business was $5,755,000 before the cumulative effect of
a change in accounting methods and $2,326,000 after the effect of this change.
This compares to $9,509,000 of earnings allocable to patronage business last
year.
NOTE 13. EARNINGS AND DIVIDENDS PER SHARE - The Company allocates its
earnings and patronage distributions based on patronage business (bushels of
durum delivered, which approximates one bushel of durum per equity share). For
11
presentation purposes, it has calculated basic 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
effective and outstanding during the period.
For the periods presented, the Company had outstanding convertible preferred
stock and stock options for convertible preferred stock. Fully diluted earnings
per share have been calculated for the assumed conversion of these dilutive
securities. Because the Company's stock is only traded in a small secondary
market through private transactions, the Company has assumed the proceeds from
the exercise of stock options would reduce debt and, thus, interest expense.
A qualified patronage allocation of $7,338,000, $1.00 per bushel delivered by
members, was authorized by the Board of Directors in October 1998 and
distributed in November 1998. Additionally, $1,981,000, $.27 per bushel, was
allocated to the members but neither distributed nor qualified for income tax
purposes.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Forward-Looking Statements
The following discussion contains forward-looking statements. Such
statements are based on assumptions by the Company's management, as of the date
of this Quarterly Report, and are subject to risks and uncertainties, including
those discussed in the Company's 1998 Form 10-K under "Risk Factors", that could
cause actual results to differ materially from those anticipated. The Company
cautions readers not to place undue reliance on such forward-looking statements.
The Company will not update any forward-looking statements in this Quarterly
Report to reflect future events or developments.
Summary
In the third quarter of fiscal year 1999, the Company made a change in
accounting for its inventory valuation methodology. This change resulted in a
charge to earnings for the nine months ended April 30, 1999 of $3,429,000 (the
impact to July 31, 1998) and is discussed in greater detail in the footnotes to
financial statements and below.
Reflecting a retroactive application of the change in accounting, the Company
had net earnings for the quarter of $1,172,000, down $957,000 from the
$2,129,000 pro forma net earnings for last year. $678,000 of the decline in
earnings can be attributed to loan losses incurred by St. Paul Bank for
Cooperatives, a cooperative bank of which the Company is a member, a major
lender to the Company. The balance of the decrease is primarily due to
competitive pressures in the pasta market. Sales volumes for the quarter were
up only slightly (0.5%).
Earnings for the nine months ended April 30, 1999 of $5,773,000 were down
$641,000 from the pro forma earnings last year, reflecting the impact of the St.
Paul Bank. While volumes for the nine months were up 30%, higher fixed costs
associated with acquired facilities and interest on the financing of this
acquisition, together with market pressures, negated this impact.
Anticipating these competitive pressures, the Company in 1998 embarked on a
focused cost analysis and reduction program. Its mill expansion and other
completed and scheduled capital projects will reduce overall costs. Its
technology additions have been designed to eliminate non-value-added activities
as well as enhance customer communication and service. The mill expansion
project was completed in early May 1999, and several significant cost reduction
projects are scheduled for completion prior to December 1999. The Company has
also identified several non-competitive assets, and has conditonal agreements
for their sale prior to the end of July 1999.
The Company feels it is well positioned for future volume growth, and
continues to aggressively pursue opportunities in the retail, foodservice and
ingredient segments.
Effect of Accounting Change
As discussed in Note 3 to the financial statements for the periods ended
April 30, 1999, the Company changed its method of accounting for valuing its
inventories from the net realizable method to lower of cost or market. This
change was made for a number of reasons.
Over the last 3 years, the Company has experienced a significant increase in
inventory, both in overall quantities as well as in the number of product lines
and number of items. Because of the incompatibility of the net realizable
value
13
methodology of valuing inventory with manufacturing software systems and the
high cost of specialized programming to automate the net realizable value
calculations, the Company has been maintaining manual net realizable value
calculations and analysis, resulting in higher than appropriate administrative
costs. As part of its cost analysis and reduction process, the Company
determined that it was prudent to eliminate these recurring costs.
The adoption of the lower of cost or market method will improve comparability
of the Company's operating results and its financial condition to industry
practice, and provide a better matching of revenues with related costs. The
Company also has experienced frequent and rapid market changes in inventory
values using the net realizable value method, and its results of operations were
impacted by such fluctuations.
The statements of operations for the three and nine months ended April 30,
1999 reflect the results utilizing the new methodology. The impact of this
change on prior years (to July 31, 1998) amounted to a reduction in earnings of
$3,429,000, which was reflected in the statement of operations for the nine
months ended April 30, 1999. If this change had been applied retroactively, the
following pro forma amounts would have been reflected:
Three Months Ended
April 30,
1999 1998
----------- -----------
Net revenues ................................. $31,907 $30,542
Cost of product sold ......................... 27,325 25,570
----------- -----------
Gross proceeds ............................... 4,582 4,972
Net earnings ................................. 1,172 2,129
Nine Months Ended
April 30,
1999 1998
----------- -----------
Net revenues ................................. $93,340 $75,120
Cost of product sold ......................... 76,891 62,358
----------- -----------
Gross proceeds ............................... 16,449 12,762
Net earnings ................................. 5,773 6,414
References to pro forma results in the following discussions refer to the
above pro forma amounts.
The Company's board of directors has not yet made a decision on how to
allocate the cumulative effect of the change in accounting for patronage
purposes. It has been discussed that the cumulative effect be allocated against
prior years' allocated non-qualified earnings, as these earnings arose in part
due to net realizable value accounting. If the board goes forward with this
allocation as discussed, the Company does not anticipate any negative impact on
its cash distributions to members for fiscal year 1999 attributed to the change
in accounting. If the board does not allocate the cumulative effect against
prior years' allocated non-qualified earnings, there will be a negative impact
on current year's cash distributions. Other factors, such as market conditions
in the pasta industry and actions by the St. Paul Bank for Cooperatives, may
also have an impact on such distributions.
14
Results of Operations
Comparison of the Three Months ended April 30, 1999 and 1998
REVENUES - Total revenues decreased $2.8 million, to $31.9 million for the
quarter ended April 30, 1999. If the change in accounting had been applied
retroactively, revenues would have increased $1.4 milion, or 4.5%. Pasta sales
volumes were essentially flat, up only 0.5% for the quarter. The average
revenue per pound increased as a greater portion of sales were in the retail
segment. The Company anticipates future volume growth in all segments, as it
continues to aggressively pursue new opportunities in the retail, foodservice
and ingredient segments, and anticipates pursuing opportunities in the
government bid segment to fill short-term capacity availabilities. Average
prices are anticipated to decline due to the impact of lower durum prices.
Revenues from milling by-products sales declined as the Company utilized
almost 100% of its semolina production for its internal use. Reduced demand in
the livestock feeding industry and increased competition from other sources of
feed also had a negative impact on the comparative quarterly revenues.
COST OF PRODUCT SOLD - Cost of product sold as reported decreased 6% to $27.3
million. Retroactive application of the change in accounting would have
resulted in cost of sales increasing 7%, or $1.8 million. Most of the cost of
sales increase can be attributed to the higher packaging costs associated with
the increase in the retail segment. Pro forma gross margin as a percentage of
revenues decreased from 16% to 14% reflecting competitive pressures in the pasta
market as well as the higher proportion of private label retail sales which
carry a lower margin than other segments.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE (MG&A) - MG&A expense increased
2% over last year. As a percentage of pro forma sales, MG&A decreased from 6.1%
last year to 6% this year.
INTEREST EXPENSE AND PATRONAGE ADJUSTMENT - Interest expense increased
$144,000, primarily due to the Company not estimating any patronage return of
interest on its debt with St. Paul Bank for Cooperatives (the Bank), resulting
in an effective increase in the Company's debt rate and negating the impact of
debt restructuring in July and August 1998. As discussed in Note 7 to the
financial statements for the periods ended April 30, 1999, the Company reversed
a significant portion of its estimated patronage return of interest from the
Bank for calender year 1998 and wrote down its investment in the Bank. The
impact of this reversal and writedown increased expense for the quarter by
$597,000.
NET INCOME - Net income for the quarter of $1,250,000 was down $1.4 million.
If the change in accounting had been applied retroactively, net income would
have declined $882,000, most of which was due to the impacts associated with the
St. Paul Bank for Cooperatives.
Comparison of the Nine Months ended April 30, 1999 and 1998
REVENUES - Total revenues increased $8.2 million. On a pro forma basis,
assuming retroactive application of the change in accounting, revenues would
have increased $18.2 million, or 24%. Pasta sales volumes increased by 30% due
to the addition of new private label retail customers and volume expansions and
acquisitions by several of the Company's existing private label retail and
foodservice customers. The average price of pasta sales increased 5% due to the
higher proportion of private label retail sales.
Revenues from milling by-products sales declined almost $6 million as the
Company utilized 100% of its semolina production for its internal use, while
15
lower prices for by-products due to reduced demand in the livestock feeding
industry and increased competition from other sources of feed also reduced
revenues for the period.
COST OF PRODUCT SOLD - Cost of product sold increased $7.1 million. Applying
the change in accounting retroactively, cost of product sold increased $14.5
million, or 23%. Most of the change was due to the impact of the increase in
volumes sold. Additional increases can be attributed to the higher proportion
of retail sales, as well as fixed costs associated with the Minnesota
facilities. These increases were partially offset by a reduction in average
durum costs per bushel. Pro forma gross margin as a percentage of revenues
increased from 17% last year to 17.6% for the nine months ended April 30, 1999.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE (MG&A) - MG&A expense increased
$2.4 million, or 56% over last year. Most of the increase was due to the
enhancement of the Company's sales and sales support efforts to meet the needs
of new customers and pursue continued growth. The enhancement of the Company's
information technology department and infrastructure to focus on the Year 2000
issue, electronic data interchange and the increasing business requirements also
added to the change. As a percentage of sales, MG&A increased from 5.6% last
year to 7.1% this year, reflecting the higher costs of administering retail
programs.
INTEREST EXPENSE - Interest expense, including the patronage adjustment,
increased $2.1 million, primarily due to the debt issued for the acquisition of
the Minnesota facilities and the impact of operations of the St.Paul Bank for
Cooperatives. Debt restructuring in July and August 1998 have had a positive
impact on the overall average interest rates.
NET INCOME - Net income for the nine months ended April 30, 1999 declined
$6.6 million, with $3.4 million due to the cumulative effect recorded in 1999,
$2.6 million due to the positive impact on 1998's earnings attributed to net
realizable value accounting, and $0.7 million due to the patronage adjustment
and non-accrual of a patronage return of interest in the third quarter of 1999.
Liquidity and Capital Resources
The opening line in Dakota Growers' Mission Statement reads "Dakota Growers
Pasta Company was founded on the dream to provide farmers with the means to
secure a future for themselves and their families." In keeping true to this
statement, the Company attempts to return as much of its earnings as possible
to its members annually, balanced with financial responsibility for ongoing
obligations and future growth opportunities. The Company's liquidity
requirements include the construction or acquisition of manufacturing
facilities and equipment and the expansion of working capital to meet its
growth requirements, as well as providing a fair return to its members. The
Company meets these liquidity requirements from operations, short-term
borrowings under its line of credit, sales of equities and outside debt
financing.
The Company utilizes outside financing on a short-term basis to fund
operations and capital projects until permanent financing is issued. The
Company's short-term line of credit is $15.0 million, none of which is
outstanding as of April 30, 1999.
The Company's long-term financing is provided through various secured term
loans and secured notes. As of April 30, 1999, the Company is in compliance
with the covenants of these agreements. On May 3, 1999, the Company utilized
a portion of its cash position to pay down the variable portions of its debt
16
portfolio, a reduction of $5.2 million, bringing its total outstanding debt,
both classified current and long-term, to $61.8 million.
Operations generated $8.6 million in cash for the nine months ended April
30, 1999, up from the $4.8 million cash used in operations for the same period
last year. While net income after the cumulative effect of change in
accounting declined by $6.6 million, working capital, excluding cash and debt,
declined by $877,000. In 1998, significant increases in inventories and
prepayments resulted in a working capital increase which required $16.7
million.
On a pro forma basis for the nine months ended April 30, 1999, assuming
retroactive application of the change in accounting, earnings before interest,
taxes, depreciation and amortization, commonly referred to as EBITDA,
increased from $11.8 million to $15.1 million. EBITDA is a measure of cash
flow provided by operations.
Cash used in investing activities totaled $11.5 million for the nine months
ended April 30, 1999, relatively unchanged from last year. Most of the
expenditures in 1999 have been for the Company's mill expansion project. In
fiscal year 1999, the Company enhanced its technology infrastructure to focus
on electronic date interchange, process automation and meeting increasing
business requirements. Most of the Company's technology assets are placed
under lease agreements, which allows the Company to stay relatively current
with changing technologies.
Cash from financing activities totaled $14.2 million for the nine months
ended April 30, 1999. Through its stock offering ended February 28, 1999, the
Company received $24.4 million of proceeds, net of expenses of the offering
and payments due the selling preferred shareholders. The proceeds from this
offering have been used for the mill expansion project, a reduction of debt
and the enhancement of the Company's working capital position. In November
1998, the Company paid its members $7.3 million in patronage distributions.
The Company has current commitments for $3.4 million in raw material
purchases, primarily durum purchase commitments from its members. The Company
anticipates additional capital expenditures of $1.5 million through the end of
the fiscal year, primarily the final payments due on the mill expansion.
Additionally, the Company has $2.5 million in capital commitments through the
end of the calendar year for cost reduction projects currently scheduled.
Commitments for monthly lease payments for technology and other assets total
$3.0 million, $1.3 million of which is due in the next twelve months. The
Company currently has no other material commitments.
The Company continues to identify opportunities to reduce operating costs
and enhance its competitive position. It has conditional agreements for the
sale of several non-competitive assets that are currently anticipated to close
prior to the end of the fiscal year. The sale of these assets could net the
Company approximately $3.5 million.
Management believes that net cash currently available and to be provided by
operating activities, along with its available line of credit, will be
sufficient to meet the Company's expected capital and liquidity requirements
for the foreseeable future.
Year 2000
Many computer and other software and hardware systems currently are not, or
will not be, able to read, calculate or output correctly using dates after
1999, and such systems will require significant modification in order to be
17
year 2000 compliant. This issue may have a material adverse effect on the
Company's operations and financial performance because computer and other
systems are integral parts of the Company's, and the Company's suppliers' and
customers', manufacturing and distribution activities, as well as the
Company's accounting, sales and other information systems. In the event of
failure or miscalculation, the Company will have to divert financial resources
and personnel to address this issue.
The Company is in the process of reviewing its computer and other hardware
and software systems, and has begun upgrading systems that are identified as
not being year 2000 compliant. The ERP system (software and hardware), along
with the critical pasta production equipment has been tested, and either
replaced or modified to be year 2000 compliant at this time. The Company
anticipates all existing critical information and processing systems will be
year 2000 compliant by the end of its fiscal year ending July 1999. The
Company has alternate plans in the event any critical system upgrading that is
necessary is not completed on time. The Company believes these alternate
plans are sufficient to meet our internal needs.
Although the Company is not aware of any material operational impediments
associated with making any necessary upgrades to its computer and other
hardware and software systems to be year 2000 compliant, it cannot make any
assurance that the upgrade of its computer systems will be free of defects or
that its alternate plans will be sufficient to meet its needs. If such risks
materialize, the Company could experience material adverse consequences to its
operations and financial performance, substantial costs, or both.
The Company has contacted its significant suppliers and customers as part
of its year 2000 compliance action plan, to identify any potential year 2000
compliance issues with them. The Company is currently unable to anticipate
the magnitude of the operational or financial impact or year 2000 compliance
issues with its suppliers and customers.
The Company expects to incur up to $500,000 during calendar year 1999 to
resolve its year 2000 compliance issues. All expenses incurred in connection
with becoming year 2000 compliant will be expensed as incurred, other than
acquisitions of new software or hardware, which will be capitalized.
18
Part II
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 10-Q
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1 Preferability letter from EideBailly, LLP on change in
accounting principle.
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
19
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: June 23, 1999 /s/ Timothy J. Dodd
---------------- ----------------------------------
Timothy J. Dodd (President and
General Manager, and Principal
Executive Officer)
Date: June 23, 1999 /s/ Thomas P. Friezen
---------------- ----------------------------------
Thomas P. Friezen (Vice President,
Finance and Principal Financial
and Accounting Officer)
20
EXHIBIT 10.1
June 14, 1999
Board of Directors
Dakota Growers Pasta Company
One Pasta Avenue
P.O. Box 21
Carrington, ND 58421-0021
As discussed in Note 3 to the financial statements for the three months ended
April 30, 1999, the Company changed its method of accounting for valuing
substantially all of its inventory from the net realizable value method to
lower of cost or market. The lower of cost or market method was adopted
during 1999 to improve the comparability of the Company's operating results
and its financial condition to industry practice. During the past two years,
the Company has been experiencing significant increases in the number of
products lines and volume of inventory maintained. The Company has also
experienced frequent and rapid market changes in inventory values using the
net realizable value method. Due to these factors, the Company feels the
lower of cost or market method is more practical to maintain and control. The
Company also feels the lower of cost or market method will provide a better
matching of revenues with related costs.
As you have requested, we have discussed with you the circumstances, business
judgement, and other underlying factors that contributed to your decision to
make this accounting change.
Based on our review of the attendant circumstances and discussions with
management, we concur that the newly adopted accounting principle of valuing
inventory at lower of cost or market as described in Note 3 is preferable
under the circumstances.
Because we have not audited any financial statements of the Company as of any
date or for any period subsequent to July 31, 1998, we do not express an
opinion on the financial statements for the three months ended April 30, 1999.
Yours very truly,
Eide Bailly LLP
<TABLE> <S> <C>
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<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
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<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1999
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<PERIOD-END> APR-30-1999 APR-30-1999
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<SECURITIES> 0 0
<RECEIVABLES> 13,221 13,221
<ALLOWANCES> 260 260
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<PP&E> 106,283 106,283
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