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Previous: TAYLOR CALVIN B BANKSHARES INC, 10KSB, 2000-03-16 |
Next: DAKOTA GROWERS PASTA CO, 10-Q, 2000-03-16 |
U.S. 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, 2000 | ||
| |
|
or |
| / / |
|
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File No. 33-99834
DAKOTA GROWERS PASTA COMPANY
(Exact name of registrant as specified in its charter)
| North Dakota (State of incorporation) |
45-0423511 (IRS Employer Identification No.) |
One Pasta Avenue, P.O. Box 21, Carrington, ND 58421-0021
(Address of principal executive offices including 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
The number of shares outstanding of the Registrant's classes of common stock were 1,144 shares of membership stock, par value $125.00, and 11,154,769 of equity stock, par value $2.50, as of January 31, 2000.
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Information)
| |
(Unaudited) January 31, 2000 |
July 31, 1999 |
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|---|---|---|---|---|---|---|---|
| ASSETS | |||||||
| CURRENT ASSETS | |||||||
| Cash and cash equivalents | $ | 734 | $ | 3,425 | |||
| Short-term investments (restricted) | 812 | 513 | |||||
| Receivables | |||||||
| Trade accounts receviable, less allowance for cash discounts and doubtful accounts of $245 and $193, respectively | 13,758 | 15,843 | |||||
| Other receivables | 1,554 | 1,751 | |||||
| 15,312 | 17,594 | ||||||
| Short-term note receivable | — | 1,884 | |||||
| Inventories | 22,649 | 18,681 | |||||
| Prepaid expenses | 1,302 | 1,790 | |||||
| Total current assets | 40,809 | 43,887 | |||||
| PROPERTY AND EQUIPMENT | |||||||
| In service | 108,935 | 107,151 | |||||
| Construction in process | 2,393 | 547 | |||||
| 111,328 | 107,698 | ||||||
| Less accumulated depreciation | (24,162 | ) | (20,529 | ) | |||
| Net property and equipment | 87,166 | 87,169 | |||||
| INVESTMENT IN COOPERATIVE BANKS | 1,993 | 2,073 | |||||
| OTHER ASSETS | 2,904 | 2,744 | |||||
| $ | 132,872 | $ | 135,873 | ||||
(continued on next page)
2
| |
(Unaudited) January 31, 2000 |
July 31, 1999 |
||||
|---|---|---|---|---|---|---|
| LIABILITIES AND MEMBERS' INVESTMENT |
||||||
| CURRENT LIABILITIES | ||||||
| Notes payable and current portion of long-term debt | $ | 9,349 | $ | 3,194 | ||
| Accounts payable | 3,389 | 3,860 | ||||
| Accrued grower payments | 825 | 1,119 | ||||
| Accrued liabilities | 3,533 | 4,563 | ||||
| Deferred income taxes | — | 86 | ||||
| Total current liabilities | 17,096 | 12,822 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||
| LONG-TERM DEBT, net of current portion | 53,023 | 59,116 | ||||
| DEFERRED INCOME TAXES | 4,829 | 4,900 | ||||
| Total liabilities | 74,948 | 76,838 | ||||
| PREFERRED STOCK | ||||||
| Redeemable preferred stock | ||||||
| Series A, 6% non-cumulative, $100 par value, issued 800 shares as of January 31, 2000 | 80 | — | ||||
| Series B, 2% non-cumulative, $100 par value, issued 525 shares | 53 | 53 | ||||
| Total preferred stock | 133 | 53 | ||||
| MEMBERS' INVESTMENT | ||||||
| Convertible preferred stock | ||||||
| Series C, 6% non-cumulative, $100 par value, issued 4,878 shares as of January 31, 2000 | 502 | — | ||||
| Membership stock, $125 par value, issued 1,144 and 1,152 shares as of January 31, 2000 and July 31, 1999, respectively | 143 | 144 | ||||
| Equity stock, $2.50 par value, issued 11,154,769 and 11,097,409 shares as of January 31, 2000 and July 31, 1999, respectively | 27,887 | 27,743 | ||||
| Additional paid-in capital | 22,712 | 22,074 | ||||
| Accumulated allocated earnings | 1,931 | 4,896 | ||||
| Accumulated unallocated earnings | 4,616 | 4,125 | ||||
| Total members' investment | 57,791 | 58,982 | ||||
| Total liabilities and members' investment | $ | 132,872 | $ | 135,873 | ||
See Notes to Consolidated Financial Statements
3
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Information) (Unaudited)
| |
Three Months Ended January 31, |
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|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
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| Net revenues (net of discounts and allowances of $4,558 and 5,073, respectively) | $ | 33,969 | $ | 31,433 | |||
| Cost of product sold | 29,458 | 25,978 | |||||
| Gross proceeds | 4,511 | 5,455 | |||||
| Marketing, general and administrative expenses | 2,083 | 2,344 | |||||
| Operating proceeds | 2,428 | 3,111 | |||||
| Other income (expense) | |||||||
| Interest and other income | 157 | 43 | |||||
| Gain on sale of property and equipment | 9 | — | |||||
| Interest expense, net | (1,253 | ) | (1,271 | ) | |||
| Income before income taxes | 1,341 | 1,883 | |||||
| Income tax benefit | 500 | — | |||||
| Net income from patronage and non-patronage business | 1,841 | 1,883 | |||||
| Dividends on preferred stock | — | — | |||||
| Net earnings from patronage and non-patronage business available for members | $ | 1,841 | $ | 1,883 | |||
| Average equity shares outstanding | 11,136 | 7,356 | |||||
| Net earnings from patronage and non-patronage business per average equity share outstanding | |||||||
| Basic | $ | 0.17 | $ | 0.26 | |||
See Notes to Consolidated Financial Statements
4
| |
Six Months Ended January 31, |
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|---|---|---|---|---|---|---|---|
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2000 |
1999 |
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| Net revenues (net of discounts and allowances of $9,580 and 9,523, respectively) | $ | 69,664 | $ | 61,433 | |||
| Cost of product sold | 58,231 | 49,566 | |||||
| Gross proceeds | 11,433 | 11,867 | |||||
| Marketing, general and administrative expenses | 4,954 | 4,711 | |||||
| Operating proceeds | 6,479 | 7,156 | |||||
| Other income (expense) | |||||||
| Interest and other income | 282 | 45 | |||||
| Gain on sale of property and equipment | 9 | — | |||||
| Interest expense, net | (2,385 | ) | (2,535 | ) | |||
| Income before income taxes | 4,385 | 4,666 | |||||
| Income tax benefit | 500 | — | |||||
| Income before cumulative effect of change in accounting principle | 4,885 | 4,666 | |||||
| Cumulative effect on prior years (to July 31, 1998) of changing to a different inventory valuation method | — | (3,429 | ) | ||||
| Net income from patronage and non-patronage business | 4,885 | 1,237 | |||||
| Dividends on preferred stock | 1 | 65 | |||||
| Net earnings from patronage and non-patronage business available for members | $ | 4,884 | $ | 1,172 | |||
| Average equity shares outstanding | 11,117 | 7,356 | |||||
| Net earnings from patronage and non-patronage business per average equity share outstanding | |||||||
| Basic, before cumulative effect of accounting change | $ | 0.44 | $ | 0.63 | |||
| Cumulative effect of accounting change | — | (0.47 | ) | ||||
| Basic | $ | 0.44 | $ | 0.16 | |||
See Notes to Consolidated Financial Statements
5
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
| |
Six Months Ended January 31, |
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|---|---|---|---|---|---|---|---|
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2000 |
1999 |
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| OPERATING ACTIVITIES | |||||||
| Net income | $ | 4,885 | $ | 1,237 | |||
| Add (deduct) non-cash items | |||||||
| Cumulative effect of changing to a different inventory valuation method | 3,429 | ||||||
| Depreciation and amortization | 3,970 | 3,694 | |||||
| Non-cash portion of patronage dividends | 18 | (113 | ) | ||||
| Cooperative bank stock valuation adjustment | 80 | ||||||
| Gain on sale of property and equipment | (9 | ) | |||||
| Deferred income taxes | (157 | ) | |||||
| Changes in assets and liabilities | |||||||
| Trade receivables | 2,085 | 3,040 | |||||
| Other receivables | 197 | (465 | ) | ||||
| Inventories | (3,968 | ) | (6,057 | ) | |||
| Prepaid expenses | 488 | 355 | |||||
| Other assets | (110 | ) | |||||
| Accounts payable | (471 | ) | 2,921 | ||||
| Excess outstanding checks over cash deposits | (2,336 | ) | |||||
| Growers payables | (294 | ) | (875 | ) | |||
| Other accrued liabilities | (1,030 | ) | 1,362 | ||||
| NET CASH FROM OPERATING ACTIVITIES | 5,684 | 6,192 | |||||
| INVESTING ACTIVITIES | |||||||
| Purchases of property and equipment | (3,794 | ) | (8,953 | ) | |||
| Proceeds from sale of property and equipment | 62 | ||||||
| Receipts on note receivable | 1,884 | ||||||
| Net purchase of short-term investments | (299 | ) | |||||
| Payments for package design costs | (294 | ) | (119 | ) | |||
| NET CASH USED IN INVESTING ACTIVITIES | (2,441 | ) | (9,072 | ) | |||
| FINANCING ACTIVITIES | |||||||
| Net change in short-term debt | 6,875 | ||||||
| Payments on long-term debt | (6,813 | ) | (3,039 | ) | |||
| Preferred stock issued | 58 | ||||||
| Retirements of preferred stock | (150 | ) | |||||
| Dividends paid on preferred stock | (1 | ) | (65 | ) | |||
| Memberships issued (retired), net | (1 | ) | 2 | ||||
| Proceeds of stock offering | 27,027 | ||||||
| Preferred stock retirement commitment | (2,592 | ) | |||||
| Options exercised | 1,306 | ||||||
| Patronage distributions | (7,358 | ) | (7,338 | ) | |||
| NET CASH FROM (USED IN) FINANCING ACTIVITIES | (5,934 | ) | 13,845 | ||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (2,691 | ) | 10,965 | ||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 3,425 | 182 | |||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 734 | $ | 11,147 | |||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||
| Cash payments for Interest |
$ | 1,378 | $ | 2,535 | |||
| Income taxes | $ | 534 | |||||
See Notes to Consolidated Financial Statements
6
DAKOTA GROWERS PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following notes should be read in conjunction with the notes to the financial statements for the year ended July 31, 1999 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 of January 31, 2000 and for the six and three month periods ended January 31, 2000 and 1999, is unaudited and, in the opinion of management, reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position and results of operations for the interim periods presented. The information contained in the balance sheet as of July 31, 1999 was derived from the Company's audited annual report for 1999. Reclassifications may have been made to facilitate comparability with current presentation. Such reclassifications have no effect on the net results of operations.
The financial information presented herein includes the consolidated balances and results of operations of Dakota Growers Pasta Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated.
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 lower of cost or market, determined on a FIFO basis, using product specific standard costs. As required by generally accepted accounting principles, the impact of this change on prior years (July 31, 1998) of $3,429,000 is included as a charge against income for
7
the six months ended January 31, 1999 presented herein. The restatement of the three and six month periods ended January 31, 1999 is as follows:
| |
Three Months Ended January 31, 1999 |
Six Months Ended January 31, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| Net income as originally reported | $ | 2,400 | $ | 4,401 | |||
| Effect of change in inventory valuation method | (517 | ) | 265 | ||||
| Net income before cumulative effect of change in inventory valuation method | 1,883 | 4,666 | |||||
| Cumulative effect on prior years (to July 31, 1998) of changing to different inventory valuation method | — | (3,429 | ) | ||||
| Net income as restated | $ | 1,883 | $ | 1,237 | |||
| Per share amounts—basic: | |||||||
| Net earnings as originally reported | $ | 0.33 | $ | 0.59 | |||
| Effect of change in inventory valuation method | (0.07 | ) | 0.04 | ||||
| Net earnings before cumulative effect of change in inventory valuation method | 0.26 | 0.63 | |||||
| Cumulative effect on prior years (to July 31, 1998) of changing to a different inventory valuation method | — | (0.47 | ) | ||||
| Net earnings as restated | $ | 0.26 | $ | 0.16 | |||
NOTE 4—CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in financial institutions, and investments with maturities of less than 90 days.
NOTE 5—SHORT-TERM INVESTMENTS (RESTRICTED)
Short-term investments (restricted) represent 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 6—INVENTORIES
Inventories are valued at lower of cost or market. Inventories as of January 31, 2000 include raw materials of $6,320,000 and finished goods of $16,329,000. Inventories at July 31, 1999 include raw materials of $5,435,000 and finished goods of $13,246,000.
NOTE 7—INVESTMENTS IN COOPERATIVE BANKS
Investments in cooperative banks are stated at cost, plus unredeemed patronage refunds received in the form of capital stock.
8
In the second quarter of fiscal year 2000, the Company was notified of possible reductions in the Company's estimated patronage refunds from CoBank as well as the Company's investment in CoBank. In the three months ended January 31, 2000, the Company has recorded a charge against income for the adjustment of its estimated patronage refund and a write down in the value of its investment in CoBank totaling $184,000.
NOTE 8—LOAN AGREEMENT
In November 1999, the Company renewed its $15 million seasonal line of credit with CoBank. The seasonal loan has a variable interest rate and matures on December 31, 2000. It is secured by property, equipment, and current assets of the Company. The balance outstanding on the line of credit totaled $6,875,000 as of January 31, 2000.
NOTE 9—STOCK OPTIONS
During the second quarter of fiscal year 2000, the Board of Directors rescinded certain qualified stock options with a total exercise price totaling $585,000 for 3,697 shares of Class C convertible preferred stock. The Board approved the issuance of nonqualified stock options for 5,046 shares of Class C preferred stock and a total exercise price of $908,000.
The Company's officers exercised stock options on 6,454 shares of Class C preferred stock, of which 1,432 shares were converted into 16,368 shares of equity stock. The Company realized proceeds totaling $1,162,000 from the exercise of these options.
NOTE 10—INCOME TAXES
The Company is a non-exempt cooperative as defined by Section 1381(a)(2) of the Internal Revenue Code ("Code"). Accordingly, net margins from business transacted with its 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 81/2 months after their fiscal year end to make such allocations in the form of written notices of allocation or cash.
The Company has recorded an income tax benefit of $500,000 for the three months ending January 31, 2000. The benefit relates to a reclassification of approximately $2,000,000 of income from nonpatronage to patronage for the year ended July 31, 1999. The reclassification was based on cooperative income tax developments taking place in the second quarter of fiscal year 2000.
NOTE 11—PATRONAGE BUSINESS
The Company's business is conducted on 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, certain amounts of interest income, rental income from Company assets and any income taxes
9
assessed on non-member business. For the six months ended January 31, 2000, net earnings allocable to patronage business totaled $4,979,000. This compares to $4,336,000 of earnings before the cumulative effect of a change in accounting method allocable to patronage business last year.
NOTE 12—EARNINGS 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 presentation purposes, it has calculated basic net earnings 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.
The Company had convertible preferred stock and stock options for convertible preferred stock outstanding during the periods presented. Fully diluted earnings per share are calculated for the assumed conversion of these dilutive securities. As 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. Fully diluted earnings per share are not presented, as the dilutive effect of outstanding convertible preferred stock and stock options is not material for the periods presented.
NOTE 13—DIVIDENDS
The qualified patronage allocation of $5,787,000 ($.70 per bushel patronage) and $.10 per share dividend authorized by the Board of Directors in October were rescinded at the January 2000 Board meeting. This was done in response to the reclassification of $2,000,000 of income from nonpatronage to patronage for the year ended July 31, 1999 described in Note 11. The Board then voted to qualify and allocate $7,358,000 ($.89 per bushel acquired or $.86 per average outstanding equity share) of the revised core patronage income for fiscal year 1999. The total qualified patronage allocation was paid in cash, a portion of which was paid in November 1999 and the remainder in January 2000. The Board also voted to allocate, on a non-qualified basis, the remainder of the fiscal 1999 patronage earnings before cumulative effect of the change in accounting principle, which totaled $464,000. The Board had previously voted, at the October meeting, to allocate the $3,429,000 cumulative effect of the change in accounting principle proportionately against prior non-qualified, allocated accumulated earnings.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 1999 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 the Quarterly Report to reflect future events or developments.
Summary
Pasta sales volumes increased in comparison to last year. Highly competitive pricing due to over-capacity within the dry pasta industry continues to largely offset the volume increases.
The Company continues to focus on cost analysis and reduction programs. Technology improvements have been implemented to eliminate non-value-added activities as well as enhance customer communication and service. Inventories have increased in conjunction with the anticipated implementation of new rail programs that will reduce freight costs. The implementation of a robotic palletizing system will result in greater efficiency and cost reduction in the palletizing area. However, gains realized as a result current cost saving measures have been offset by lower than anticipated pasta prices due to the over-capacity situation in the industry.
The Company continues to invest in maintaining market share, and will aggressively pursue opportunities in all segments of the pasta market. It is committed to maintaining its current customer base while continually exploring new business opportunities to improve production efficiencies at all manufacturing sites.
Effect of Accounting Change
As discussed in Note 3 to the financial statements, the Company changed its method of accounting for inventory valuation from the net realizable method to the lower of cost or market method, determined on a FIFO basis, using product specific standard costs in fiscal year 1999. The statements of operations for the three and six months ended January 31, 1999 reflect the results using 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 six months ended January 31, 1999.
References to pro forma results in the discussion herein refer to the restated results for the three and six month periods ended January 31, 1999, before the cumulative effect of the change in accounting principle.
Results of Operations
Comparison of the Three Months Ended January 31, 2000 and 1999
Net Revenues. Total revenues increased $2.5 million, or 8%, to $34.0 million for the quarter ended January 31, 2000. While pasta sales volumes increased 11%, the average sales price per pound of pasta declined due to market pressures related to an over-capacity of pasta production in North America. These market pressures have resulted in a decline in gross margin from last year.
Revenues from the retail segment increased by 6% while retail volumes increased 12%. The volume increase was offset by price reduction due to competitive pressure. Foodservice revenues increase by 16%, primarily due to increased sales resulting from expansions and acquisitions made by several of the
11
Company's current customers. Ingredient revenues increased by 8% due to new customers and increased sales to current customers.
The Company markets semolina production in excess of its own requirements as well as by-products of durum milling. Revenues from by-product sales increased by 45% due to an increase in durum grind, resulting from the completion of the mill expansion project in May 1999, along with an increase in average selling prices compared to the second quarter of fiscal 1999.
Cost of Product Sold. Cost of product sold increased 13% to $29.5 million. The $3.5 million increase was mainly due to an increase in sales volumes. Pro forma gross margin decreased reflecting market pressures.
Marketing, General, and Administrative ("MG&A") Expenses. MG&A expenses decreased $261,000, or 11%, from last year. MG&A as a percentage of net revenues decreased to 6.1% compared to 7.5% for the corresponding period in the prior year.
Interest Expense. Interest expense decreased by $18,000 while average outstanding debt decreased by $15 million. In the second quarter of fiscal year 2000, the Company was notified of possible reductions in its estimated patronage refunds from CoBank ("the Bank") as well as its investment in CoBank. The Company has recorded an adjustment of its estimated patronage refund and a write down in the value of its investment in CoBank totaling $184,000. The CoBank patronage and investment adjustments largely offset the decrease in average outstanding debt.
Income Taxes. The Company has recorded an income tax benefit of $500,000 for the three months ending January 31, 2000. The benefit relates to a reclassification of approximately $2,000,000 of income from nonpatronage to patronage for the year ended July 31, 1999. The reclassification was based on cooperative income tax developments taking place in the second quarter of fiscal year 2000.
Net Income. Net income decreased by $42,000, essentially unchanged from last year.
Comparison of the Six Months Ended January 31, 2000 and 1999
Net Revenues. Net revenues increased $8.2 million, or 13%. While pasta sales volumes increased 18%, the average sales price per pound decreased due to contractual price adjustments based on lower raw material costs, and market pressures due to the lower raw material costs and an over-capacity of pasta production in North America.
Revenues from the retail market increased 11%, while volumes were up 19%. Again volume increases were offset by price reductions due to competitive pressures caused by over-capacity and lower raw material costs. Foodservice revenues increased by 21%, primarily due to expansions and acquisitions made by current customers. Ingredient revenues were up 20% primarily due to increased sales to existing customers.
Revenues from milling by-product sales increased by 52% due to an increase in durum grind, resulting from the completion of the mill expansion project in May 1999, along with modest increases in average selling prices.
Cost of Product Sold. Cost of product sold increased 17% to $58.2 million. The $8.7 million increase was mainly due to an increase in sales volumes. Pro forma gross margin as a percentage of net revenues decreased from 19.3% to 16.4% reflecting market pressures.
Marketing, General, and Administrative ("MG&A") Expenses. MG&A expenses increased $243,000, or 5%, over last year. A majority of the increase was due to the enhancement of the Company's sales and sales support efforts to meet the needs of new and existing customers while pursuing continued growth. MG&A as a percentage of net revenues decreased to 7.1% compared to 7.7% in the prior year.
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Interest Expense. Interest expense decreased by $150,000 due to a decrease in average outstanding debt. In the second quarter of fiscal year 2000, the Company was notified of possible reductions in its estimated patronage refunds from CoBank as well as its investment in CoBank. The Company has recorded an adjustment of its estimated patronage refund and a write down in the value of its investment in CoBank totaling $184,000. The CoBank patronage and investment adjustments largely offset the decrease in average outstanding debt.
Income Taxes. The Company has recorded an income tax benefit of $500,000 for the six months ending January 31, 2000. The benefit relates to a reclassification of approximately $2,000,000 of income from nonpatronage to patronage for the year ended July 31, 1999. The reclassification was based on cooperative income tax developments taking place in the second quarter of fiscal year 2000.
Net Income. Net income before the cumulative effect of the change in accounting increased by $219,000, or 4.7%, compared to the six months ended January 31, 1999.
Liquidity and Capital Resources
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 cash provided by operations, short-term borrowings under its line of credit, sales of equities and outside debt financing.
The Company utilizes financing on a short-term basis to fund operations and capital projects until permanent financing is issued. The Company renewed its short-term line of credit for $15.0 million with CoBank ("the Bank") in November 1999. The balance outstanding on the line of credit was $6,875,000 as of January 31, 2000. $4,875,000 of the balance relates to seasonal line of credit funds used to pay down variable rate term loans. Cash, receivables and inventories secure borrowings against the line of credit.
The Company's long-term financing is provided through various secured term loans and secured notes. Variable interest rates on term and seasonal loans are based on the lender's cost of funds, and are subject to an adjustment (increase or decrease) depending on the Company's financial condition. The CoBank loan agreement was renewed in November 1999.
The various debt agreements with the Bank and institutional investors obligate the Company to maintain or achieve certain amounts of equity and certain financial ratios and impose certain restrictions on the Company. As of January 31, 2000, the Company is in compliance with its debt covenants, and the Company does not anticipate any conditions which will cause any non-compliance in the foreseeable future, nor any limitations on its operations or future plans.
Operations generated $5.7 million for the six months ended January 31, 2000, down from the $6.2 million generated for the corresponding period of the prior year. Though net income before the cumulative effect of the change increased $219,000 compared to last year, working capital cash flow decreased slightly from last year.
For the six months ending January 31, 2000, earnings before interest, taxes, depreciation, and amortization, commonly referred to as EBITDA, decreased slightly from $10.9 million to $10.7 million. EBITDA is a measure of cash flow provided by operations.
Cash used in investing activities relates primarily to the construction and installation of milling and pasta equipment. Net cash used in financing activities totaled $2.4 million and $9.1 million for the six months ended January 31, 2000 and 1999, respectively. Most of the expenditures for 1999 relate to the mill expansion project. The Company continues to enhance its technology infrastructure to focus on electronic data interchange, process automation, and increased business requirements. Most of the Company's
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technology assets are placed under lease agreements, which allows the Company to stay relatively current with changing technologies.
Net cash used in financing activities totaled $5.9 million for the six months ended January 31, 2000. In January 2000, the Board of Directors declared a qualified patronage distribution of $7,358,000 ($.89 per bushel or $.86 per average outstanding equity share) after rescinding the qualified patronage distribution and dividend approved at the October 1999 meeting (See Note 13 of the financial statements). All of the qualified patronage distribution was paid in cash during the second quarter. Net cash from financing activities of $13.8 million for the six months ended January 31, 1999 primarily resulted from stock offering proceeds offset by patronage distributions paid.
The Company has current commitments for $1.7 million in raw material purchases, primarily durum purchase commitments from its members. The Company anticipates capital expenditures to total $5.0 million in fiscal year 2000. These expenditures are primarily for cost reduction projects currently scheduled. Commitments for monthly operating lease payments for technology and other assets total $3.7 million, of which $1.4 million is due in the twelve months ended January 31, 2001. $2.6 million of the total lease commitments, and $.8 million of the lease commitments due in the next twelve months, are related to leased warehouse facilities for which the Company has a sublease agreement. The Company currently has no other material commitments.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Members' Meeting was held January 15, 2000. Mr. John S. Dalrymple III, Mr. James F. Link, and Mr. John D. Rice Jr. were reelected to their positions as members of the Company's Board of Directors at Annual District Meetings held in December 1999.
The terms of office of the remaining members of the Board of Directors continue for the terms for which they were elected in prior years as follows:Mr. Jeffrey O. Topp, Mr. Eugene J. Nicholas, and Mr. Roger A. Kenner—one year remaining; Mr. Allyn K. Hart, Mr. Michael E. Warner, and Mr. Curtis R. Trulson—two years remaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
| *10.1 | Loan Agreement in the aggregate amount of $48,300,000 dated November 9, 1999 between the Company and CoBank and related Promissory Notes. | |
| 27 | Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed. |
*—Portions of this exhibit have been deleted from the publicly filed document and have been filed separately with the Commission pursuant to a request for confidential treatment.
Reports on Form 8-K
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DAKOTA GROWERS PASTA COMPANY | |||
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By: |
/s/ TIMOTHY J. DODD Timothy J. Dodd, President and General Manager, and Principal Executive Officer |
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Dated: March 15, 2000 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date |
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|---|---|---|---|---|
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| /s/ TIMOTHY J. DODD Timothy J. Dodd |
General Manager (Principal Executive Officer) | March 15, 2000 | ||
| /s/ THOMAS P. FRIEZEN Thomas P. Friezen |
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Vice-President—Finance (Principal Financial and Accounting Officer) |
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March 15, 2000 |
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