SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30,
1996
Commission File Number 0-13963
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
NEW MEXICO 85-0054230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
811 South Platinum, Deming, New Mexico 88030
(505) 546-2769
Check whether the issuer (1) filed all reports required to be
filed by Section or 15(d) of the Exchange Act during the past 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
As of November 15, 1996, 13,776 shares of Common Stock of
Mimbres Valley Farmers Association, Inc. ("Farmers" or the
"Company") were outstanding.
Transitional small business disclosure format: Yes No X
<PAGE>
PART I
Item 1. Financial Statements
BALANCE SHEET
September 30, 1996
UNAUDITED
ASSETS
CURRENT ASSETS:
<TABLE>
<S> <C>
Account receivables net of allowance for
doubtful accounts $18,852 $ 380,513
Inventories net of reserve for
inventory discounts $150,000 3,050,353
Prepaid expenses 164,467
Prepaid income taxes 158,182
TOTAL CURRENT ASSETS 3,753,514
PROPERTY AND EQUIPMENT
Land 80,203
Buildings and improvements 2,360,145
Leasehold improvements 51,669
Rental property 1,295,428
Furniture, fixtures & equipment 2,850,008
5,342,025
Less accumulated depreciation 3,071,639
NET PROPERTY AND EQUIPMENT 2,270,386
OTHER ASSETS
Investment in supplier 68,051
Note receivable--supplier 59,667
Intangibles, net of amortization 17,771
TOTAL OTHER ASSETS 145,489
$6,169,389
</TABLE>
<PAGE>
BALANCE SHEET
September 30, 1996
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
CURRENT LIABILITIES
<S> <C>
Accounts payable and bank overdraft $1,286,512
Accrued expenses: 276,130
Notes Payable 112,096
Current installments and
maturities of long-term debt 364,471
TOTAL CURRENT LIABILITIES 2,039,209
LONG-TERM DEBT LESS CURRENT PORTION 1,702,936
DEFERRED INCOME TAXES 37,537
TOTAL LIABILITIES 3,779,682
STOCKHOLDERS' EQUITY
Common stock, $25 par--shares
authorized 500,000; 13,910
issued and 13,1776 outstanding 347,750
Retained earnings 1,968,748
Year to date earnings 76,560
Treasury shares (3,350)
TOTAL STOCKHOLDERS' EQUITY 2,389,707
$6,169,389
</TABLE>
<PAGE>
STATEMENTS OF INCOME AND RETAINED EARNINGS
Quarter Ended September 30, 1996
UNAUDITED
<TABLE>
<S> <C>
NET SALES $5,064,372
COST OF SALES 3,765,342
Gross profit on sales 1,299,030
SELLING GENERAL AND ADMINISTRATIVE EXPENSES 1,195,699
Operating income 103,331
OTHER INCOME (EXPENSE)
Patronage rebates and commissions 36,810
Rent income 12,197
Interest 725
Interest expense (51,655)
Miscellaneous 20,117
Income before income taxes 121,524
INCOME TAXES (REDUCTION) (44,964)
NET INCOME 76,560
RETAINED EARNINGS
Beginning of quarter 1,968,748
End of quarter $2,045,308
NET INCOME PER COMMON SHARE $6
</TABLE>
<PAGE>
STATEMENT OF CASH FLOWS
Quarter Ended September 30, 1996
UNAUDITED
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 76,560
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 77,335
Decrease in accrued expenses (99,167)
Increase in income taxes 44,964
Decrease in accounts receivable trade 126,122
Increase in inventories (187,035)
Decrease in prepaid expenses 16,952
Decrease in accounts payable and
bank overdraft (272,337)
Net cash used by operating activities (216,606)
INVESTING ACTIVITIES
Property and equipment additions (27,398)
FINANCING ACTIVITIES
Proceeds from long term borrowing 5,648
Repayment of long term borrowing (54,807)
Net cash used for financing
activities (49,159)
DECREASE IN CASH EQUIVALENTS (293,163)
CASH AND EQUIVALENTS
Beginning of period 293,163
End of period $0
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Quarter Ended September 30, 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Mimbres Valley Farmers Association, Inc., d.b.a. Farmers, Inc.
("Farmers" or the "Company"), a New Mexico corporation,
currently operates two retail food stores, a hardware store,
a franchised craft store, a furniture and appliance store, a
franchised electronics store, a clothing store and a feed
store. The Company also leases certain retail space to
unrelated parties, operates a self-service laundry and, as a
seasonal operation, the Company cleans, packages and markets
dry beans for area farmers. All operations are located in
Deming, New Mexico ("Deming"). The economy of Deming is
dependent mainly on agriculture and related agri-business.
Use of Estimates
The accompanying financial statements include estimates and
assumptions made by management that affect the carrying
amounts of assets and liabilities, reported amounts of
revenues and expense, and the disclosure of contingent assets
and liabilities. Actual results may differ from these
estimates.
Financial Statement Preparation
These financial statements were prepared on the same basis as
those contained in the June 30, 1996 Form 10-K. These
quarterly results may not be indicative of a twelve month
period.
Cash
The Company considers all highly liquid financial instruments
with original maturities of three months or less to be cash
equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
The Company grants credit to customers, substantially all of
whom are residents of Deming. Management of the Company has
established an allowance for doubtful accounts to cover losses
inherent in the accounts receivable portfolio. Ultimate
losses may vary from the current estimates.
Property and Equipment
Property and equipment are stated at cost including
capitalized interest and labor incurred to construct major
additions and are depreciated on a straight-line basis over
the estimated useful lives of the respective assets. No
interest was capitalized in the year quarter ended September
30, 1996 as the amounts were insignificant.
Capital leases are amortized using the straight-line method
over the shorter of the estimated useful life of the property
or the lease term. The estimated useful lives for property
and equipment are as follows:
Buildings-30 years
Furniture, fixtures and equipment-3 to 10 years
Leasehold improvements-5 years
Gains and losses upon retirement or disposal of property and
equipment are recognized as incurred. Additions and major
improvements are capitalized, and repairs and maintenance, and
minor improvements are expensed as incurred.
Inventories
Inventories, which represent merchandise available for sale,
are stated at the lower of market or cost determined on a
first-in, first-out (FIFO) basis.
Advertising
The Company expenses costs of advertising when the cost is
incurred. At September 30, 1996, the advertising expense was
$70,410.
Income Taxes
The Company records deferred income taxes to reflect the tax
consequences on future years of differences between the tax
basis of assets and liabilities and their financial reporting
amounts.
Net Income per Common Share
Net income per share is computed by dividing the net income by
the number of shares of common stock outstanding for the
quarter ended September 30, 1996.
2. NOTES RECEIVABLE-SUPPLIER:
The notes receivable-supplier at September 30, 1996 have
maturities which range from December 1996 to December 2000 and
have interest rates ranging from 6.5% to 9.5%. The fair value
of the notes receivable-supplies approximate their carrying
value.
<PAGE>
3. INVESTMENTS IN SUPPLIER:
Investments in supplier, at cost, as of September 30, 1996,
consist of the following:
663 shares of Class B non-voting stock $67,051
10 shares of Class A non-voting stock 1,000
$68,051
4. LONG TERM DEBT AND CAPITAL LEASES:
Long term debt and capital leases as of September 30, 1996,
consists of the following:
Fixed rate notes payable to Norwest Bank
("Bank"), due in monthly installments ranging
from $896 to $16,788 with a balloon payment of
$1,314,459 due on January, 24, 2001. Interest
as rates ranging from 8.95% to 9.90%, and
secured by real estate mortgages and property
and equipment. $1,806,651
Capital leases 135,587
Note payable to Supplier, due in monthly
installments ranging from $272 to $2,322.
Interest rates ranging from 8.00% to 10.50%,
secured by equipment and notes receivable-
supplier. 105,882
Other notes payable 19,288
2,067,408
Less: Current portion 364,471
$1,702,937
Certain of the fixed rate notes payable to Bank require the
Company to comply with debt covenants including, but not
limited to: (a) minimum working capital balance at June 30,
1996 or $1.2 million or greater and (b) total liabilities to
net worth of 1.15 to 1 or lower. The Company is in compliance
with all debt covenants at June 30, 1996 with the exception of
the covenant which requires total liabilities to net worth of
1.15 to 1 or lower. The Company has obtained a waiver from
the Bank for this covenant.
5. SUPPLIER BANKRUPTCY:
During the fiscal year ended June 30, 1996, the franchisor of
the supplier of the Company's craft store filed for bankruptcy
reorganization under Chapter 11 of the Federal Bankruptcy
Code. Sales of inventory for this franchise represented
approximately 3% of the Company's revenue for fiscal year
1996. The Company has recently contracted with various other
suppliers to ensure a continued supply of inventory for the
craft store. Management believes that the operations of the
craft store will not be significantly impacted if the supplier
emerges from bankruptcy of if the Company continues to
purchase goods from other supplier sources.
6. MAJOR SUPPLIERS:
A substantial portion of the inventory of the Company is
purchased from a limited number of suppliers. During the year
ended June 30, 1996, two such supplier accounted for 64% of
inventory purchases. In addition, certain related parties of
the Company are guarantors for amounts outstanding to certain
major suppliers.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
General. The Company has a current ratio of 1.72 to 1 as of
September 30, 1996. The annualized inventory turnover rate was
4.92 for the current quarter. The quarter ending September 30,
1995 had a current ratio of 2.2 to 1 and an annualized inventory
turnover rate of 6.05.
The capital resources which will be required to repay the
Company's indebtedness will come mainly from operating cash flows.
The Company's liquidity will improve in the long-term as debt is
paid off.
During the first quarter of fiscal year 1996, liquidity of
$136,388 was used by operations. The only major capital
expenditure of the quarter was for property and equipment additions
($27,398).
The Company showed income of $103,331 from operations for the
quarter ending September 30, 1996. This is a decrease from the
prior year's first quarter profit from operations of $191,675. The
Company had an increase in interest expense due to an increase in
debt during the previous fiscal year, primarily arising from the
hardware expansion. Debt obligations are being paid off over a
five-year period.
Financial condition and results of operations. Farmers'
total sales in the first quarter decreased as compared with sales
in the first quarter of the previous year, reflecting a decline in
grocery sales (down 19.67%), an increase in hardware sales (up
46.95%), and an increase in all other sales (up 11.17%). On the
other hand, costs associated with the sales decreased as compared
with the same costs for 9/30/95 (down 9.13%) and resulted in income
before taxes of $121,524.
The Board expects to sell of liquidate certain retail
categories. For example, the electronics business has been a poor
financial performer. In addition, the Board intends to eliminate
or (preferably) sell the furniture business, which has not shown
promise, and move the appliance business into the hardware store.
The furniture business is outside Farmers' traditional scope of
retail activity, and the Company has been unable to apply its
business experience to good effect in this area.
The total number of permanent employees at the end of the
quarter was 205, a 14.94% decrease of the corresponding number at
the end of the fourth quarter of the 1995 fiscal year. The
decrease is a result of the cost reduction activities the Company
has instituted to prevent the continuation of excessive costs
associated with new activities started in Fiscal Year 1995.
Further reductions in the number of permanent employees are
expected when the retail categories, discussed above, are
eliminated. In as much as possible, the reduction in employment
will be done through normal attrition.
<PAGE>
The Board believes that once the excessive costs associated
with the expanded hardware business and other non-grocery
activities are controlled, these portions of the Company's business
will return to their historical profitability, and, in the case of
the hardware business, will consistently exceed its historical rate
of net return.
The grocery business is the principal source of Farmers' sales
and income. Grocery net income before taxes was $494,069 in the
first quarter of fiscal year 1996. Total grocery sales were
$3,085,132 for the first quarter. Total grocery sales declined
19.67% from the same time last year. The total sales reflect the
competitive effect of Peppers, which opened in late June, just
before the end of the previous fiscal year in June. In addition,
Furrs started a frequent shopper program early in the summer.
Since Peppers increases the number of major supermarkets in the
market area from two to three, the Board anticipates that grocery
sales for fiscal year 1997 will decline. Nevertheless, the Board
believes that customer loyalty and its competitive prices will keep
the decrease to a minimum, and that even with a decrease in sales
the grocery business can be kept profitable by decreasing labor
costs proportionally. The Board also notes that population growth
in Luna County has been strong in recent years, and that a greater
pool of customers may play a strong role in offsetting the effect
of competition from Peppers.
The Board also expects increased income from the hardware and
other retail activities to offset possible decreases in grocery
sales. The gross profit from the hardware store increased over
last year's first quarter results by 45%.
Liquidity. Farmers ended the quarter with inventory levels
higher than they have been in any of the three previous years,
which significantly affected liquidity and contributed to increases
in interest and other carrying costs. Generally the high inventory
levels occurred in three areas. First, the hardware expansion was
characterized by both a significant increase in product lines and
numbers of items in stock for existing product lines. Results
since the new store opened in March have shown that some product
lines have not sold as well as anticipated. Second, premature
shipments by Ben Franklin arising from its bankruptcy filing have
created a large inventory for the craft store. The management of
the Company has written down inventories of the craft store to
estimated net realizable value. Third, considerable investment was
required to stock the furniture and appliance store, and such
products have had a low turnover.
The Management of the Company has written down inventory to
net realizable value and established a reserve to account for any
future mark downs due to discontinued operations. The stock of the
furniture department will be eliminated when that business is
discontinued. The high levels of hardware inventory, on the other
hand, will be addressed primarily through an analysis of the
profitability of each product line and the elimination or reduction
<PAGE>
in stocking levels of products that do not produce enough revenue
to justify their continuance or inventory levels.
Farmers is also reassessing its generous credit terms. The
Board intends to review its credit policy to determine ways in
which the total amount of credit outstanding at any one time may be
reduced without significantly affecting the sales that the current
credit policy promotes.
Capital resources. No major capital expenditures, other than
the aforementioned property and equipment ($27,398) were made in
the first quarter. The Company plans to eliminate, liquidate, or
(preferably) sell the furniture and electronics businesses, which
is not anticipated to result in significant losses (if any). The
Company has negotiated additional short term borrowings of $300,000
to fund short term working capital needs.
PART II
Item 1. Legal Proceedings
Disposition of Tender Offer. On June 3, 1996, a tender offer
(the "Tender Offer") was made for all outstanding shares of Farmers
common stock. The bidders making the Tender Offer (the "Bidders")
included two Farmers directors, John V. Brownfield and James Walter
Donaldson, Jr., as well as the Company's independent auditor,
Harold Morrow, who resigned his position on June 4, 1996. The
other Bidders (excluding numerous persons who were listed in the
Tender Offer for the sole purpose of holding legal title, as
opposed to beneficial ownership, of purchased stock) were John
Keck, Frederick H. Sherman, and Kenny Stevens. Mr. Stevens had
been the General Manager of Farmers until his resignation on March
8, 1996, and at the time of the Tender Offer was employed by
Farmers as a consultant. The Tender Offer was made without any
prior notice by any of the Bidders.
On June 20, 1996, Farmers filed a complaint against the
Bidders, and a motion for injunctive relief, in the U.S. District
Court for the District of New Mexico, in Albuquerque. In its
complaint, and as the basis for its motion for injunctive relief,
Farmers asserted that the Tender Offer violated Section 14(e) of
the federal Securities Exchange Act of 1934. Specifically, Farmers
claimed that Mr. Morrow's statement as a certified public
accountant that the tender price of $50.00 per share is "fair", and
a statement in the Tender Offer concerning the nature of the
fiduciary responsibilities of directors, violate the prohibition in
Section 14(e) against making an "untrue statement of a material
fact ... in connection with [a] tender offer". In addition,
Farmers claimed that Mr. Morrow's resignation on June 4, 1996 was
improperly delayed for the specific purpose of putting Farmers at
the greatest possible disadvantage in responding to the Tender
Offer, and that this action violated the Section 14(e) prohibition
against "fraudulent, deceptive and manipulative acts or practices
... in connection with [a] tender offer".
<PAGE>
Following a hearing, the court issued a temporary restraining
order (the "TRO") against the Bidders on June 21, 1996. The TRO
prohibited the Bidders and any of their agents (and specifically
including Mimbres Valley Abstract and Title Company, the depositary
for the Tender Offer) "from accepting delivery of any shares of
[Farmers] stock tendered in response to [the Tender Offer], or from
purchasing any stock that may have been tendered prior to this
temporary restraining order."
Farmers subsequently entered into an agreement with the
Bidders (the "Agreement") under which the Bidders agreed to extend
the expiration date of the Tender Offer to September 16, 1996, and
to amend the Tender Offer to state that "Morrow is not Farmers'
outside accountant, and ... the representations about the fairness
of the tender price in the Tender Offer do not reflect his judgment
as a certified public accountant." In return, Farmers agreed to
provide the Bidders a copy of a valuation report that the Company
had commissioned, as well as certain other financial information as
it became available. As a result of the Agreement, Farmers and the
Bidders jointly petitioned the court to dissolve the TRO, which the
court did on June 28, 1996.
On September 12, 1996, the Bidders extended the Tender Offer
to November 20, 1996.
On October 2, 1996, Farmers and the Bidders entered into a
settlement agreement (the "Settlement Agreement"), under which the
Bidders (1) agreed to withdraw the Tender Offer within ten days of
the date of the Settlement Agreement, (2) represented that they had
not purchased, and agreed that they would not purchase, any shares
tendered under the Tender Offer, (3) released Farmers, its
directors, officers, employees, agents and shareholders from any
and all claims arising out of or related to the Tender Offer, and
(4) released Farmers from any and all claims arising from any
actions or occurrences prior to the date of the Settlement
Agreement. In addition, Harold Morrow agreed to fully cooperate in
any accounting or financial investigation that may be made by
Farmers pertaining to the period when Mr. Morrow was Farmers'
independent accountant.
In return, Farmers (1) agreed to dismiss with prejudice,
within ten days of the date of the Settlement Agreement, the suit
that Farmers filed against the Bidders in federal court on June 20,
1996, and (2) released the Bidders from any and all claims arising
from actions or occurrences prior to the date of the Settlement
Agreement. Farmers and the Bidders each agreed to bear their own
expenses arising out of or relating to the Tender Offer. The
Settlement Agreement did not address any other matters.
Pursuant to the Settlement Agreement, Farmers has dismissed
its suit, and the Bidders have filed notice of the withdrawal of
the Tender Offer with the SEC.
Farmers believes that the Settlement Agreement, which
eliminates a costly and time-consuming drain on the Company's
resources, is in the best interests of both Farmers and its
shareholders.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on October 16,
1996. At the meeting, a vote was held on the confirmation of the
appointment of William B. Kennon, CPA, and Arthur Andersen LLP as
the Company's independent auditors. The appointments were
confirmed by a vote of 3328 in favor and 224 against, with 45
abstentions.
Item 5. Other Information.
On October 16, 1996, J.W. Donaldson, Jr., one of the Company's
directors who participated in making the Tender Offer, submitted
his resignation as director effective that date. The entire text
of the resignation is as follows: "I, J.W. Donaldson, resign from
the Board of Directors of Farmers, Inc. as of 10/16/96.
(Signature)." The Board has not yet appointed anyone to fill Mr.
Donaldson's position.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
(3)(i) & (ii) Articles of Incorporation and Bylaws of
Mimbres Valley Farmers Association, Inc., as currently in effect,
were filed as an exhibit to the Company's registration statement
filed in 1985 and are incorporated herein by reference.
(27) The Financial Statements are included in Part I of
this Form 10-QSB. A Financial Data Schedule is submitted
electronically as Exhibit 27 to this Form 10-QSB.
(b) Reports on Form 8-K. The following reports on Form 8-K
were filed during the first quarter of fiscal year 1997: (1)
Report dated August 2, 1996 (filed August 5, 1996), concerning
response of Morrow & Company to a report on Form 8-K dated June 4,
1996, which reported Morrow & Company's resignation as Farmer's
independent auditor; and (2) Report dated September 5, 1996 (filed
September 12, 1996) pertaining to temporary and preliminary
financial information delivered to the Bidders under the terms of
a June 25, 1996 agreement between Farmers and the Bidders.
PAGE
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 19, 1996.
MIMBRES VALLEY FARMERS ASSOCIATION,
INC.
By James E. Keeler
James E. Keeler
President and Chairman of the
Board
By Daniel Gonzales
Daniel Gonzales, General Manager,
Financial and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE SEPTEMBER 30, 1996 UNAUDITED FINANCIAL STATEMENTS INCLUDED AS
ITEM 1 TO THIS FORM 10-QSB TO WHICH THIS SCHEDULE IS ATTACHED AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 399,365
<ALLOWANCES> 18,852
<INVENTORY> 3,050,353
<CURRENT-ASSETS> 3,753,514
<PP&E> 5,342,025
<DEPRECIATION> 3,071,639
<TOTAL-ASSETS> 6,169,389
<CURRENT-LIABILITIES> 2,039,209
<BONDS> 1,702,936
0
0
<COMMON> 347,750
<OTHER-SE> 2,045,308
<TOTAL-LIABILITY-AND-EQUITY> 6,169,389
<SALES> 5,064,372
<TOTAL-REVENUES> 5,134,221
<CGS> 3,765,342
<TOTAL-COSTS> 3,765,342
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,852
<INTEREST-EXPENSE> (51,655)
<INCOME-PRETAX> 121,524
<INCOME-TAX> (44,964)
<INCOME-CONTINUING> 76,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,560
<EPS-PRIMARY> 6
<EPS-DILUTED> 6
</TABLE>
