SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 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
Securities Registered Pursuant to Section 12(g) of the Act:
Title Name of Each Exchange
on which Registered
Common Stock ($25 par value) None
Indicate by check mark whether the company (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
company was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X YES NO
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the company's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or in any amendment to this Form 10-K. [ ]
As of August 27, 1996, 13,776 shares of Common Stock of the Mimbres
Valley Farmers Association, Inc. ("Farmers") were outstanding. The aggregate
market value of voting stock held by nonaffiliates of the company is
indeterminable since there is no established market price for the stock and
private sales are not reported to Farmers.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Farmers' 1996 Annual Meeting of
Shareholders to be held on October 16, 1996 are incorporated by reference
to Part III of this Annual Report on Form 10-K.
<PAGE>
PART I
Item 1. Business
Mimbres Valley Farmers Association, Inc. ("Farmers" or the
"Company") was incorporated in 1913. It has operated in
substantially the same form since that time in the retail grocery,
hardware, dry goods, and feed business in Deming, New Mexico. Over
the past five years, the Company has experienced consistent growth
in sales and assets, including continued growth in sales and assets
during the year.
The principal business of the Company is retail sales of a
variety of product types including groceries, hardware,
electronics, clothing, craft items, furniture and appliances, and
feed and farm supplies. The Company also operates a self-service
laundry and leases certain retail space which it owns to unrelated
parties, and, as a seasonal operation, the Company cleans, packages
and markets dry edible beans for area farmers. The total revenue
derived from the non-retail business segments is less than one
percent of total retail sales.
All of the Company's operations and assets are in or around
Deming, New Mexico, a primarily farming community in the
southwestern part of the state. Deming (population 13,000) is the
county seat and largest municipality in Luna County, which has a
population of approximately 22,000. Because all parts of the
County are distant from other population centers (Las Cruces,
population 62,000, in Dona Ana County, and Silver City, population
11,000, in Grant County, are 62 and 55 miles, respectively, from
Deming), most of the day to day shopping of County residents is
done in Deming.
Most of the Company's receipts are generated by retail sales
to the general public. Total revenues for the fiscal year ending
June 30, 1996 were $21,949,927, of which $15,111,185 were from
grocery sales. Notwithstanding increased hardware sales in fiscal
year 1996, this continues the same pattern of sales experienced in
the previous two years. In fiscal year 1995 total sales and
grocery sales were $19,615,130 and $14,413,743, respectively, and
in fiscal year 1994 total sales and grocery sales were $18,596,846
and $13,274,679, respectively. The percentage of total revenues
attributable to grocery sales for the past three fiscal years is as
follows: 68.8% (1996), 73.5% (1995), and 71.4% (1994).
Corresponding percentages for hardware sales are 11.2% (1996), 9.9%
(1995), and 10.1% (1994). No class of similar products or services
other than the grocery business and the hardware business amounted
to ten percent or more of total revenues.
The Company's grocery business is conducted at two locations:
the main 24,000 square-foot supermarket at 811 South Platinum in
Deming, and an auxiliary store with a laundromat (together
totalling approximately 7,000 square feet) at 501 North Gold in
<PAGE>
Deming. Farmers is a member of the IGA advertising group, and
sells groceries under the IGA trademark. Farmers' principal grocery
competitor for the past five years has been a Furrs' supermarket in
Deming. However, in late June 1996 a new independent grocery
competitor, Peppers, opened a 40,000 square foot store for
business, resulting in Deming and surrounding area now having three
large grocery supermarkets. The potential effect of Peppers on the
Company's grocery business is discussed in detail in Item 303
(Management's Discussion and Analysis of Financial Condition and
Results of Operations). Competition in the grocery business is
based primarily on price and selection; Farmers believes that it is
competitive with respect to both of these factors. The Company did
not make any significant changes in its grocery business during the
past fiscal year.
During the past fiscal year Farmers expanded its hardware
business by moving it from a location adjoining the main
supermarket to 40,000 square feet of leased space in a former KMart
store on Highway 70-80 East in Deming, which the Company
refurbished for the new operations. The new site, which opened for
business in March, 1996, allows a greater selection of building
materials and increased storage, while freeing parking spaces at
the old site for grocery patrons. The lease term for the new site
expires in 2002, and the lease contains options to renew for five
additional terms of five years each. Farmers' hardware store is
part of the True Value chain, and sells products under the True
Value trademark. Farmers has two local major competitors for its
hardware business, which are Foxworth-Galbraith Lumber Company and
Surplus City, both of which are located in Deming. Competition in
the hardware business is based on both price and selection.
Farmers believes that its prices are competitive, and that with its
expanded inventory it may have a competitive advantage with respect
to selection.
All of Farmers' other retail operations are adjacent to the
main supermarket. At the beginning of the fiscal year ended June
30, 1996, the craft and dry goods operations were operated as a V&S
Franchise, which continued until the franchisor, Cotter and
Company, discontinued its V&S division. Farmers then converted the
store to a Ben Franklin franchise; however, the Ben Franklin
franchisor filed Chapter 11 bankruptcy on July 26, 1996, and ceased
supplying goods. Accordingly, the craft store is not currently
operating under any franchise, but continues to conduct operations
under the Ben Franklin trademark.
The furniture and appliance store, which opened in June, 1996,
is a new retail venture for Farmers.
No other Farmers retail operations have experienced any
significant changes in the past fiscal year.
The Company plans to discontinue the operations of its
electronics department and the furniture component of its furniture
and appliance store during fiscal year 1997. See Item 7
(Management's Discussion and Analysis of Financial Condition and
Results of Operation). The total sales of the electronics and
<PAGE>
furniture departments combined made up approximately 2% of the
retail sales of the Company.
In addition to its retail operations, Farmers leases space to
other retail business at the main supermarket site. These
activities are discussed in more detail in Item 102 (Description of
Property).
Due mainly to the expansion of the hardware operations,
Farmers increased its total employment over the last year. At the
end of the fiscal year, Farmers employed 241 persons, compared with
total employment of 179 persons at the end of the 1995 fiscal year.
The Company intends to gradually reduce employment as part of a
strategy to make the hardware business more profitable, and as a
result of the anticipated discontinued operation of the electronics
and furniture departments. See Item 7 (Management's Discussion and
Analysis of Financial Condition and Results of Operation).
In the retail sales business in which the Company competes,
inventory turnover is rapid and inventories must be maintained at
high levels. However, neither the Company nor other businesses in
the retail food industry have had problems maintaining the
inventories at desired levels. Businesses like the Company are not
dependent on any single customer or a small number of customers.
The retail grocery business is not seasonal in nature; however, the
Company's December sales are typically 1% to 2% higher than sales
for other months. The Company has no material backlog orders.
Sales revenues, operating profits or losses and other
financial information for the last three fiscal years are shown on
the financial statements attached to this report as described in
Item 14. Given the Company had a current year loss for tax
purposes, and will able to carryback the loss to the fiscal years
ended June 30, 1992 and June 30, 1993, an income tax benefit of
$121,631 has been recorded in the current year statement of
operations.
Farmers does not foresee any unusual future expenses, except
that the Company may be responsible for remediation of leakage from
an underground storage tank at the auxiliary grocery store site at
402 North Gold Street. This potential liability is discussed under
Item 3 (Legal Proceedings).
Item 2. Description of Property.
The Company owns or leases the following properties:
(1) A small shopping mall totalling approximately 60,300
square feet of retail space, located at 811 South
Platinum Street, Deming, New Mexico, which the Company
owns in fee. The property is the site of the Company's
principal supermarket (approximately 24,000 square feet),
its electronics store (approximately 2300 square feet),
its clothing store (approximately 2400 square feet), its
craft store (approximately 9000 square feet), its
<PAGE>
furniture and appliance store (approximately 10,000
square feet). The mall contains three additional retail
areas totalling approximately 12,600 square feet of space
that Farmers leases to separate tenants for retail
purposes. The leases are generally for terms of several
years. One of the current tenants is a Little Caesar's
pizza franchise, which occupies approximately 1200 square
feet. The remaining space is currently unoccupied,
although one tenant is continuing to make rental
payments. Most of the unoccupied space (approximately
7200 square feet) was the former site of a drugstore
which filed Chapter 7 bankruptcy. Farmers expects the
lease to be released from the bankruptcy estate in the
near future, and is actively seeking one or more new
tenants for this space. The Company does not anticipate
any difficulty is obtaining new tenants.
(2) The feed and farm supply store, which is located in an
approximately 2500 square feet building across the street
from the shopping mall, at 913 South Diamond Street.
(3) An auxiliary grocery store with an attached laundromat,
totalling together approximately 7000 square feet, which
Farmers owns in fee. This building is located at 501
North Gold Street, Deming, New Mexico.
(4) The hardware store, consisting of approximately 40,000
square feet, which Farmers leases. The lease provides
for an initial term that expires in 2002, with lease
options for a total of 25 additional years. The leased
premises, which are located on Highway 70-80 East in
Deming, totalling 3.76 acres, including parking areas and
associated grounds.
(5) An 8.48-acre parcel of undeveloped land within the Deming
city limits, adjoining the Columbus highway (State Route
11).
Item 3. Legal Proceedings.
In addition to legal proceedings involving account collections
and other matters in the ordinary course of business, the Company
is currently involved, or may become involved, in the following
legal matters.
A. 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
<PAGE>
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".
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. Farmers has not, however, withdrawn its complaint
against the Bidders; nor has it served the complaint on any of the
Bidders. Instead, it is the Company's intention to wait until
October 18, 1996, the deadline for service of the complaint under
Federal Rule of Civil Procedure 4(m), and to determine based on the
facts and circumstances known then whether or not to prosecute its
suit against any or all of the Bidders for damages. If the Company
does decide to prosecute its case, it expects to assert other
<PAGE>
federal claims, as well as significant state claims against Messrs.
Brownfield, Donaldson and Morrow.
On September 12, 1996, the Bidders extended the Tender Offer
to November 20, 1996, without, however, specifying a time of
termination.
Mr. Brownfield and Mr. Donaldson have continued as directors
of Farmers, but have voluntarily abstained from any discussions or
votes of the board of directors (the "Board") concerning the Tender
Offer.
B. Underground Storage Tank. Farmers' retail activities
include sales of gasoline at the auxiliary grocery store location.
The fuel is dispensed from underground storage tanks, which Farmers
previously leased from a petroleum wholesaler. During the year,
the leased tanks were removed and replaced with tanks that Farmers
owns, at which time it was determined that one of the leased tanks
had a hole towards the top which may have leaked when the tank was
full or nearly full. The State Environment Department has
indicated that corrective action may be required; however, the
process has not proceeded beyond the investigative stage. Based on
the location of the leak and the results of investigations to date,
Farmers believes that the amount of leakage and the remediation
required may be minimal; nevertheless, whether the regulatory
authorities presently agree with this view or will agree in the
future is unclear. Remediation expenses for leaking underground
storage tanks may be significant, particularly if contamination of
underground water is threatened.
If remedial action is required, Farmers could have liability
based on its status as an "operator" under the New Mexico
Underground Storage Tank regulations (the "Regulations"). However,
Farmers will vigorously pursue a claim for indemnity from the owner
of the tank. If the Company is determined to be in compliance with
the Regulations, it will also qualify for reimbursement from a
"corrective action fund" established under the state Groundwater
Protection Act, which would potentially pay for all but $10,000 of
the Company's investigation and remediation expenses. On the other
hand, the Company has not yet received a determination that it
qualifies for reimbursement from the fund. In addition, the state
has no obligation to reimburse parties if claims exceed the amount
available in the fund, and current claims exceed the fund balance.
Since, however, the fund is constantly replenished by a fee on
petroleum products, the likely result of the present excess of
claims is a delay in payment, rather than an outright denial of
payment based on insufficient monies.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the security holders of
the Company during the fourth quarter of the fiscal year ended June
30, 1996.
<PAGE>
PART II
Item 5. Market Price and Dividends on the Company's Common
Equity and Related Stockholder Matters.
There is no established public trading market for the
Company's common stock, and no public quotations for the stock.
Accordingly, there is no verifiable record maintained of any stock
prices. Sales of the Company's common stock, as indicated by
changes in ownership on the Company's registration book, are
infrequent. Price has been established historically by private
party negotiations. Since the Company has no systematic or
reliable method of determining share prices, the Company does not
disseminate any specific information regarding price. The Company
does not know the most recent sales price of its stock.
In the Tender Offer, discussed above in Item 3, the Bidders
stated that, to their knowledge, "the purchase price for previous
purchases of [s]hares have historically ranged from $12.00 per
[s]hare to as much as the par value price [of] $25.00 per [s]hare",
except for one sale of $30.00 per share. Farmers does not have
definite information about the accuracy or inaccuracy of these
statements, but mentions them simply for whatever information they
may provide. Under the Tender Offer, the Bidders have offered $50
per share. The Bidders reported that as of July 1, 1996,
"approximately 871" shares had been tendered.
On August 22, 1996, the Company released a valuation report
(the "Valuation Report") prepared by Rogoff, Diamond & Walker LLP,
an independent accounting firm, which indicated a value to the
Bidders or another unified control group, if they acquired all of
Farmers' stock, of $283 per share, and a value to shareholders, as
of circumstances on June 3, 1996, of $106 per share. Farmers has
no reliable information on trading of stock, or trading prices,
since release of the valuation report. On September 12, 1996, the
Bidders extended the Tender Offer until November 20, 1996. In the
announcement of the extension, the Bidders stated that "[a]s of
9/9/96, there were approximately 1,486 shares tendered or
controlled." Farmers does not believe that this disclosure, which
apparently includes shares owned by the Bidders and affiliates
prior to the Tender Offer, complies with the requirement under SEC
Regulation 14e-1(d) to disclose "the approximate number of
securities deposited" to the date of the extension notice. In any
event, the Bidders' wording prevents Farmers from knowing how many
additional shares were tendered to the Bidders after July 1, 1996,
or how many shares that had been tendered were withdrawn.
The Valuation Report attributed the large difference between
the current value to shareholders and the value to a control group
(the "Value Difference") to three factors: (1) a "minority
discount" (i.e., the absence of a "control premium"), estimated to
account for 37% of the Value Difference; (2) the lack of an active
market for stock, estimated to account for 43% of the Value
Difference; and (3) restrictions in the articles and bylaws on the
amount of stock one person can own, estimated to account for 20% of
<PAGE>
the Value Difference. The Board believes that as long as Farmers
is owned by a large number of shareholders, there seems little that
can be done about the first factor; it is, in effect, the price to
be paid for shareholder democracy. The second and third factors,
however, are within the Company's power to change. A more active
market might be encouraged by a number of actions, ranging from a
Company referral service that would put potential buyers and
sellers in contact with one another to listing Farmers stock on a
regional or national stock exchange. Increasing the historical
rate of dividends or buying back stock would also tend to increase
market activity in Farmers' stock. The restrictions on share
ownership can be rescinded by amendments of the articles and
bylaws, which could either remove the restrictions at once or (to
control share price volatility) in a series of stages.
The Board is firmly of the opinion that actions should be
taken to reduce the Value Difference. However, the Board believes
that before such fundamental changes are implemented, there should
be an opportunity for full discussion by all interested
shareholders. Accordingly, the Board wishes to hear any and all
comments of shareholders at the annual meeting on October 16, 1996,
following which the Board expects to implement certain policies to
at least increase the market activity in Company stock. The Board
notes, however, that it has not placed a vote on an amendment of
the articles on the agenda of the October 16, 1996 annual meeting.
Instead, the Board expects to place one or more proposals relating
to amendment of the ownership restriction in the articles before
shareholders at the 1997 annual meeting.
In addition to the measures discussed above, the Bidders have
proposed, in a letter dated September 12, 1996 to the Board, three
other actions pertaining to Farmers stock and shareholders' rights.
First, the Bidders propose that Farmers adopt cumulative voting.
Second, the Bidders propose that the Company buy back fractional
shares. Third, the Bidders propose that Farmers decrease the
number of shareholders in order to avoid "the expensive and
burdensome requirements of the Securities and Exchange Commission."
The Board believes that all of these proposals should be discussed
by the shareholders. However, the Board notes that cumulative
voting would require an amendment of the articles, and that, as
noted above, votes on amendments of the articles will not be
considered at the October 16, 1996 meeting. With respect to the
SEC requirements, the Board believes that deregistration could
potentially result in significant savings for Farmers. On the
other hand, under current SEC regulations, the number of
shareholders would have to be reduced to less than 300 before
deregistration could occur. While the number of shareholders may
(or may not) be reduced as a result of a more active market, a
program to buy out the interests of shareholders to reduce their
number could be very expensive. In addition, the Board believes
that the SEC requirements, although quite burdensome, nevertheless
ensure certain procedures and availability of information that may
be of significant value to shareholders.
<PAGE>
As of August 27, 1996, there were 845 holders of record of the
common stock of the Company. The Company's common stock is the
only authorized class of equity of the Company.
A $1.00 per share dividend was declared for both the 1994
fiscal year and for the 1995 fiscal year. In light of the
operating loss for the 1996 fiscal year, the Board does not expect
to approve a dividend this year.
Item 6. Selected Financial Data.
The following table highlights selected financial data for the
Company over the past five fiscal years.
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Sales Revenue $21,949,927 $19,615,130 $18,596,846
Net Income (Loss) (197,678) 425,420 242,848
Income (Loss) per (14.35) 30.08 17.63
Common Share
Total Assets 6,468,528 4,707,733 4,507,345
Long-Term Debt and
Capital Leases 2,228,662 1,031,659 1,212,327
Cash Dividends Declared
per Share --- 1.00 1.00
1993 1992
<S> <C> <C>
Sales Revenue $16,955,470 $16,347,288
Net Income 222,692 219,612
Income per Common Share 16.17 15.94
Total Assets 4,346,146 4,573,133
Long-Term Debt and
Capital Leases 1,489,068 1,561,900
Cash Dividends Declared
per Share 1.00 1.00
</TABLE>
There are no factors such accounting changes, business
combinations or dispositions of business operations that would
materially affect the comparability of the information provided
immediately above for the past five fiscal years.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General. The Company has a current ratio of 1.83 to 1 as of
June 30, 1996. The inventory turnover rate was 6.89 for the
current fiscal year. The fiscal years ending June 30, 1995 and
June 30, 1994 had current ratios of 2.09 to 1 and 1.97 to 1
respectively, and inventory turnover rates of 6.91 and 7.12,
respectively.
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.
<PAGE>
During fiscal year 1996 liquidity of $275,448 was used by
operations. The expansion of the hardware operation was the only
major capital expenditure in fiscal year 1996.
The Company showed a loss from operations for fiscal year
ending June 30, 1996 of $417,996. This is a decrease from the
prior year's profit from operations of $619,613. The Company had
an increase in interest expense due to an increase in debt during
the 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 fiscal year 1996 increased by a healthy 11.90% over sales
in the previous fiscal year, reflecting increases in the grocery
business (up 4.84%), the hardware business (up 25.50%), and all
other retail activities (up 35.07%). On the other hand, costs
associated with the expansion of the hardware business and the
opening of the furniture and appliance store were also significant,
resulting in Farmers showing a loss of $319,309 before taxes, as
opposed to a pre-tax profit of $675,517 in fiscal year 1995. The
grocery business, whose operation was not significantly changed in
fiscal year 1996, continued to show a profit (of $276,629), but the
hardware business and other retail activities, which showed such
large increases in sales, showed disproportionate increases in
costs, resulting in net losses of $272,088 attributable to the
hardware business and $323,850 attributable to other activities.
(Grocery, hardware and other net income before taxes is calculated
based on sales from the individual department minus all operating
expenses directly traceable to the department less corporate
overhead expenses allocated to each department. The overhead
allocation is based on each department's gross profit percentage.)
Although certain of the increased expenses are non-recurring,
the Board recognizes that the expansion of the hardware business
and other activities over the past year will require changes in
operating strategy to prevent continuing excessive costs associated
with the new activities. Part of the necessary strategy involves
a better identification of product lines that are profitable as
opposed to those that are unprofitable. For example, the hardware
expansion included a significant increase in number and variety of
items carried in stock, but it is now apparent that a winnowing is
needed to eliminate certain items that sell slowly and/or have low
profit margins.
The Board has also determined that certain retail categories
should be eliminated entirely to help control costs. Accordingly,
the Board expects to sell or liquidate its electronics business,
which historically 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.
<PAGE>
The total number of permanent employees at the end of the year
was 241, a 34.6% increase over the corresponding number at the end
of fiscal year 1995. In connection with the cost-reduction
activities discussed above, the Company has reduced the current
number of permanent employees to approximately 232, and expects to
gradually reduce employment over the coming year to a level of
approximately 200 permanent employees. To avoid an adverse effect
on employee morale, such reduction in employment will be done
through normal attrition as much as possible, or through lay-offs
of newer employees.
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 remains the principal source of Farmers'
sales and income. Grocery net income before taxes was less in
fiscal year 1996 ($276,629) than in recent years ($483,664 and
$332,961 in fiscal years 1995 and 1994, respectively). Total
grocery sales increased 4.84%, which is less than the rate of
increase of the two preceding years (8.58% and 7.45%). The total
sales, however, only reflect a few days of competitive effect of
Peppers, which opening in late June, just before the end of the
fiscal year. 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. Although cash activity figures subsequent to June 30, 1996
are preliminary and not audited, estimated total Company cash
activity from all operations for the period June 30, 1996 to August
15, 1996 are 92.9% of total cash activity in the corresponding
period in 1995. Although this is clearly a decrease, it is not a
precipitous one. Furthermore, the Board expects that Peppers may
initially attract some customers through its novelty, but that as
time passes such benefit will wane.
Liquidity. Farmers ended the fiscal year 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
<PAGE>
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 slow turnover.
The excess inventory in the grocery business and for the craft
store were or are temporary, and were or will be reduced through
sales in the ordinary course of business. 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
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 are planned
for fiscal year 1997. The Company plants to eliminate, liquidate,
or (preferably) sell the furniture and electronics businesses,
which is not anticipated to result in significant losses (if any).
The Company is also in the process of negotiating additional short
term borrowings to fund short term working capital needs.
Item 8. Financial Statements and Supplementary Data.
Financial statements required by Regulation S-X are attached
to this report as described in Item 14.
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure.
Information on the Company's independent accountant will be
included under the caption "Independent Public Accountants" in the
Company's definitive Proxy Statement relating to the annual meeting
of shareholders to be held on October 16, 1996.
PART III
Item 10. Directors and Executive Officers of the Registrant.
1. John V. Brownfield, age 48, has been a director of the Company
since 1980. His occupation for the last five years has been
ranching. He is a director of Sun Products, Inc., a local
chile dehydrating company. His term as director ends in 1998.
<PAGE>
2. James W. Donaldson, Jr., age 47, has been a director of the
Company since 1978 and has been Farmers' Treasurer since 1995.
His principal occupation for the last five years has been
farming. Mr. Donaldson is also a director and vice-president
of Sun Products, Inc., a local chile dehydrating company.
From 1989 to 1995 he acted as the manager of Sun Products.
Previously he was employed as an engineer for LTV Corporation.
Mr. Donaldson's term as director ends in 1997.
3. Jim T. Hyatt, age 44, has been a director of the Company since
1993. His occupation for the last five years has been
ranching. He is a partner in Hyatt & Hyatt, a general
partnership, and president of Quartzite, Inc. Both Hyatt &
Hyatt and Quartzite, Inc. are ranching businesses. Mr.
Hyatt's terms as director ends in 1998.
4. William R. Johnson, III, age 46, has been a director of the
Company since 1993. His occupation for last five years has
been farming and ranching. He is a partner in W. R. Johnson
and Sons, a general partnership in the business of farming and
ranching, and a director of Carzalia Valley Gin, Inc., a
corporation involved in processing of agricultural products.
Mr. Johnson's directorship ends in 1998.
5. James E. Keeler, age 63, has been a director of the Company
since 1968, and President since 1993. He is Chairman of the
Board of Directors. His occupation for the last five years
has been farming and the operation of a produce business. His
term as director ends in 1997.
6. Judy Phillips, age 81, has been a director of the Company
since 1974. She has been the Company Secretary since 1993.
Ms. Phillips is a homemaker and has had no previous business
experience. Her directorship ends in 1998.
7. Douglas Tharp, age 76, has been a director of the Company
since 1973 and Vice-President since 1993. Mr. Tharp's regular
occupations for the past five years include general manager of
a cotton compressing operation for Roundtree Cotton Company in
Deming, part-time rancher, and self-employed auctioneer. His
directorship ends in 1997.
8. Officer: Daniel V. Gonzales, age 36, has been general manager
of the Company and board secretary since 1996. In his
position he generally supervises and directs all of the
departments of the Company's business and makes all personnel
decisions. From 1984 to 1996, he was assistant general
manager of the Company. As assistant general manager, he
worked under the direct supervision of the general manager and
implemented management decisions made by the general manager.
Prior to his employment as assistant general manager, he was
the head of the grocery department of the Farmers for over
four years and was responsible for ordering, stocking and
general operation of the grocery department. Mr. Gonzales has
<PAGE>
been an employee of Farmers in different capacities since
1978.
There are no known arrangements or understandings between any
nominee, director, or officer and any other person pursuant to
which they were or are to be selected as an officer or director.
There are no family relationships between any of the directors or
officers. There are no directors who hold directorships in any
other company with a class of stock registered under the Securities
Exchange Act of 1934 or any company registered as an investment
company.
The Company has no standing audit, nominating or compensation
committees. During the fiscal year ended June 30, 1996 the Board
of Directors held seven regular meetings and six special meetings.
Section 16(a) Compliance. Based on a review of the relevant
reporting forms furnished to the Company, there were no late
reports concerning reportable transactions.
Item 11. Executive Compensation
Directors of the Company receive the sum of $100 per regular
meeting attended, and no other compensation. During the 1996
fiscal year the board of directors held seven regular meetings.
The following table sets forth compensation paid to Kenneth E.
Stevens and Daniel Gonzales, General Managers, who are the
Company's only paid "executive officer" as that term is used in
Item 402 of Regulation S-K under the Securities Exchange Act of
1934. Mr. Stevens served as General Manager of the Company until
March 8, 1996, and was employed as consultant with the Company from
March 18, 1996 until June 30, 1996. Mr. Stevens is no longer
employed by the Company in any capacity. Mr. Gonzales served as
Assistant General Manager until March 18, 1996, and has
subsequently served as General Manager. The following tables
include all compensation paid to Messrs. Stevens and Gonzales
during the time indicated, regardless of their positions.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Name and Principal Fiscal Salary Bonus Other Annual
Position Year Compensation
<S> <C> <C> <C> <C>
Kenneth E. Stevens, 1996 $60,000 -0- -0-
General Manager & 1995 60,000 -0- -0-
Consultant 1994 54,270 -0- -0-
Daniel Gonzales, 1996 $51,194 -0- -0-
General Manager 1995 40,000 -0- -0-
1994 37,700 -0- -0-
Mr. Gonzales serves as general manager of the Company at will,
without an employment agreement.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information on beneficial ownership of the Company's voting
securities by each director and all officers and directors as a
group, and by any person know to beneficially own more than 5% of
any class of voting security of the Company will be included under
the caption "Security Ownership of Certain Beneficial Owners and
Management: in the Company's definitive Proxy Statement relating to
the annual meeting of shareholders to be held on October 16, 1996.
Item 13. Certain Relationships and Related Transactions.
None of the reporting requirements of Item 404 of Regulation
S-K are applicable to this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
The documents listed below are filed as part of this report
and attached hereto.
1. Financial Statements and Financial Statement Schedules
(i) Financial Statements
Report of Independent Public Accountants
Balance Sheets as of June 30, 1996
Statements of Operations for the year ended June
30, 1996
Statements of Stockholders' Equity for the year
ended 1996
Statements of Cash Flows for the year ended June
30, 1996
Notes to Financial Statements
(ii) Financial Statement Schedules
None.
2. Reports on Form 8-K. The following reports on Form 8-K
were filed during the last quarter of fiscal year 1996: (1)
Report dated June 4, 1996 (filed June 11, 1996), reporting the
resignation of Morrow and the appointment of William D. Kennon, CPA
as the replacement independent accountant of the Company; and (2)
Report dated June 12, 1996, and filed June 18, 1996, reporting the
<PAGE>
dual appointment of both William D. Kennon, CPA and Arthur Andersen
LLP as independent accountants of the Company.
3. Exhibits required by Item 601. All exhibits required by
Item 601 of Regulation S-K which are applicable to the Company and
currently in effect are incorporated by reference as follows:
Exhibits 3.1 and 3.2: 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.
Exhibit 9: An "Agreement between Purchasers", which
was filed as an exhibit to a Schedule 14D-1 filed by the
Bidders on June 4, 1996, is incorporated herein by
reference.
SIGNATURES
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.
Dated: September 30, 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
<PAGE>
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 Company and in the capacities and the dates
indicated.
Date
______________________________ September 30, 1996
John W. Brownfield, Director
______________________________ September 30, 1996
James W. Donaldson, Jr.,
Director and Treasurer
Jim T. Hyatt
______________________________ September 30, 1996
Jim T. Hyatt, Director
William R. Johnson, III
______________________________ September 30, 1996
William R. Johnson, III,
Director
James E. Keeler
______________________________ September 30, 1996
James E. Keeler, Director,
Chairman of the Board and
President
Judy Phillips
______________________________ September 30, 1996
Judy Phillips, Director and
Secretary
Douglas Tharp
______________________________ September 30, 1996
Douglas Tharp, Director and
Vice-President
<PAGE>
EXHIBIT INDEX
Exhibit Number Nature of Exhibit Page
3.1 Articles of Incorporation Incorporated
by reference
3.2 Bylaws Incorporated
by reference
9 Voting Trust Agreement Incorporated
by reference
</TABLE>
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
d.b.a. FARMERS, INC.
FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Report of Independent Public Accountants
To the Shareholders and Board
of Directors of Mimbres Valley
Farmers Association, Inc.
d.b.a. Farmers, Inc.:
We have audited the accompanying balance sheet of Mimbres Valley
Farmers Association, Inc. d.b.a. Farmers, Inc. (a New Mexico
corporation) as of June 30, 1996, and the related statements of
operations, shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Mimbres
Valley Farmers Association, Inc. d.b.a. Farmers, Inc. as of June
30, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted
accounting principles. As explained in Note 1 to the financial
statements, Mimbres Valley Farmers Association, Inc. d.b.a.
Farmers, Inc. changed its method of reporting cash flows from
operating activities from the direct method to the indirect method
during 1996.
Albuquerque, New Mexico
September 27, 1996
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
d.b.a. FARMERS, INC.
BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash $ 293,163
Accounts receivable, net of
allowance for doubtful
accounts of $18,852 -
Trade 439,671
Related parties 66,964
Inventories 2,863,318
Prepaid income taxes 339,600
-------------------
Total current assets 4,002,716
-------------------
PROPERTY AND EQUIPMENT, net 2,320,206
-------------------
OTHER NONCURRENT ASSETS:
Intangibles, net 17,888
Notes receivable - supplier 59,667
Investments in supplier 68,051
-------------------
Other noncurrent assets, net 145,606
Total assets $ 6,468,528
-------------------
The accompanying notes to financial statements are an integral part of this
statement
<PAGE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,558,849
Current portion of long-term
debt and capital leases 302,185
Accrued expenses 330,333
-------------------
Total current liabilities 2,191,367
-------------------
NON-CURRENT LIABILITIES:
Long-term debt and capital leases,
less current portion 1,926,477
Deferred income taxes 37,537
-------------------
Total non-current liabilities 1,964,014
-------------------
Total liabilities 4,155,381
-------------------
SHAREHOLDERS' EQUITY:
Common stock: $25 par value;
500,000 authorized;
13,910 issued and
13,776 outstanding 347,749
Retained earnings 1,968,748
Treasury shares (3,350)
-------------------
Total shareholders' equity 2,313,147
-------------------
Total liabilities
and shareholders'
equity $ 6,468,528
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
d.b.a. FARMER'S, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<S> <C>
NET SALES AND GROSS REVENUE $ 21,949,927
COST OF SALES 17,743,893
-------------
Gross profit 4,206,034
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,624,030
--------------
OPERATING LOSS (417,996)
OTHER INCOME (EXPENSE):
Other income 269,916
Interest expense (171,229)
--------------
Loss before income tax
benefit (319,309)
INCOME TAX BENEFIT (121,631)
--------------
Net loss $ (197,678)
--------------
Net loss per common share $ (14.35)
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
d.b.a. FARMERS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
Common Retained Treasury Total
Stock Earnings Shares Shareholders'
Equity
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
BALANCE,
JUNE 30, 1995 $ 347,749 $ 2,166,426 $ (3,350) $ 2,510,825
Net loss - (197,678) - (197,678)
---------- ------------ --------- ---------
BALANCE,
JUNE 30, 1996 $ 347,749 $ 1,968,748 $ (3,350) $ 2,313,147
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement
<PAGE>
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
d.b.a. FARMERS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (197,678)
Adjustments to reconcile net loss to net cash
used for operating activities -
Depreciation and amortization 213,584
Increase in accounts receivable (232,827)
Decrease in notes receivable - supplier 45,063
Increase in inventories (574,546)
Increase in prepaid taxes and other (290,478)
Increase in accounts payable 798,017
Increase in accrued expenses 150,341
Decrease in income taxes payable (119,769)
Decrease in deferred income taxes (67,119)
---------------
Net cash used for operating activities (275,412)
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (813,431)
Increase in investments in supplier 21,169
---------------
Net cash used for investing activities (792,262)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 2,567,925
Repayments on long-term debt (1,370,922)
---------------
Net cash provided by financing activities 1,197,003
---------------
NET INCREASE IN CASH 129,329
CASH at beginning of year 163,870
---------------
CASH at end of year $ 293,199
---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest $ 165,157
---------------
Cash paid for income taxes $ 189,600
---------------
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
d.b.a. FARMERS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
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 expenses,
and the disclosure of contingent assets and liabilities. Actual
results may differ from these estimates.
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 possible 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 ended June 30, 1996 as the
amounts were insignificant. Labor totaling $92,710 was capitalized
in the year ended June 30, 1996.
<PAGE>
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 June 30, 1996, the advertising expense was $267,652.
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 Loss per Common Share
Net loss per share is computed by dividing the net loss by the
weighted average number of shares of common stock outstanding for
the year ended June 30, 1996.
Change in Reporting
The Company changed its method of reporting cash flows from
operating activities from the direct method to the indirect method
during 1996.
2. PROPERTY AND EQUIPMENT:
Property and equipment as of June 30, 1996, consisted of the following:
Furniture, fixtures and equipment $ 2,830,607
Buildings 2,249,146
Leasehold improvements 154,671
Land 80,203
-------------
5,314,627
Less: Accumulated depreciation
and amortization (2,994,421)
-------------
$ 2,320,206
-------------
<PAGE>
3. NOTES RECEIVABLE - SUPPLIER:
The notes receivable - supplier at June 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 -
supplier approximate their carrying value.
4. INVESTMENTS IN SUPPLIER:
Investments in supplier, at cost, as of June 30, 1996, consists 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
The Class A and B stock of the supplier were received as patronage
dividends. None of the stock shown as investments in supplier is
readily marketable. The book value of the shares was $69,104 as of
June 30, 1996.
5. LONG-TERM DEBT AND CAPITAL LEASES:
Long-term debt and capital leases as of June 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 at rates ranging from 8.95% to 9.90%, and secured
by real estate mortgages and property and equipment $ 1,755,885
Capital leases, net of interest of $36,646 143,025
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 109,621
Note payable to Bank, due November 5, 1996. Interest at Bank
prime rate plus .50% (9.25% at June 30, 1996), secured by
inventories 100,000
Variable rate note payable to Bank, due in monthly installments
of $1,675. Interest at Bank prime rate plus .75% (9.75% at June
30, 1996), secured by equipment 74,875
Other notes payable 45,256
------------
2,228,662
Less: Current portion 302,185
------------
$ 1,926,477
------------
<PAGE>
The fair value of long-term debt and capital leases approximates their
carrying values. Future maturities of long-term debt and capital leases
as of June 30, 1996, are as follows:
1997 $ 302,185
1998 174,750
1999 182,618
2000 173,024
2001 1,396,085
Thereafter -
-------------
Total $ 2,228,662
-------------
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 of $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.
Furniture, fixtures and equipment totaling $116,885 as of June 30, 1996, was
financed under capital leases.
6. OPERATING LEASES:
Future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of 1 year as of June 30, 1996,
are as follows:
1997 $ 110,000
1998 110,000
1999 110,000
2000 110,000
2001 110,000
Thereafter 155,835
--------------
Total minimum future lease payments $ 705,835
7. OTHER INCOME: Other income as of June 30, 1996, consists of the
following:
Rentals $ 115,004
Check Cashing Fees 51,159
Western Union Commissions 28,999
Other 74,754
--------------
Total other income $ 269,916
--------------
<PAGE>
8. RENTAL INCOME: The Company leases retail space to customers with terms
generally ranging from 2 to 10 years. The leases contain provisions for 3 to
an unlimited number of renewal options of 5 to 10 years. The future minimum
rental payment receivables on operating leases that have initial or remaining
noncancelable lease terms in excess of 1 year as of June 30, 1996, are
as follows:
1997 $ 39,736
1998 20,472
1999 19,939
2000 10,872
2001 10,872
Thereafter 39,864
-----------
Total minimum rental
payment receivables $ 141,755
9. TENDER OFFER: On June 3, 1996, a tender offer (the "Tender Offer") was
made for all outstanding shares of Farmers common stock for a price of
$50.00 net cash per share. 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 E. Keck, Frederick H. Sherman
and Kenny Stevens. Kenny 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 Bidders are engaging
in this transaction in order to gain control over the management,
operations and assets of the Company. 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 of injunctive relief, in the U.S. District Court for the District
of New Mexico (the "Court"), 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 (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.
Farmers has not, however, withdrawn its complaint against the Bidders; nor
has it served the complaint on any of the Bidders. Instead, it is the
Company's intention to wait until October 18, 1996, the deadline for
service of the complaint under Federal Rule of Civil Procedure 4(m) , and
to determine based on the facts and circumstances known then whether or not
to prosecute its suit against any or all of the Bidders for damages. If
the Company does decide to prosecute its case, it may have other federal
and state claims available. On September 12, 1996 the Bidders extended the
term of the Tender Offer again to November 20, 1996.
10. LITIGATION:
The Company is presently engaged in litigation in connection with a Tender
Offer (see Note 9). The Company has filed a complaint against the Bidders
which alleges violations of the Securities Exchange Act of 1934 arising
from the Tender Offer.
The Company is also engaged in various legal proceedings, including an
action involving an environmental claim, all of which are incidental to its
normal business activities. In the opinion of the Company, none of such
proceedings are material in relation to the Company's financial position
or operations.
11. 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 or if the
Company continues to purchase goods from other supplier sources.
<PAGE>
12. SUBSEQUENT EVENT:
Subsequent to year end, the Company determined to not renew its electronics
store franchise in fiscal year 1997 and to also discontinue sales of
furniture. The sales of the two operations combined was approximately 2%
of total sales revenue in 1996.
13. 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
suppliers accounted for 64% of inventory purchases. In addition, certain
related parties of the Company are guarantors for amounts outstanding to
certain major suppliers.
14. MANAGEMENT'S PLANS FOR FUTURE OPERATIONS (UNAUDITED):
The Company incurred operating losses, experienced a deterioration of its
working capital and violated a debt covenant, among other matters in the
preceding year. The Company's viability as a going concern is dependent
upon various factors, including the ability to obtain additional credit and
a return to profitability. Management of the Company is anticipating the
generation of positive cash flows from operations as soon as the second
quarter of fiscal year 1997. They attribute this to the following factors:
(1) The Company is anticipating a refund of fiscal year 1996 income
taxes paid of approximately $190,000 due to operating losses. In addition,
the Company expects to be able to carryback fiscal year 1996 losses to
prior years resulting in additional cash refunds of previous income taxes
paid;
(2) The Company incurred significant non-recurring expenses in fiscal
year 1996 which are not expected to be incurred in fiscal year 1997 for
legal and accounting costs associated with the Tender Offer;
(3) The expansion of the Company's hardware business and other
activities over the past year will require changes in operating strategy
to prevent continuing excessive costs associated with the new activities.
Part of the necessary strategy involves a better identification of product
lines that are profitable as opposed to those that are unprofitable. For
example, the hardware expansion included a significant increase in number
and variety of items carried in stock, but it is now apparent that a
winnowing is needed to eliminate certain items that sell slowly and/or have
low profit margins;
(4) The Company also determined that certain retail categories should
be eliminated entirely to help control costs. Accordingly, the Company
expects to sell or liquidate its electronics business, which historically
has been a poor financial performer. In addition, the Company intends to
eliminate or (preferably) sell the furniture business, which has not shown
promise, and move the appliance business into the hardware store;
<PAGE>
(5) In connection with the cost-reduction activities, the Company
expects to gradually reduce employment over the fiscal year 1997 and
(6) The company is currently negotiating with a bank for a $500,000
working capital loan.
15. SELECTED QUARTERLY INFORMATION (UNAUDITED):
The Company's restated unaudited fiscal year 1996 quarterly financial
information is presented below to reflect a correction of inventory
costing. Inventories were inadvertently calculated using a method
determined not to comply with generally accepted accounting principles:
<TABLE>
First Quarter Second Quarter Third Quarter
---------------- ---------------- ----------------
<S> <C> <C> <C>
Gross profit $ 1,158,851 $ 2,409,217 $ 3,453,289
Operating income 134,870 350,520 168,103
Net income 76,220 259,644 78,939
Earnings per share 5.53 18.85 5.73
</TABLE>
16. INCOME TAXES:
Components of the net deferred income tax liability at June 30, 1996,
are as follows:
Deferred income tax assets:
Inventory method change $ 111,594
Inventory capitalization 23,850
Allowance for doubtful accounts 7,070
---------------
Deferred income tax asset 142,514
Deferred income tax liability
related to depreciation
and other differences (180,051)
---------------
Deferred income tax liability $ 37,537
---------------
The Company had a current year loss for tax purposes which will be carried
back to the fiscal years ended June 30, 1992 and 1993. Also, the Company
overpaid for fiscal year 1996 taxes by $189,600. These amounts are
included in prepaid income taxes in the accompanying balance sheet.
The income tax benefit consists of the following for the fiscal year ended
June 30, 1996:
Deferred income tax benefits:
Federal $ (110,279)
State (11,352)
---------------
Total $ (121,631)
---------------
<PAGE>
The income tax benefit is reconciled with the expected Federal
statutory rate for the year ended June 30, 1996, as follows:
Provision computed at Federal statutory rate $ (108,565)
State taxes net Federal benefit (7,376)
Non-deductible meals and entertainment 1,194
Other 6,884
--------------
Total $ (121,631)
--------------
