UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File
May 31, 1996 Number 0000927536
ALLIANCE FARMS COOPERATIVE ASSOCIATION
(Exact name of registrant as specified in its charter)
Colorado 84-1270685
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
302 Idlewild Street, Yuma, Colorado 80759
(Address of principal executive offices)
303-848-3231
(Issuers telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 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 [ ]
At July 12, 1996, there were 102 shares of the issuers common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [No]
ALLIANCE FARMS COOPERATIVE ASSOCIATION
CONDENSED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
May 31, 1996 August 31, 1995
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 0 $1,477,213
Receivables 55,394 31,887
Inventory (Note 4) 1,688,684 1,069,144
Other current assets 67,304 19,274
Total current assets 1,811,382 2,597,518
Property, plant and equipment, at cost 15,872,975 10,345,236
Less accumulated depreciation 1,144,209 705,989
14,728,766 9,639,247
Breeding stock 3,593,710 2,877,957
Less accumulated depreciation 924,691 708,363
2,669,019 2,169,594
Other assets, net of $46,630 and $26,932
accumulated amortization 210,899 165,581
$19,420,066 $14,571,940
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft 317,616 0
Page 3
Current maturities of long-term debt (Note 5) 870,000 580,000
Accounts payable (Note 3) 574,159 714,096
Accrued Rebates (Note 2) 480,249 ---
Accrued expenses 123,249 65,151
Total current liabilities 2,365,273 1,359,247
Long-term debt (Note 5) 12,397,924 8,585,000
Shareholders' equity
Common stock of $.01 par value; authorized
10,000 shares, issued and outstanding 102
shares (85 shares at August 31, 1995) 1 1
Additional paid-in capital 7,487,653 6,165,970
Accumulated deficit (2,830,785) (1,538,278)
Total shareholders' equity 4,656,869 4,627,693
Commitments (Note 6) ------ ---
$19,420,066 $14,571,940
<FN>
See accompanying notes to condensed financial statements
</TABLE>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
May 31 May 31
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales (Note 2) $1,928,627 $382,629 $4,799,903 $1,179,640
Cost of goods sold 1,821,149 467,423 4,828,839 1,405,088
Gross margin 107,478 (84,794) (28,936) (225,448)
Expenses related to start-up
of new production facilities 237,806 264,983 238,822 424,637
Administrative expenses 93,792 23,570 264,357 67,911
(Gain)Loss on sale of breeding stk (9,140) 23,100 161,397 46,522
Operating loss ($214,980) ($396,447) ($693,512) ($764,518)
Other income (expense):
Interest expense (193,038) (105,555) (632,358) (116,107)
Other 25,789 9,893 33,363 24,736
(167,249) (95,662) (598,995) (91,371)
Page 6
Net loss ($382,229) ($492,109) ($1,292,507) ($855,889)
<FN>
See accompanying notes to condensed financial statements
</TABLE>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Nine Month Periods Ended
May 31
1996 1995
<S> <C> <C>
Cash flow from operating activities:
Net loss (1,292,507) (855,889)
Adjustment to reconcile net loss to net cash
used in operating activities:
Provision for depreciation and amortization 1,211,378 662,797
Loss on sale of breeding stock 161,397 46,522
Changes in assets and liabilities:
Receivables (23,507) (160,556)
Inventory (619,540) (370,638)
Other current assets (48,030) (11,210)
Other assets (25,262) (23,536)
Accounts payable (139,937) 251,736
Accrued rebates 480,249 ---
Accrued expenses 58,098 29,203
Net cash used in operating (237,661) (431,571)
activities
Cash flows from investing activities:
Capital expenditures (7,300,281) (7,903,642)
Proceeds from sale of breeding stock 360,506 52,878
Net cash used in investing activities (6,939,775) (7,850,764)
Page 9
Cash flows from financing activities
Proceeds from issuance of long term debt 1,810,000 6,285,000
Net increase in revolving term credit 2,019,000 ---
Payment on long term debt (362,500) ---
Increase in note payable to Farmland 636,424 ---
Issuance of common shares, net of offering cost 1,321,683 ---
Loan origination fees (42,000) (66,878)
Bank Overdraft 317,616 ---
Net cash provided by
financing activities: 5,700,223 6,218,122
Decrease in cash and cash
equivalents (1,477,213) (2,064,213)
Cash and cash equivalents at beginning of period 1,477,213 2,107,599
Cash and cash equivalents at end of period 0 43,386
<FN>
See accompanying notes to condensed financial statements
</TABLE>
Alliance Farms Cooperative Association
Notes to Condensed Financial Statements
(Unaudited)
1. Interim Financial Statements
The accompanying condensed unaudited financial statements reflect all
adjustments (consisting of only normal recurring accruals) which in the
opinion of management, are necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods presented. Income taxes have not been provided because Alliance
Farms Cooperative Association (Alliance) expects to derive 100% of its net
income principally from the sale of feeder pigs to its members which will
be apportioned and distributed to members of Alliance on a patronage basis
in accordance with its by-laws.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying unaudited
condensed financial statements should be read in conjunction with the
financial statements and notes in Alliance August 31, 1995 Annual Report on
Form 10-KSB.
2. Sales
Alliance has sold 100% of its feeder pigs to its members for the three
month and nine month periods ending May 31, 1996 and 1995 at a contractual
price which is based on Alliance's operating costs (which are based on a
twelve month rolling average), debt service and an additional $4.50 per pig
sold for the three month and nine month periods ending May 31, 1996 and at
a contractual price which was based on Alliance's operating costs (which
were based on a twelve month rolling average) for the three month and nine
month periods ending May 31, 1995.
Alliance's sales for the three and nine months ending May 31, 1996 have
been reduced by the accrual of a rebate of $480,249 (as of May 31, 1996)
that is intended to be paid to its members after the end of the fiscal
year, subject to board of director approval and the consent and approval of
Alliance's lender, CoBank.
Because the contractual price for the sale of a feeder pig is determined
based upon, among other things, a twelve month historical rolling average
for operating costs and to the extent that current operating costs per pig
exceed the historical average operating costs, Alliance may incur a
negative gross margin on the sale of its feeder pigs during periods of
rising costs.
Alliance's average net sales price and the average industry market price
were as follows:
<TABLE>
<CAPTION><
Three Months Ended Nine Months Ended
May 31 May 31
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Average Net Sales Price 48.45 36.49 44.86 34.60
Average Industry Market* 43.89 38.02 41.60 32.12
*As published by Spark's Companies, Inc. (from the USDA's Market News Service)
</TABLE>
3. Transactions with Farmland and Yuma
Alliance purchased feed from Yuma Farmers' Milling and Mercantile
Cooperative (Yuma), and animal health supplies and breeding stock from
Farmland Industries, Inc. (Farmland) based on market prices. Yuma and
Farmland are members of Alliance. Alliance also sold feeder pigs to
Farmland and Yuma. Such purchases and sales were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Feed Purchases....................$ 1,003,546 $ 285,692 $ 2,271,680 $ 617,991
Animal Health Purchases........... 53,916 9,318 147,172 35,468
Breeding Stock.................... 254,568 63,479 712,518 114,650
Feeder Pig Sales.................. 1,268,784 382,629 3,214,592 1,179,640
</TABLE>
Farmland also performs administrative, advisory and consulting services on
behalf of Alliance pursuant to a contractual agreement. The agreement
provides that Farmland will be compensated for such services in an amount
equal to one dollar per pig shipped adjusted annually for inflation for a
term of ten years commencing July 13, 1994. Amounts paid by Alliance to
Farmland under such agreement were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Management Fee $ 40,627 $ 10,647 $ 109,213 $ 34,091
</TABLE>
Alliance owed $67,110 and $107,953 at May 31, 1996 and $66,597 and $32,882
at August 31, 1995 to Farmland and Yuma respectively, for goods and
services.
4. Major components of inventories as of May 31, 1996 and August 31, 1995 are
as follows:
May 31 August 31
1996 1995
Feeder Pigs............$ 1,576,888 $ 993,554
Feed................... 94,431 75,590
Shop Stock............. 17,365 ---
$ 1,688,684 $ 1,069,144
Results of operations for the periods ended May 31, 1996 have been reduced
by approximately $17,077 to recognize the write down of inventory from cost
to market.
5. Long-Term Debt
On May 19, 1995, Alliance entered into a $23,600,000 secured credit
facility with CoBank. This agreement provides for $18,850,000 of term
loans and $4,750,000 of revolving term credit. Proceeds from the term
loans are used for construction of feeder pig production facilities and are
advanced by CoBank as Alliance incurs construction costs. Proceeds from
Page 18
revolving term credit may be used for working capital and other purposes.
The unused commitments expire February 28, 1997 for the term loans and June
20, 2006 for the revolving term credit. Interest accrues on the
outstanding principle balance of the loan at a rate equal to CoBank's
national variable rate, plus 1.25% (9.5% at May 31, 1996). Alliance
capitalized $30,599 and $34,644 of interest on construction for the nine
month periods ended May 31, 1996 and 1995 respectively.
At May 31, 1996, term loans amounting to $9,747,500 were outstanding,
$89,000 was immediately available and $2,321,000 will be available upon
acceptance by CoBank of a feeder pig production facility under construction
at May 31, 1996. On June 10, 1996, CoBank made available $1,899,000 with
the remaining amount of $422,000 to be made available upon final acceptance
of the feeder pig production facilities.
At May 31, 1996, revolving term credit of $2,884,000 was outstanding and
$36,000 was immediately available.
Term loans of $6,330,000 and revolving term credit of $1,830,000 are
restricted and available only as additional shares of common stock are sold
($2,110,000 of term loans and $610,000 of revolving term credit for every
$1,360,000 of common stock sold).
Alliance is required to comply with various covenants, including, but not
limited to (i) maintaining at least $3,350,000 of shareholder's equity,
(ii) maintaining modified working capital (calculated as current assets
plus the available revolving term credit minus current liabilities
excluding the current portion of term debt payments) of at least $406,000,
(iii) restrictions on the occurrence of additional indebtedness, (iv)
restrictions on the declaration and payment of the cash portion of
patronage distributions and other distributions or allocations of earnings,
surplus or assets. As of May 31, 1996 Alliance was in compliance with all
covenants except for the working capital requirement, which was waived by
CoBank on July 9, 1996. Working capital, as defined, as of May 31, 1996
was $352,109, which was $53,891 less than the required amount. Alliance
will be required to make equity investments in CoBank in an amount not to
exceed 1% of the average five-year principal loan balance until Alliance
meets CoBank's target level of equity investment. As of May 31, 1996,
substantially all assets of Alliance were pledged to CoBank.
At May 31, 1996, $636,424 had been borrowed from Farmland pursuant to a
$760,000 loan agreement. The loan agreement with Farmland provides for
interest at CoBank's prime rate and requires repayment in 2005.
Long-term debt as of May 31, 1996 matures during the fiscal years ending
August 31 in the following amounts:
1996........$ 217,500
1997........ 870,000
1998........ 1,318,800
1999........ 1,318,800
2000........ 1,318,800
Thereafter.. 8,224,024
$ 13,267,924
6. Alliance Farms is currently operating four 2,450 sow feeder pig production
units and has an additional two units under construction. At May 31,
1996, commitments for construction of such facilities totaled approximately
$775,000. These commitments will be funded through bank borrowings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN
THIS REPORT ON FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ALLIANCE'S ACTUAL RESULTS, FINANCIAL CONDITION OR BUSINESS COULD
DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION OR BUSINESS,
OR THE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS CONTEMPLATED BY
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW UNDER THE
CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL
CONDITION OR BUSINESS", AS WELL AS THOSE DISCUSSED ELSEWHERE IN ALLIANCE'S
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
Alliance commenced operations in July 1994, following its acquisition of
the entire equity ownership rights and interest in Yuma Feeder Pig Limited
Liability Company ("Yuma LLC"), a Colorado limited liability company in which
Farmland Industries, Inc. ("Farmland") and Yuma Farmers Milling and Mercantile
Cooperative Company ("Yuma") owned 71.5% and 28.5%, respectively, of the
outstanding equity interests. Subsequent to Alliance's acquisition of Yuma LLC,
Yuma LLC was dissolved and liquidated and Alliance received all assets and
liabilities of Yuma LLC and continued the feeder pig production operations of
Yuma LLC as described herein.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Alliance issued 17 shares of common stock in August 1995 and 17 shares in
October 1995 for net proceeds of approximately $2,605,600. Alliance used these
proceeds, in combination with borrowings of $3,451,712 through May 31, 1996, for
the development, population, and start-up of one 2,450-sow feeder pig production
facility in Yuma County, Colorado and one 2,450-sow feeder pig production
facility in Wayne County, Illinois.
Alliance has issued 102 common shares and is presently offering an
additional 51 shares to qualified buyers. Alliance has under its credit
facility $125,000 immediately available as of May 31, 1996, and $1,899,000 of
term loans became available on June 10, 1996. An additional $422,000 of term
loan is to become available approximately 90 days following completion of
construction. Of the $125,000 currently available and the $2,321,000 to be made
available under the credit facility at May 31, 1996, Alliance had approximately
$775,000 remaining to complete the construction of the two new units, $228,000
of other capital expenditures, and $1,318,000 is available for working capital
as such construction costs were previously funded through working capital. In
the opinion of management, these arrangements for debt capital are adequate for
Alliance's present operating and capital plans. Another $8,160,000 will be
eligible for borrowing upon the completion of the sale of an additional 51
common shares of Alliance. Proceeds from the sale of the common shares and
additional bank borrowings would be used for future capital expansion of
additional feeder pig production facilities. However; there is no assurance
that additional shares of common stock will be sold and that the resulting
additional debt would be available.
During the nine month period ended May 31, 1996, Alliance incurred capital
expenditures of $5,840,271 for construction of a new 2,450 sow feeder pig unit
in Yuma County, Colorado and a new 2,450 sow feeder pig unit in Wayne County,
Illinois, as well as capital expenditures of $636,424 for land purchased for
future construction. The remaining capital expenditures were for replacement
breeding stock and building construction for the first four units.
Alliance estimates that an additional $1,503,000 of costs will be incurred
before the two facilities under development are operating at full capacity
which will be funded by additional borrowings from its existing credit
facility.
THREE MONTHS ENDED MAY 31, 1996 AND 1995
Shipments of feeder pigs were higher for the three months ended May 31,
1996 than in the prior year's period. Alliance shipped 39,831 feeder pigs for
the quarter ended May 31, 1996 compared to 10,485 feeder pigs shipped for the
quarter ended May 31, 1995 for an increase of 280%. Net sales for the quarter
ended May 31, 1996 increased to $1,928,627 from $382,629 for the prior year
period, an increase of $1,545,998, or 404%. This increase in volume and sales
dollars is primarily due to four units operating at full capacity for the
quarter ended May 31, 1996 versus one unit at full capacity for the quarter
ended May 31, 1995.
The fiscal 1996 selling price per pig was determined pursuant to the
formula established under Alliance's Feeder Pig Purchase Agreement with its
members. Alliance's results are dependent upon the sale price paid to the
Company for feeder pigs, which in turn is determined in part on the twelve month
historical rolling average of operating costs incurred by Alliance in producing
feeder pigs. The average sales price per head for the three month period ending
May 31, 1996 reflects a contractual arrangement which became effective in July
1995 in which the price is based on Alliance's operating costs (which are based
on a twelve month rolling average), debt service and an additional $4.50 per
pig. The average sales price per head for the three month period ending May 31,
1995 reflects a contractual price which was based on Alliance's operating costs
(which were based on a twelve month rolling average) for the three month period
ending May 31, 1995. Alliance's sales for the three months ending May 31, 1996
have been reduced by the accrual of a rebate of $179,240 that is intended to be
paid to its members after the end of the fiscal year, subject to board of
director approval and the consent and approval of Alliance's lender, CoBank. No
assurances can be given that such board of director approval and CoBank consent
and approval will be obtained and that any such rebate will be paid. Alliance
incurred a positive gross margin of $107,478 and a negative gross margin of
$84,794 for the three month periods ended May 31, 1996 and 1995 respectively.
The slim and negative margins are a result of Alliance's current operating costs
exceeding the historical average.
Sales to Farmland for the three month period ended May 31, 1996 and 1995
were $1,268,784 and $382,629 respectively. The average net sales price per
head was $48.45 and $36.49 and the average industry market price per head was
$43.89 and $38.02 during 1996 and 1995 respectively.
Alliance recorded $237,806 of start-up costs relating to the operation of
the two production facilities under construction during the three months ended
May 31, 1996 and $264,983 of start-up costs relating to the operation of the
three production facilities under construction and the conversion of its
existing facility during the three months ended May 31, 1995. All costs for the
three month period ended May 31, 1996 and $237,557 of the costs for the period
ended May 31, 1995 were comprised of utilities, feed, labor and other general
expenses prior to the operation of the new 2,450-sow feeder pig production
facilities and $27,425 for the three month period ended May 31, 1995 were
attributable to the conversion of the existing 2,450-sow feeder pig unit to a
multiplier unit.
Administrative expenses were $93,792 for the three months ended May 31,
1996 compared to $23,570 for the prior year period. This increase reflects the
increased operations and includes higher administrative, payroll and
professional fees.
Interest expense of $193,038 for the three months ended May 31, 1996 was
incurred in financing the development of four existing and two new 2,450-sow
feeder pig facilities. As of May 31, 1996, Alliance had borrowed $12,631,500
from CoBank for construction and start up costs and $636,424 from Farmland for
the purchase of land which is intended to be used for future expansion.
The overall result of the increased production costs, volume,
administrative and interest expenses resulted in a net loss of $382,229 for the
three months ended May 31, 1996 compared to net loss of $492,109 for the prior
year period.
NINE MONTHS ENDED MAY 31, 1996 AND 1995
Shipments of feeder pigs were higher for the nine months ended May 31, 1996
than in the prior year's period. Alliance shipped 107,072 feeder pigs in the
first nine months of fiscal 1996 compared to 34,085 feeder pigs shipped in the
first nine months of fiscal 1995 for an increase of 214%. Net sales for the
nine months ended May 31, 1996 increased to $4,799,903 from $1,179,640 for the
prior year period, an increase of $3,620,263, or 307%. This increase in volume
and sales dollars is primarily due to four units operating at full capacity for
the first nine months of fiscal 1996 versus one unit at full capacity for the
first half of fiscal 1995 and the change in the contract price as previously
described.
Alliance's sales for the nine months ending May 31, 1996 have been reduced
by the accrual of a rebate of $480,249 that is intended to be paid to its
members after the end of the fiscal year, subject to board of director approval
and the consent and approval of Alliance's lender, CoBank. No assurances can be
given that such board of director approval and CoBank consent and approval will
be obtained and that any such rebate will be paid. Alliance incurred negative
gross margins of $28,936 and $225,448 for the first nine months of fiscal 1996
and 1995 respectively. For the nine months ended May 31, 1996 current operating
costs exceeded the historical rolling average of operating costs by $2.28 per
head sold. For the nine months ended May 31, 1995 current operating costs
exceeded the historical rolling average of operating costs by $1.59 per head
sold.
Sales to Farmland for the first nine months of fiscal 1996 and 1995 were
$3,214,592 and $1,179,640 respectively. The average net sales price per head
was $44.86 and $34.60 and the average industry market price per head was $41.60
and $32.12 during 1996 and 1995 respectively.
Alliance recorded start-up costs of $238,822 and $424,637 relating to the
operation of new production facilities during the nine months ended May 31, 1996
and 1995 and conversion of the existing unit to a multiplier unit during the
nine months ended May 31, 1995. All costs for the nine month period ended May
31, 1996 and $317,632 of the costs for the nine month period ended May 31, 1995
were comprised of utilities, feed, labor and other general expenses prior to the
operation of the new 2,450-sow feeder pig production facilities and $107,005 for
the nine month period ended May 31, 1995 were attributable to the conversion of
the existing 2,450-sow feeder pig unit from a commercial sow unit to a
multiplier sow unit.
Administrative expenses were $264,357 for the first nine months of fiscal
1996 compared to $67,911 for the prior year period. This increase reflects the
increased operations and includes higher administrative, payroll and
professional fees.
Interest expense of $632,358 for the first nine months of fiscal 1996 was
incurred in financing the development of four existing and two new 2,450-sow
feeder pig facilities.
The overall result of the increased production costs, volume,
administrative and interest expenses resulted in a net loss of $1,292,507 for
the first nine months of fiscal 1996 compared to a net loss of $855,889 for the
prior year period.
PLAN OF OPERATION
Alliance is currently expanding its operations and until such time when its
units are operating at full capacity, management expects these losses to
continue.
During the year ending August 31, 1996, Alliance intends to continue the
operation of its four, 2,450-sow production facilities located in Yuma County,
Colorado and to complete construction and population of the two 2,450 sow
production facilities under development. Alliance believes that construction of
each of the two new facilities will be completed by September 1, 1996. Further,
in the event that completion of construction and population of these facilities
is accomplished in a timely manner, Alliance expects to be in a position to
produce feeder pigs from at least one of the two new facilities by August, 1996
and to be operating at full capacity by October, 1996. It is anticipated that
employment of Alliance will have increased by approximately twenty-four persons
by August 31, 1996, as the operation of each production unit, together with
attendant nursery facilities, is expected to require twelve persons.
As of May 31, 1996, Alliance had expended approximately $6,180,000 in
connection with the two new facilities. Funding of the ongoing operation of
Alliance's existing 2,450-sow feeder pig production facilities is anticipated to
be obtained from revenues from the sale of feeder pigs to members based on
Alliance's Feeder Pig Purchase Agreement and its existing credit facility.
Alliance has implemented an artificial insemination program (AI) in the
Colorado operation and plans on continuing AI as Alliance expands into other
geographical areas. Alliance believes that AI will allow more rapid improvements
in carcass quality with both their Pig Improvement Company (P.I.C.) and DeKalb
genetic stock.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of,"
("Statement 121") was issued by the Financial Accounting Standards Board in
March 1995 and is effective for fiscal years beginning after December 15, 1995
(the Company's 1997 fiscal year). Statement 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
Management expects that the adoption of Statement 121 will not have a
significant impact on Alliance's Financial Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS FINANCIAL CONDITION OR
BUSINESS
In order to take advantage of the safe harbor provisions for forward-
looking statements contained in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
added to those Acts by the Private Securities Litigation Reform Act of 1995,
Alliance is identifying important risks and uncertainties that could cause
Alliance's actual results of operations, financial condition or business to
differ materially from its historical results of operations, financial condition
or business, or the results of operations, financial condition or business
contemplated by forward-looking statements made herein or elsewhere orally or in
writing. Factors that could cause or contribute to such differences include,
but are not limited to, those factors described below.
EARLY STAGE OF DEVELOPMENT
Alliance was formed in May, 1994 (with its predecessor, Yuma LLC, being
formed in October, 1991) and is at an early stage of development. Accordingly,
it is subject to all of the risks inherent in the establishment of a new
business and the operation of a business generally, including the need for
substantial capital to support its facilities development efforts, the need to
attract and retain qualified personnel and experienced management, the risks
related to facility location and construction, changes in market conditions and
costs, competition, inflation, production efficiency, quality control, herd
health, environmental and other governmental laws and regulations, and the other
risks described in this Report. There can be no assurance that Alliance
successfully will implement its business plan to develop additional feeder pig
production facilities and realize any significant economies of scale or that the
feeder pigs to be raised at such facilities will be made available to Alliance's
stockholders under the Feeder Pig Purchase Agreements in quantities which are
sufficient to meet the requirements of such stockholders and at prices that are
less than otherwise could be obtained from other sources.
HERD HEALTH
The health of the breeding herd and feeder pigs produced by Alliance can
greatly impact the profitability of Alliance. In the event that Alliance's
breeding herd or feeder pig population contracts a disease causing diminished
breeding stock productivity, or extreme mortality and morbidity, Alliance will
face substantial cost or loss and its operating results will be adversely
affected. In addition, herd health problems could result in an increase in the
price for feeder pigs under the Feeder Pig Purchase Agreements as well as a
reduction in the feeder pigs available for purchase by stockholders under said
Agreements. Although Alliance's facilities have been designed in an attempt to
allow for disease separation between the facilities, large numbers of animals
will be raised together and may be vulnerable to disease. No assurance can be
given that Alliance will be able to avoid herd health problems.
VOLATILE INPUT COSTS
Because the cost of feed and other supplies constitute a substantial
portion of the cost of producing a feeder pig, Alliance's profitability is
extremely sensitive to changes in the cost of such inputs. These costs are
subject to substantial fluctuations based upon regional and seasonal
availability and demand, including those attributable to crop conditions,
weather and other factors. A substantial increase in the cost of these inputs
could materially adversely affect the performance of Alliance and result in the
price for feeder pigs under the Feeder Pig Purchase Agreements being higher than
otherwise could be obtained from other sources. Moreover, Alliance's operating
results are dependent upon the sale price paid to Alliance for feeder pigs,
which in turn is determined in part based on the twelve month historical rolling
average of operating costs incurred by Alliance in producing feeder pigs.
Actual changes in the sale price of feeder pigs therefore will lag changes in
the related operating costs and may adversely affect Alliance's operating
results.
ADEQUATE WATER SUPPLY
Alliance's operations are dependent upon the availability of an ample
supply of pure water at reasonable cost. Although Alliance has obtained the
necessary commercial water well permits to obtain the water necessary to conduct
its current operations in Colorado, Alliance has been advised that it will be
unable to obtain any new commercial well permits in Colorado. Accordingly,
Alliance has found it necessary in Colorado to obtain the water necessary for
its operations through the purchase of more expensive, irrigated land or other
real property already having the necessary commercial well permits. No
assurance can be given that Alliance will be able to obtain the water permits
necessary to enable it to expand its operations in Colorado, Illinois or other
locations selected by Alliance. Alliance's inability to obtain the necessary
water well permits for the expansion of its operations could have a material
adverse effect on Alliance's business.
OBLIGATION TO PURCHASE FEEDER PIGS
Each member of Alliance has entered into a Feeder Pig Purchase Agreement,
pursuant to which such member is obligated to purchase his or her proportionate
share of Alliance's feeder pig production for an initial term of ten years and,
unless earlier terminated by the member, for succeeding one year renewal terms.
Feeder pigs are made available to members of Alliance on a rotating schedule
determined and implemented by Alliance, with the number of lots made available
to a member and the frequency of availability being based upon the member's
proportionate equity interest in Alliance and the actual production of
Qualifying Pigs from Alliance's facilities. No assurance can be given that the
availability of feeder pigs to members will coincide with the member's needs or
capacity to take delivery.
The purchase price for feeder pigs is established pursuant to a formula
consisting of the sum of the following factors: the financing cost per pig, the
operating cost per pig, and a $4.50 per pig production margin (all as defined in
the Feeder Pig Purchase Agreement). The effect of such pricing is to shift the
risks of increasing production costs and lower market prices for feeder pigs
from Alliance and to the member. No assurance can be given that the price for
feeder pigs under the Feeder Pig Purchase Agreements will be less than otherwise
could be obtained from other sources. Among other factors, a substantial
increase in operating costs, including the costs of feed and other supplies and
the costs associated with diminished breeding stock health or productivity, or
extreme mortality and morbidity, could result in a higher price to be paid by
members for feeder pigs than otherwise could be obtained from other sources.
Moreover, the prevailing market price for feeder pigs could decline below the
price to be paid for feeder pigs under the Feeder Pig Purchase Agreements.
UNPURCHASED AND EXCESS FEEDER PIGS
Each member of Alliance has entered into a Feeder Pig Purchase Agreement,
pursuant to which such member has agreed to purchase his or her proportionate
share of Alliance's feeder pig production. The failure of Alliance's
stockholders to purchase their respective share of Alliance's feeder pig
production could materially adversely affect the performance of Alliance. In
the event that one or more stockholders fail to purchase their respective share
of Alliance's feeder pig production, it will be necessary for Alliance to find
alternate purchasers for its unpurchased feeder pigs. In addition, it also may
be necessary to find alternate purchasers to the extent Alliance's production of
feeder pigs exceeds two and seven-tenths (2.7) lots per share of Common Stock on
a prospective rolling 12-month basis. Stockholders will not be obligated under
the Feeder Pig Purchase Agreements to purchase their proportionate share of such
excess production. Although Alliance has agreed to provide Farmland the first
opportunity to purchase feeder pigs that stockholders have failed to purchase
and any excess feeder pig production during the five year period ending July 13,
1999, no assurances can be given that Farmland will exercise its option to
purchase any such feeder pigs. In addition, no assurances can be given that
alternate purchasers will be available, or that any such alternate purchasers
will agree to purchase feeder pigs upon terms as favorable to Alliance as those
contained in the Feeder Pig Purchase Agreements. To the extent that unpurchased
feeder pigs are sold to alternate purchasers at prices less than would have been
obtained under the Feeder Pig Purchase Agreements, the price for feeder pigs to
stockholders may increase.
LOSSES ASSOCIATED WITH START-UP
Alliance was formed recently and has a limited history of operations. The
development of feeder pig production facilities entails substantial up front
expenditures for the purchase of real estate, the construction of the
facilities, and the acquisition of breeding stock and for working capital during
the initial start-up period for each new facility. As a result, Alliance
anticipates that the development of feeder pig production facilities will result
in Alliance's continued incurrence of losses. There can be no assurance that
Alliance will become profitable after it ceases facilities development
activities. Yuma LLC, Alliance's predecessor, incurred net losses in connection
with the development and start-up of its feeder pig production facility in each
of its two fiscal years since inception but generated net income for the period
ended July 8, 1994 as its facility operated at full capacity. Unlike Alliance,
Yuma LLC was not burdened with debt financing costs during the development and
start-up of its feeder pig production facility. In addition, Yuma LLC generally
produced feeder pigs of greater weight than those of Alliance, and sold its
entire production of feeder pigs to Farmland at prices greater than the price at
which Alliance believes it will sell feeder pigs pursuant to the Feeder Pig
Purchase Agreements between Alliance and its members. The operating results of
Yuma LLC therefore should not be relied upon as the basis for predicting the
future operating results of Alliance.
SUBSTANTIAL INDEBTEDNESS
Alliance is highly leveraged. The degree to which Alliance is and will be
leveraged could have an adverse impact on Alliance, including (i) increased
vulnerability to adverse general economic and market conditions, (ii) impaired
ability to obtain additional financing for future working capital, capital
expenditures, general corporate or other purposes, and (iii) dedication of a
significant portion of cash provided by operating activities to the payment of
debt obligations and thereby reducing funds available for operations or
distribution. Alliance's ability to make required debt service payments in the
future will be dependent upon Alliance's operating results, which are subject to
financial, economic and other factors affecting Alliance, many of which are
beyond its control. Moreover, such operating results are dependent upon the
sale price paid to Alliance for feeder pigs, which in turn is determined in part
based on the twelve month historical rolling average of operating costs incurred
by Alliance in producing feeder pigs. Actual changes in the sale price of
feeder pigs therefore will lag changes in the related operating costs and may
affect Alliance's ability to timely make required debt service payments. No
assurance can be given that Alliance will be able to make required debt service
payments. No person has agreed to guarantee the obligation of Alliance to make
timely debt service payments.
ASSETS SECURING DEBT; CREDIT AGREEMENT RESTRICTIONS
Alliance entered into various loan agreements and other documentation with
Alliance's existing lender, CoBank. Pursuant to such loan documentation,
Alliance has been, and anticipates that it will be, required to grant liens on
substantially all of its properties and assets to CoBank and to comply with
various affirmative and negative covenants, including but not limited to (i)
maintenance of minimum levels of working capital, (ii) restrictions on the
incurrence of additional indebtedness, (iii) restrictions on certain liens,
mergers, sales of assets, investments, guaranties, loans, advances and business
activities unrelated to existing operations, and (iv) restrictions on the
declaration and payment of dividends or patronage distributions. There can be
no assurance that Alliance will be able to achieve and maintain compliance with
the prescribed covenants of such loan documentation. Alliance has successfully
sought and received consents, waivers and amendments to its loan documentation
on various occasions. If further consents, waivers or amendments are requested
by Alliance, including any such consents, waivers or amendments required for the
payment of rebates on the price of feeder pigs sold, there can be no assurance
that Alliance's lender will again grant such requests. The failure to obtain
any such consents, waivers or amendments would reduce Alliance's flexibility to
respond to adverse industry conditions and could have a material adverse effect
on Alliance's results of operations, financial condition and business. If an
event of default occurs under Alliance's loan documentation, CoBank will have
the right to foreclose upon such collateral. In addition, the terms of
Alliance's financing with CoBank might adversely affect the ability of Alliance
to obtain additional financing for any future expansion efforts. No person has
agreed to guarantee the obligation of Alliance to make timely debt service
payments.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Alliance is and will be subject to the risks normally associated with debt
financing, including the risk that Alliance's cash flow will be insufficient to
meet required payments of principal and interest and the risk that indebtedness
will not be able to be refinanced or that the terms of such refinancing will not
be as favorable as the terms of the original indebtedness and thereby increasing
the cost to stockholders of feeder pigs made available under the Feeder Pig
Purchase Agreements. Alliance anticipates that it will be required to raise
additional capital in order to further expand its operations. Such capital may
be raised through additional private or public financings, as well as
collaborative relationships, borrowings and other available sources. If
Alliance needs to raise additional funds, there can be no assurance that
additional or sufficient financing will be available, or, if available, that it
will be available on acceptable terms. If additional funds are raised by
issuing equity securities of Alliance, dilution to then existing stockholders
may result. If adequate funds are not available, Alliance may be required to
significantly curtail a portion of its planned operations.
COMPETITION
Many of Alliance's existing or potential competitors may have substantially
greater financial, technical and personnel resources than Alliance. There can
be no assurance that Alliance's competitors will not be more successful than
Alliance in developing and improving pork production technologies and raising
consistent high quality feeder pigs that are more economical to raise than any
which may be developed or raised by Alliance. Moreover, as additional
competitors commence operations, the supply of feeder pigs may exceed demand and
result in a downward pressure on the prevailing market prices for feeder pigs.
Under the Feeder Pig Purchase Agreements, each investor is obligated to purchase
his proportionate share of Alliance's feeder pig production based in large part
on Alliance's cost of production. Accordingly, if Alliance is not successful in
developing and improving pork production technologies relative to its
competitors or if the prevailing market prices for feeder pigs decline below
those applicable under the Feeder Pig Purchase Agreements, each member may be
obligated to purchase his proportionate share of Alliance's feeder pig
production at a price higher than could be available from other sources.
Alliance's ability to achieve or maintain cost competitive feeder pig production
operations on an ongoing basis may depend on its ability to raise additional
capital, which may not then be available on acceptable terms, if at all.
ANTI-CORPORATE FARMING SENTIMENT
The development of large corporate farming operations and concentration of
hog production in larger-scale facilities, such as those of Alliance, has
increased dramatically over the last decade. This development has engendered
opposition from residents of Colorado, Illinois and other states in which
Alliance conducts, or may conduct, its business operations. Such opposition may
reflect various concerns, including concerns about pollution and effluent
emissions, excessive water use, offensive odor, humane treatment of animals and
the perceived threat to small farmers and the family farm. To the extent that
public opposition is expressed with respect to large corporate farming
operations such as those of Alliance, national, state or local laws restricting
their operations may be enacted in response, legal proceedings may be instituted
to obtain monetary awards, injunctive orders or other legal or equitable
remedies, potential employees may be dissuaded from accepting a position with
such corporate farming operators, property owners may be reluctant to sell
parcels to such corporate farming operators, or other consequences may result
that could have a material adverse effect on Alliance and its business. No
assurances can be given that public opposition will not result in the occurrence
of any one or more of such adverse consequences.
EXPANSION
The development and successful operation of each new facility of Alliance
depends on various factors, including the availability of suitable sites,
regulatory compliance, the ability to meet construction schedules, the
capabilities of Alliance's contractors, the ability to maintain facility
construction costs within original estimates, the ability of Alliance to manage
its anticipated expansion generally and to hire and train qualified personnel,
and general economic and business conditions. Many of the foregoing factors are
not within the control of Alliance or its contractors, and therefore no
assurance can be given that Alliance's expansion objectives and goals will be
successfully implemented.
CONTROL BY CURRENT STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST
As of the date of this Report, Farmland Industries, Inc. ("Farmland"),
Farmers Cooperative Elevator Company, Yuma Farmers Milling and Mercantile
Cooperative Company ("Yuma Cooperative"), and Farmers Cooperative Association
collectively own 81 shares of Alliance's Common Stock, which constitutes
approximately 79% of Alliance's outstanding shares. Although no one cooperative
association stockholder is permitted to vote shares of Common Stock representing
25% or more of the shares outstanding during any period in which Alliance has
borrowed money from a lender subject to regulations of the Farm Credit
Administration regarding loan policies and operations (such as Alliance's
current lender), the above-named stockholders could exercise a significant
degree of influence or control over Alliance with respect to the election of
directors and other matters if they, or several of them, agree to vote together
on such matters.
Alliance has contracted with Farmland and Yuma Cooperative for the
provision of certain requirements of Alliance, including the supply of feed and
other inputs, breeding stock, and management services. Alliance's agreements
with Farmland and Yuma Cooperative may be modified in the future and Alliance
may enter into additional agreements or transactions with Farmland and Yuma
Cooperative. Farmland, through its various business divisions, subsidiaries and
affiliates, is engaged in the production of livestock elsewhere, in the sale of
the above described supplies and services to other parties, and in the slaughter
and processing of hogs. Farmland may have conflicting interests in the
provision of such services to Alliance in light of its other business
activities. Similarly, Yuma Cooperative also may have conflicting interests in
the provision of goods and services to Alliance.
ATTRACTION AND RETENTION OF EMPLOYEES
Alliance is dependent on members of its management and facilities
operations personnel, the loss of whose services might adversely affect the
achievement and success of its planned expansion activities. In addition,
attracting and retaining qualified facilities operations personnel is important
to Alliance's success. The inability to acquire and retain the services of such
management and facilities operations personnel could have a material adverse
effect on Alliance's operations and significantly impact its prospects for
success. Although Alliance has contracted with Farmland and others to provide
certain managerial, administrative and other services, Alliance can give no
assurance that it will be able to attract and retain the personnel it needs on
acceptable terms.
DISTRIBUTIONS AND DIVIDENDS
No dividends will be paid by Alliance on its Common Stock. Alliance,
however, intends to make annual patronage distributions of its net margins, if
any, to its members on the basis of the quantity or value of business done by
Alliance with or for the member-patrons. Such patronage distributions may be
paid in cash, written notices of allocation, whether qualified or non-qualified,
or a combination thereof, as determined by Alliance's Board of Directors in its
sole discretion. Alliance has entered into various loan agreements and other
documentation with its existing lender which restrict Alliance's ability to pay
patronage distributions in cash.
GOVERNMENT REGULATION
Alliance is subject to various federal, state and local government
regulations, including those restricting certain types of investor-owned
livestock production operations and those concerning the environment,
occupational safety and health, and zoning. While Alliance attempts to monitor
all aspects of its regulatory compliance responsibilities, there can be no
assurance that it will satisfy all applicable governmental regulations or obtain
all required approvals. Failure to comply with applicable regulations can,
among other things, result in fines, suspensions of regulatory approvals,
operating restrictions, and criminal prosecution. Changes in or additions to
applicable regulations also could adversely affect Alliance and its business.
ADDITIONAL FACTORS
Additional risk and uncertainties that may affect future results of
operations, financial condition or business of Alliance include, but are not
limited to: the effect of economic and industry conditions on prices for
Alliance's feeder pigs and its cost structure; the ability to keep pace with
technological change timely and cost-effectively and to provide better service
and remain competitive; adverse publicity, news coverage by the media, or
negative reports by industry analysts regarding Alliance or its feeder pigs
which may have the effect of reducing the reputation and goodwill of Alliance;
the ability to attract and retain capital for growth and operations on
competitive terms; and changes in accounting policies and practices.
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
The exhibit listed below is filed as part of Form 10-Q for quarter ended
May 31, 1996.
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended May 31, 1996.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ALLIANCE FARMS COOPERATIVE ASSOCIATION
(Registrant)
/s/ WAYNE SNYDER
Wayne Snyder
Chairman of the Board, President
and Director
(Principal Executive Officer and Principal
Financial and Accounting Officer)
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<LEGEND>
This schedule contains summary financial information extracted from Form 10-QSB
for the period ending May 31, 1996 and is qualified in its entirety by reference
to such financial statements.
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<PERIOD-END> MAY-31-1996
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