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, 1998 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)
970-848-3231
(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 15, 1998, there were 155 shares of the issuers common stock outstanding,
of which 119 were shares of Class A common stock and 36 were shares of Class B
common stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
ALLIANCE FARMS COOPERATIVE ASSOCIATION
BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
May 31, 1998 August 31, 1997
<S> <C> <C>
ASSETS
Current Assets:
Receivables, trade 13,589 69,550
Receivables, non-trade (Note 3) 191,376 200,137
Inventory (Note 4) 3,720,201 3,179,402
Other current assets 68,025 0
Total current assets 3,993,191 3,449,089
Property, plant and equipment, at cost (Note 5) 24,376,151 19,610,833
Less accumulated depreciation 2,982,345 2,193,650
21,393,806 17,417,183
Breeding stock 4,190,176 4,603,996
Less accumulated depreciation 1,055,288 1,353,650
3,134,888 3,250,346
Other assets, net of $100,476 and $77,261
accumulated amortization 333,351 263,788
$28,855,236 $24,380,406
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft 400,074 1,106,122
Current maturities of long-term debt (Note 5) 1,744,800 1,262,700
Accounts payable (Note 3) 1,464,717 952,431
Accrued expenses 390,955 242,261
Total current liabilities 4,000,546 3,563,514
Long-term debt (Note 5) 15,100,561 14,320,724
Shareholders' equity
Class A common stock of $.01 par value;
authorized
5,000 shares, issued and outstanding 119 shares 1 1
Class B common stock of $.01 par value;
authorized
2,500 shares, issued and outstanding 36 shares 0 0
Class C common stock of $.01 par value;
authorized 2,500 shares, none issued 0 0
Additional paid-in capital 10,751,325 8,719,237
Accumulated deficit (997,197) (2,223,070)
Total shareholders' equity 9,754,129 6,496,168
Commitments (Note 6)
------ ------
$28,855,236 $24,380,406
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
Three Month Periods Ended Nine Month Periods Ended
May 31 May 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales (Note 2) $4,375,672 $3,351,997 $13,346,482 $9,871,995
Cost of goods sold 3,355,709 2,690,524 9,587,739 8,239,573
Gross income 1,019,963 661,473 3,758,743 1,632,422
Expenses related to start-up
of new production facilities 342,814 98,547 791,861 174,215
Administrative expenses 424,610 111,174 751,269 326,170
(Gain) Loss on sale of breeding stock 103,518 (4,310) 159,057 76,710
Operating income $149,021 $456,062 $2,056,556 $1,055,327
Other income (expense):
Interest expense (412,924) (238,776) (1,129,039) (919,360)
Other 246,194 15,325 298,355 101,111
(166,730) (223,451) (830,684) (818,249)
Net income (loss) ($17,709) $232,611 $1,225,872 $237,078
See accompanying notes to condensed financial statements
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
STATEMENTS OF CASH FLOWS
UNAUDITED
Nine Month Periods Ended
May 31
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,225,872 $ 237,078
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization 1,922,780 1,581,526
Loss on sale of breeding stock 159,057 76,710
Changes in assets and liabilities:
Receivables 64,722 13,138
Inventory (540,799) (594,810)
Other current assets (68,025) (39,945)
Other assets (104,778) (70,897)
Accounts payable 512,286 741,510
Accrued expenses 148,694 105,882
Net cash provided by operating activities 3,319,809 2,050,192
Cash flows from investing activities:
Capital expenditures (7,305,367) (3,888,065)
Proceeds from sale of breeding stock 1,385,582 609,636
Net cash used in investing activities (5,919,785) (3,278,429)
Cash flows from financing activities:
Proceeds from issuance of long term debt 2,658,785 422,000
Net decrease in revolving term credit (309,782) 151,000
Payment on long term debt (970,400) (652,500)
Increase (decrease) in note payable to Farmland (116,666) 1,340,000
Loan origination fees 12,000 0
Issuance of common shares, net of offering cost 2,032,087 0
Increase (decrease) in bank overdraft (706,048) (32,263)
Net cash provided by
financing activities: 2,599,976 1,228,237
Change in cash and cash
equivalents 0 0
Cash and cash equivalents at beginning of period 0 0
Cash and cash equivalents at end of period $ $
0 0
See accompanying notes to 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 adjustments) 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.
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's August 31, 1997 Annual Report
on Form 10-KSB.
2. Sales
Alliance sold nearly 100% of its feeder pigs to its members for the three
and nine month periods ended May 31, 1998 and 1997 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 $4.50 per pig sold.
Because the contractual price for the sale of a feeder pig is determined
based upon, among other things, a twelve month historical rolling average
of operating costs and to the extent that current operating costs per pig
exceed the historical average operating costs, Alliance may incur a
negative gross margin on the sale of its feeder pigs during periods of
rising costs. Conversely, in periods of falling costs, Alliance may earn
higher than normal gross margins.
Alliance's average net sales price and the average industry market price
for feeder pigs were as follows:
Three Months Ended Nine Months Ended
May 31 May 31
1998 1997 1998 1997
Average Net Sales Price 56.05 59.16 58.53 58.26
Average Industry Market* 35.14 64.99 39.48 57.65
*As published by the USDA's Market News Service
3. Transactions with Farmland and Yuma
Alliance purchased feed from Yuma Farmers' Milling and Mercantile
Cooperative (Yuma), and animal health supplies and breeding stock from
Farmland Industries, Inc. (Farmland) based on market prices. Yuma and
Farmland are members of Alliance. Alliance also sold feeder pigs to
Farmland and Yuma. Such purchases and sales were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
1998 1997 1998 1997
<S>...............................<C> <C> <C> <C>
Feed Purchases....................$ 806,062 $1,072,431 $ 2,874,834 $3,167,871
Animal Health Purchases........... 82,698 172,686 169,736 549,933
Breeding Stock.................... 795,685 789,328 2,308,245 1,284,084
Feeder Pig Sales.................. 2,293,777 2,111,550 8,009,564 6,072,633
</TABLE>
Farmland also pays Alliance a royalty for any pigs raised by Alliance and
sold to a Farmland finisher that are then selected as breeding stock for
Farmland's contract herds pursuant to a swine production services
agreement. The royalty, which is $10 per head selected, paid to Alliance
under such agreement was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
1998 1997 1998 1997
<S>...............................<c <C> <C> <C>
Royalty Income............. $ 0 $7,240 $21,100 $79,840
</TABLE>
Alliance had $191,376 and $200,137 of non-trade receivables at May 31,1998
and August 31, 1997, respectively. The $191,376 due to Alliance at May 31,
1998 was due from Farmland for royalties as described above and for items
received by Farmland out of Alliance's shop stock inventory, and from Pig
Producers I, LP ("Pig Producers"), a limited partnership in which Farmland
holds a 12.5% interest, for the reimbursement of wages, benefits and other
costs attributable to Alliance employees that are assigned to perform
various duties at Pig Producers, as well as for items received by Pig
Producers out of Alliance's shop stock inventory. Of the $200,137 due to
Alliance at August 31, 1997, $120,195 was due from Yuma Cooperative as a
result of a feed pricing adjustment and the remainder was due for wages and
benefits as described above from Pig Producers, in addition to charges for
items received out of Alliance's shop stock inventory by both Pig Producers
and Farmland.
Farmland 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
1998 1997 1998 1997
<S>...............................<C> <C> <C> <C>
Management Fee $ 87,277 $ 61,701 $ 254,344 $ 183,297
</TABLE>
Alliance owed $60,762 and $188,849 at May 31, 1998 and $197,755 and
$185,413 at August 31, 1997 to Farmland and Yuma, respectively, for goods
and services. Alliance is also obligated to Farmland in the amounts of
$499,758 and $616,424 at May 31, 1998 and August 31, 1997, respectively,
pursuant to a promissory note. See note 5.
4. Major components of inventories as of May 31, 1998 and August 31, 1997 are
as follows:
<TABLE>
<CAPTION>
May 31 August 31
1998 1997
<S> <C> <C>
Feeder Pigs.......$ 3,590,694 $ 2,922,594
Other............. 129,507 256,808
..................$ 3,720,201 $ 3,179,402
</TABLE>
5. Long-Term Debt
Long term debt at May 31, 1998 and August 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
May 31 August 31
1998 1997
<S> <C> <C>
CoBank Term Loan.................$ 12,209,600 $ 12,525,131
CoBank Construction Loan.........$ 2,003,916 $ 0
CoBank Revolving
Term Credit..................$ 2,132,087 $ 2,441,869
Note Payable, Farmland...........$ 499,758 616,424
$ 16,845,361 $ 15,583,424
Less Current Maturities..........$ 1,744,800 $ 1,262,700
$ 15,100,561 $ 14,320,724
</TABLE>
On March 18, 1998, Alliance entered into a new $34,506,700 secured credit
facility with CoBank to provide financing for the debt portion of the
construction of up to six 2,450-sow weaned and/or feeder pig production
facilities, related support facilities and initial breeding stock
associated with each unit and to restate and modify the terms and
conditions of the existing loan agreements, including the commitments for
financing the debt portion of the two 2,450-sow weaned pig facilities
already under construction, along with these units related support
facilities, initial breeding stock and capitalized start-up costs. This
agreement provides for $26,846,700 of term loans and $7,660,000 of
revolving term credit. The availability of non-revolving term debt and
revolving term credit under the CoBank credit facility is subject to
specified equity investment levels in the Company being satisfied. There
is no assurance that additional shares of common stock will be sold and the
specified equity investment levels satisfied. Under this new credit
facility, proceeds from the construction loan are used for construction of
facilities and are advanced by CoBank as construction costs are incurred by
Alliance. Proceeds from the term loans and revolving term credit are used
to repay the construction loan upon completion of a facility, and for
working capital.
The credit facility was also amended to accommodate the construction of two
weaned pig facilities in place of two feeder pig facilities. The unused
revolving term credit expires June 20, 2006. Interest accrues on the
outstanding principle balance of the loan at a rate equal to CoBank's
national variable rate, plus 1.25% (9.75% at May 31, 1998). Alliance
capitalized $38,606 and $8,241 of interest on construction for the nine
months ended May 31, 1998 and 1997 respectively.
At May 31, 1998, Alliance had $3,564,000 immediately available under its
credit facility with CoBank, consisting of $2,316,000 of term loans and
$1,248,000 of revolving term credit. An additional $4,320,000 is to become
available following CoBank's acceptance of certain documents, as specified
in the loan agreement.
The new credit facility provides for the monthly payment of principal and
interest. The existing non-revolving term loans will change from ten year
to eight year terms effective August 31, 1998. Each new tranche of non-
revolving term credit will be repaid with monthly interest payments and
with 97 monthly principal payments of $21,800 for feeder pig facilities and
$17,300 for weaned pig facilities to begin 18 months after the initial
advance on each new construction loan commitment. The revolving credit
facility will mature on August 31, 2010 and will decrease in 40 equal
amounts at the end of each of the Company's fiscal quarters based on the
amount of available commitment at August 31, 2001.
Alliance is required to comply with various covenants, including, but not
limited to (i) maintaining a total equity to total assets ratio of not less
than .25, (ii) maintaining a debt service coverage ratio of not less than
1.00 (calculated as average annual cash flow divided by current debt),
(iii) restrictions on the occurrence of additional indebtedness. As of May
31, 1998, Alliance was in compliance with all covenants. Alliance may 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, which is currently 11.5% of the
average five-year principal loan balance. As of May 31, 1998,
substantially all assets of Alliance were pledged to CoBank.
At May 31, 1998, $499,758 had been borrowed from Farmland pursuant to a
$760,000 loan agreement. The $760,000 loan agreement provides for interest
at CoBank's prime rate and requires repayment in 2005.
Long-term debt as of May 31, 1998 matures during the fiscal years ending
August 31 in the following amounts:
1998........$ 385,800
1999........ 1,812,000
2000........ 2,227,200
2001........ 2,280,502
2002........ 2,440,409
Thereafter.. 7,699,450
$ 16,845,361
6. Alliance Farms is currently operating seven 2,450 sow feeder pig facilities
and has one weaned pig facility under construction in Yuma County, Colorado
and in Wayne County, Illinois. As of May 31, 1998, commitments for
construction of these two facilities totaled $261,396. Also, there is a
commitment of $3,243,200 for an additional 5,000 sow facility in Yuma County,
Colorado. As of May 31, 1998 construction had not begun.
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 IN ALLIANCE FARMS'
AUGUST 31, 1997 ANNUAL REPORT ON FORM 10-KSB 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1998, Alliance reported a working capital deficit of $7,355 and
total assets of $28,855,236. Alliance issued 17 shares of Class A common stock
in August 1997 for net proceeds of $1,231,584. Alliance used these funds, in
combination with $2,110,000 of borrowings through May 31, 1998 for the repayment
of a $1,360,000 loan made by Farmland, and for the development, population, and
start-up of its second feeder pig facility in Wayne County, Illinois. Alliance
issued 36 shares of Class B common stock in November 1997 for net proceeds of
$2,032,087. Alliance used these funds to repay the balance owed Farmland
pursuant to another $1,360,000 loan agreement, and for the development,
population, and start-up of one weaned pig facility in Yuma County, Colorado and
one in Wayne County, Illinois.
As of the date of this report, Alliance has 119 shares of Class A Common
Stock issued and outstanding, 36 shares of Class B Common Stock issued and
outstanding, no issued and outstanding shares of Class C Common Stock and is
offering an additional 34 shares of Class A Common Stock, 18 shares of Class B
Common Stock, and 72 shares of Class C Common Stock to qualified prospective
investors. At May 31, 1998, Alliance had $3,564,000 immediately available
under its credit facility with CoBank, consisting of $2,316,000 of term loans
and $1,248,000 of revolving term credit. An additional $4,320,000 is to become
available following CoBank's acceptance of certain documents, as specified in
the loan agreement. The availability of non-revolving term debt and revolving
term credit under the CoBank credit facility is subject to specified equity
investment levels in the Company being satisfied.
As of May 31, 1998, Alliance has borrowed $499,758 from Farmland to
purchase land for future expansion.
During the nine month period ended May 31, 1998, Alliance had capital
expenditures of $2,349,630 for construction of its first weaned pig production
facility in Yuma County, Colorado and $1,735,736 for its first weaned pig
production facility in Wayne County, Illinois. The remaining capital
expenditures were for replacement breeding stock and building construction for
the first seven production facilities.
Major uses of cash during the nine months ended May 31, 1998 include:
$7,305,367 for capital expenditures on new and existing facilities, $309,782
decrease in revolving term credit, $970,400 of principal payments on long term
debt, and $116,666 paid to Farmland pursuant to a $760,000 loan agreement.
Major sources of cash include: $2,032,087 of proceeds, net of offering costs,
from the issuance of capital stock, $2,658,785 of proceeds from the issuance of
long term debt and $3,319,809 in cash provided by operating activities.
On March 18, 1998, Alliance entered into a new $34,506,700 secured credit
facility with CoBank to provide financing for the debt portion of the
construction of up to six 2,450-sow weaned and/or feeder pig production
facilities, related support facilities and initial breeding stock associated
with each unit and to restate and modify the terms and conditions of the
existing loan agreements, including the commitments for financing the debt
portion of the two 2,450-sow weaned pig facilities already under construction,
along with these units related support facilities, initial breeding stock and
capitalized start-up costs. This agreement provides for $26,846,700 of term
loans and $7,660,000 of revolving term credit. The availability of non-
revolving term debt and revolving term credit under the CoBank credit facility
is subject to specified equity investment levels in the Company being satisfied.
There is no assurance that additional shares of common stock will be sold and
the specified equity investment levels satisfied. Under this new credit
facility, proceeds from the construction loan are used for construction of
facilities and are advanced by CoBank as construction costs are incurred by
Alliance. Proceeds from the term loans and revolving term credit are used to
repay the construction loan upon completion of a facility, and for working
capital.
The new credit facility provides for the monthly payment of principal and
interest. The existing non-revolving term loans will change from ten year to
eight year terms effective August 31, 1998. Each new tranche of non-revolving
term credit will be repaid with monthly interest payments and with 97 monthly
principal payments of $21,800 for feeder pig facilities and $17,300 for weaned
pig facilities to begin 18 months after the initial advance on each new
construction loan commitment. The revolving credit facility will mature on
August 31, 2010 and will decrease in 40 equal amounts at the end of each of the
Company's fiscal quarters based on the amount of available commitment at August
31, 2001.
Alliance is required to comply with various covenants, including, but not
limited to (i) maintaining a total equity to total assets ratio of not less than
.25, (ii) maintaining a debt service coverage ratio of not less than 1.00
(calculated as average annual cash flow divided by current debt), (iii)
restrictions on the occurrence of additional indebtedness. As of May 31, 1998,
Alliance was in compliance with all covenants. Alliance may 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, which is currently 11.5% of the average five-year principal loan
balance. As of May 31, 1998, substantially all assets of Alliance were pledged
to CoBank.
THREE MONTHS ENDED MAY 31, 1998 AND 1997
Shipments of feeder pigs were higher for the three months ended May 31,
1998 than in the prior year's period. Alliance shipped 78,065 feeder pigs for
the quarter ended May 31, 1998 compared to 56,659 feeder pigs shipped for the
quarter ended May 31, 1997 for an increase of 38%. Net sales for the quarter
ended May 31, 1998 increased to $4,375,672 from $3,351,997 for the prior year
period, an increase of $1,023,675, or 31%. The selling price per pig is
determined pursuant to the formula established under Alliance's Feeder Pig
Purchase Agreement with its members. The selling 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 above increase in volume and sales
dollars is partially a result of having seven units in production for the
quarter ended May 31, 1998 as compared to six units in production for the
quarter ended May 31, 1997, in addition to improved productivity during the
quarter ended May 31, 1998. The per pig sales price was lower during the three
months ended May 31, 1998 compared to the three months ended May 31, 1997 due to
higher pig production partially offset by higher expenses. Average net sales
price was $56.05 and $59.16 during the quarter ended May 31, 1998 and 1997,
respectively.
Alliance earned gross margins of $1,019,963 and $661,473 for the three
month periods ended May 31, 1998 and 1997, respectively. This improvement in
gross margin is primarily due to the nature of the contractual pricing
arrangements applicable to Alliance's sale of feeder pigs to its members. As
previously described, the selling price is based on, among other things,
Alliance's operating costs on a twelve month historical rolling average. For
the third quarter of fiscal 1998, Alliance's net sales price exceeded then
current production costs by $13.07 per pig sold. For the third quarter of
fiscal 1997, the net sales price exceeded then current production costs by
$11.67 per pig sold.
Sales to Farmland for the three month periods ended May 31, 1998 and 1997
were $2,293,777 and $2,111,550, respectively. The average net sales price per
head was $56.05 and $59.16 and the average industry market price per head was
$35.14 and $64.99 during 1998 and 1997, respectively.
Alliance recorded $342,814 of start-up costs relating to the operation of
it's two newest production facilities under construction during the three months
ended May 31, 1998. Start-up costs for the three month period ended May 31,
1998 were comprised of utilities, feed, labor and other general expenses prior
to the operation of the new feeder pig production facilities.
Administrative expenses were $424,610 for the three months ended May 31,
1998 compared to $111,174 for the prior year period. This increase reflects the
increased operations and includes higher administrative, payroll and
professional fees, related primarily to additional facilities being in
operation.
Loss on sale of breeding stock was $103,518 for the three months ended May
31, 1998 as compared to a gain of $4,310 for the prior year period. This change
is attributable to an accelerated cull rate during the third quarter of fiscal
1998 compared to the third quarter of fiscal 1997.
Interest expense of $412,924 for the three months ended May 31, 1998 as
compared to $238,776 for the prior year period, was incurred in financing the
development of seven existing and two new pig production facilities. This
increase is primarily due to the increase in the outstanding loan balance. As
of May 31, 1998, Alliance had borrowed $16,345,603 from CoBank for construction
and start up costs and $499,758 from Farmland for the purchase of land which is
intended to be used for future expansion.
Alliance incurred a net loss of $17,709 for the three months ended May 31,
1998 compared to a net gain of $232,611 for the prior year period. The net loss
for the third quarter of fiscal 1998 was due to losses incurred related to the
two pig production facilities under construction. These losses were
significantly offset by the rolling average cost that the per pig sales prices
are based on exceeding then current costs per pig by $4.16 per pig shipped,
caused primarily by an improvement in productivity. The net gain for the third
quarter of fiscal 1997 was attributable to improved gross margins resulting from
the per pig sales price exceeding current operating costs. In addition to
operating risks and uncertainties associated with any business, Alliance's
ability to generate net income is limited by any start-up expenses that are
incurred with respect to facilities development and by the selling price formula
for feeder pigs that contains a $4.50 production margin.
NINE MONTHS ENDED MAY 31, 1998 AND 1997
Shipments of feeder pigs were higher for the nine months ended May 31, 1998
than in the prior year's period. Alliance shipped 228,040 feeder pigs for the
nine months ended May 31, 1998 compared to 169,459 feeder pigs shipped for the
nine months ended May 31, 1997 for an increase of 35%. Net sales for the nine
months ended May 31, 1998 increased to $13,346,482 from $9,871,995 for the prior
year period, an increase of $3,474,487, or 35%. The selling price per pig is
determined pursuant to the formula established under Alliance's Feeder Pig
Purchase Agreement with its members. The selling 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 above increase in volume and sales
dollars is partially a result of having six units in production for nineteen
weeks and seven units in production for twenty weeks of the first nine months of
fiscal 1998 as compared to five units in production for nine weeks and six units
in production for thirty weeks of the first nine months of fiscal 1997, in
addition to improved productivity for the first nine months of fiscal 1998 as
compared to the first nine months of fiscal 1997. The per pig sales price was
slightly higher during the first nine months of fiscal 1998 compared to the
first nine months of fiscal 1997 partially because the pigs shipped weighed more
and partially because the twelve months of costs used to compute the per pig
prices was slightly higher and the twelve months of productivity used to compute
the per pig prices was lower for the first nine months of fiscal 1998 than the
first nine months of fiscal 1997. Average net sales price was $58.53 and $58.26
during the nine months ended May 31, 1998 and 1997, respectively.
Alliance earned a gross margin of $3,758,743 and $1,632,422 for the first
nine months of fiscal 1998 and fiscal 1997, respectively. This improvement in
gross margin is primarily due to the nature of the contractual pricing
arrangements applicable to Alliance's sale of feeder pigs to its members. As
previously described, the selling price is based on, among other things,
Alliance's operating costs on a twelve month historical rolling average. For the
first nine months of fiscal 1998, Alliance's net sales price exceeded then
current production costs by $16.48 per pig sold. For the first nine months of
fiscal 1997, the net sales price exceeded then current production costs by $9.64
per pig sold.
Sales to Farmland for the first nine months of fiscal 1998 and 1997 were
$8,009,564 and $6,072,633, respectively. The average net sales price per head
was $58.53 and $58.26 and the average industry market price per head was $39.48
and $57.65 during 1998 and 1997, respectively.
Alliance recorded $791,861 of start-up costs relating to the operation
of it's two newest production facilities under construction during the first
nine months of fiscal 1998 and $174,215 of start-up costs relating to the two
facilities under construction during the first nine months of fiscal 1997.
Start-up costs for the first nine months of fiscal 1998 and 1997 were comprised
of utilities, feed, labor and other general expenses prior to the operation of
the new feeder pig production facilities.
Administrative expenses were $751,269 for the nine months ended May 31,
1998 compared to $326,170 for the prior year period. This increase reflects the
increased operations and includes higher administrative, payroll and
professional fees, related primarily to additional facilities being in
operation.
Loss on sale of breeding stock was $159,057 for the nine months ended May
31, 1998 as compared to $76,710 for the prior year period. This is attributable
to an accelerated cull rate during the third quarter of fiscal 1998, partially
offset with the existence of more mature facilities culling animals during the
first nine months of fiscal 1998 as compared to more newly developed facilities
culling animals during the first nine months of fiscal 1997.
Interest expense of $1,129,039 for the nine months ended May 31, 1998 as
compared to $919,360 for the prior year period, was incurred in financing the
development of four existing and two new pig production facilities. This
increase is primarily due to the increase in the outstanding loan balance,
partially offset by the capitalization of $38,606 of interest in the first nine
months of fiscal 1998 compared to $8,241 in the first nine months of fiscal
1997. As of May 31, 1998, Alliance had borrowed $16,345,603 from CoBank for
construction and start up costs and $499,758 from Farmland for the purchase of
land which is intended to be used for future expansion.
Alliance earned net income of $1,225,872 for the nine months ended May 31,
1998 compared to $237,078 for the prior year period. The net income for the
first nine months of fiscal 1998 was attributable to the rolling average cost
that the per pig sales prices are based on exceeding then current costs per pig
by $8.84 per pig shipped, caused primarily by an improvement in productivity.
This net income was partially offset due to losses incurred in the third quarter
of fiscal 1998 related to the construction of the two new pig production
facilities. The net income for the first nine months of fiscal 1997 was
partially attributable to an improvement in productivity at the beginning of the
fiscal year which decreased throughout the first half of fiscal 1997 due to herd
health issues, and increased again during the third quarter of fiscal 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the FASB issued Statement Number 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, which is effective for all
fiscal quarters beginning after June 15, 1999, will have no impact on Alliance's
reported financial position, results of operations or cash flows.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
The exhibits listed below are filed as part of Form 10-QSB for the quarter
ended May 31, 1998.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended May 31, 1998.
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)
Wayne Snyder
Chairman of the Board, President
and Director
(Principal Executive Officer and Principal
Financial and Accounting Officer)
Dated: July 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
May 31, 1998 Form 10-Qsb and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 204,965
<ALLOWANCES> 0
<INVENTORY> 3,720,201
<CURRENT-ASSETS> 3,993,191
<PP&E> 24,376,151
<DEPRECIATION> 2,982,345
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<CURRENT-LIABILITIES> 4,000,546
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0
0
<COMMON> 1
<OTHER-SE> 9,754,129
<TOTAL-LIABILITY-AND-EQUITY> 28,855,236
<SALES> 13,346,482
<TOTAL-REVENUES> 13,346,482
<CGS> 9,587,739
<TOTAL-COSTS> 11,289,926
<OTHER-EXPENSES> 298,355
<LOSS-PROVISION> 0
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