U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 0000927536
ALLIANCE FARMS COOPERATIVE ASSOCIATION
(Name of small business issuer in its charter)
COLORADO 84-1270685
(State or other jurisdiction (I.R.S. Employer Identification
No.)
of incorporation or organization)
503 EAST 8TH AVENUE, YUMA, COLORADO 80759
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (970) 848-3231
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
None N/A
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
None
(Title of Class)
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 [ ]
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM
405 OF REGULATION S-B CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB
OR ANY AMENDMENT TO THIS FORM 10-KSB. [X]
STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR: $18,998,096.
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE ISSUER HELD BY NON-
AFFILIATES AS OF NOVEMBER 15, 1999, COMPUTED BY REFERENCE TO THE OFFERING
PRICE FOR THE ISSUER'S COMMON STOCK IN THE ISSUER'S RECENT PUBLIC OFFERING IS
$6,040,000. AS OF NOVEMBER 15, 1999, THE ISSUER HAD 136 SHARES OF CLASS A
COMMON STOCK, PAR VALUE $0.01 PER SHARE, AND 54 SHARES OF CLASS B COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
None
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES [ ] NO [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
We produce feeder pigs for sale to our members who own shares of Class A
common stock, and produce weaned pigs for sale to our members who own shares of
Class B common stock or Class C common stock. Our feeder pigs are sold to our
members when the pigs typically are 8 to 9 weeks old and weigh between
approximately 30 and 50 pounds and our weaned pigs are sold to our members when
the pigs typically are 20 to 25 days old and weigh at least six pounds.
We were formed as a Colorado cooperative association on May 3, 1994, but
did not engage in any business activity until July, 1994. Our predecessor, Yuma
Feeder Pig Limited Liability Company, was formed in October, 1991 and commenced
shipment of feeder pigs in March, 1993. On July 13, 1994 -- July 9, 1994 for
accounting purposes -- we acquired the entire equity ownership rights and
interests in Yuma Feeder Pig and then dissolved it and assumed all of its
assets, liabilities and feeder pig production operations.
Our principal executive offices are located at 503 East 8th Avenue, Yuma,
Colorado 80759, although our accounting and other managerial functions largely
are performed from the facilities of Farmland Industries, Inc. in Kansas City,
Missouri. Our telephone number in Yuma, Colorado is (970) 848-3231.
DESCRIPTION OF BUSINESS
GENERAL. Our company produces feeder pigs for sale to our members who own
shares of Class A common stock, and produces weaned pigs for sale to our members
who own shares of Class B common stock or Class C common stock. Our feeder pigs
are sold to our members when the pigs typically are 8 to 9 weeks old and weigh
between approximately 30 and 50 pounds and our weaned pigs are sold to our
members when the pigs typically are 20 to 25 days old and weigh at least six
pounds.
Our company's business strategy is to produce feeder and weaned pigs for
sale to our members at competitive prices by utilizing modern facilities,
management practices designed to maximize productivity and high quality
genetically consistent breeding stock. Our company intends to expand its
existing feeder pig production operations by using the net proceeds from the
sale of additional shares of its Class A common stock, together with debt
financing, to develop or acquire and thereafter operate additional feeder pig
production facilities, and to expand its weaned pig production operations by
using the net proceeds from the sale of shares of its Class B or Class C common
stock, together with debt financing, to develop or acquire and thereafter
operate weaned pig production facilities. In this regard, our company intends
to use the net proceeds from the sale of each block of 17 shares of Class A
common stock, together with debt financing, to develop or acquire one feeder pig
production facility having the capacity of a 2,450-sow unit, to use the net
proceeds from the sale of each block of 18 shares of Class B common stock,
together with debt financing, to develop or acquire one weaned pig production
facility having the capacity of a 2,450-sow unit, and to use the net proceeds
from the sale of each block of 24 shares of Class C common stock, together with
debt financing, to develop or acquire one weaned pig production facility having
the capacity of a 2,450-sow unit.
Operation of our company's facilities is the responsibility of the
management staff of our company. Our company has contracted with Farmland
Industries to provide certain administrative services to our company, including
accounting, production record keeping, feed and other input purchasing, employee
training, and breeding stock replacement logistics. Although no assurances can
be given, our company may choose to contract with another party to provide such
services. See "Description of Business -- Employees," "Directors and Executive
Officers" under Item 9, and "Certain Relationships and Related Transactions"
under Item 12.
Our company has entered into contractual arrangements with certain of its
members, including Farmland Industries and Yuma Farmers Milling and Mercantile
Cooperative. Pursuant to the Swine Production Services Agreement between our
company and Farmland, Farmland has agreed to provide certain administrative,
advisory and consulting services to our company. Pursuant to the Feed Purchase
Agreement between our company and the Yuma Cooperative, the Yuma Cooperative has
agreed to provide our company with feed-grains and feed additives for the
production of feed at the Yuma Cooperative's contract rates. Farmland and Yuma
Cooperative, as members, have contracted to purchase a share of the pigs to be
produced by our company under the same terms required of our company's other
members. Finally, during the five-year period ending July 13, 1999 our company
provided Farmland the first opportunity to purchase any feeder and weaned pigs
produced by our company in excess of our company's supply commitments to other
members or that other members have failed to purchase during the term of the
Swine Production Services Agreement. This right to purchase excess pigs expired
on July 13, 1999 and has not been renewed. Our company intends to cause any
excess production of weaned pigs to be retained by our company for development
into feeder pigs. See "Certain Relationships and Related Transactions" under
Item 12 and "Description of Business -- Pig Purchase Agreement."
Hog production is subject to substantial risks. Success is dependent upon
obtaining high levels of breeding stock productivity, controlling the cost and
efficiency of purchased feed and other inputs while minimizing herd exposure to
disease or other factors which can adversely impact the operation. See "Factors
That May Affect Future Results of Operations, Financial Condition or Business"
under Item 6.
BUSINESS ENVIRONMENT. The pork industry has undergone substantial change
in recent years, with respect to the production and processing of hogs. Our
company believes that current economics of the industry favor large, well-
capitalized hog producers, which use consistent, high-quality breeding stock and
employ management practices designed to maximize productivity. As a result, hog
production has become increasingly differentiated between large-scale farrowing
operations producing feeder and weaned pigs and less capital intensive smaller-
scale hog finishing operations.
Concentration of Production. The last decade saw a dramatic increase in
the concentration of hog production in larger scale facilities and a
corresponding decline in the number of farms producing hogs. Based on data
available from the U.S. Department of Agriculture, the number of farms producing
hogs in the United States has declined, while the percentage of the nation's
total hog inventory held on farms having more than a 500 head inventory, as well
as the average number of hogs per farm, has increased.
Our company believes there are several causes for the increasing
concentration of hog production into the hands of larger producers. Large,
specialized hog producers may be able to produce hogs for lower cost than
smaller scale independent farmers through economies of scale and the use of
improved genetics, nutrition, and management practices, many of which are more
easily implemented in modern, large-scale facilities. Since this cost advantage
would seem to be more readily available to those making a substantial investment
in facilities, efficient hog production has become a capital-intensive industry.
Our company believes that in the wake of the "agricultural crisis" of the mid-
1980's, capital for hog production has become more difficult to obtain and has
presented a barrier to entry. Additionally, packers generally pay premiums to
producers both for the supply of a large volume of hogs and for providing hogs
of superior carcass merit with respect to the yield, leanness and consistency.
Larger operations populated with genetically consistent stock bred for high
productivity and carcass quality therefore may be able to obtain a premium on
the sale of their hogs that may not be available to smaller producers.
Production Differentiation. In addition to the increasing concentration of
hog production in larger scale facilities, hog production increasingly has
become differentiated between feeder pig production operations -- which includes
operations relating to the production of weaned pigs -- and pig finishing
operations. Our company believes that this is partly the result of three-site
management practices which dictate the separation of production into three
stages: breeding through farrowing; nursery; and finishing; with each phase of
production being conducted in separate locations to minimize the risk of
transmission of disease. In producing feeder pigs, our company engages in the
first two of these stages of production, while our company's production of
weaned pigs involves only the first of these stages of production.
Production of feeder and weaned pigs -- which is less dependent upon
variable feed cost and more dependent upon herd health, facilities and breeding
stock investment -- is increasingly being conducted in specialized facilities.
Finishing of hogs to market weight, the economics of which are principally
driven by feed cost, is increasingly handled by producers engaged exclusively in
the finishing of hogs, with many of those producers finishing hogs under
contract to the producer of the feeder pig. Our company believes that this
increasing specialization is attributable to the capital intensive nature of
farrowing operations and the complexity of management.
BREEDING STOCK. Fully populated, each of our company's feeder and weaned
pig production facilities that is either in existence, under development or
proposed (which facilities may be developed in tandem with, or as a part of, one
or more other facilities) is anticipated to be stocked with approximately 2,450
sows. Until recently, our company has sought to maintain an adequate population
of female-line stock in its own multiplier units to produce commercial gilts for
use by our company in any future facilities development or to replace the
commercial herd as it is culled or lost to death. As of the date of this
report, our company is in the process of transitioning the sourcing our
requirements for gilts from Farmland, in cooperation with Triumph Pork Group
LLC.
Our company's feeder and weaned pigs have been and will continue to be
produced from genetically consistent breeding stock. Our company currently
utilizes breeding stock from Pig Improvement Company ("P.I.C."), although we are
in the process of beginning to utilize Triumph breeding stock. As further
improvements in genetics are recognized, the characteristics of our company's
breeding stock may change. Our company intends to continually evaluate the cost
and characteristics of breeding stock developed by other producers, and, in our
company's discretion, to populate all or a portion of its facilities with such
breeding stock.
With respect to each facility under development or proposed, our company
intends to place breeding stock in the facility over a five month period
beginning with the completion of the facility's breeding building. It is
anticipated that approximately 800 head of breeding stock will be delivered to
the facility in the first month followed by deliveries of 400 to 450 head over
the remaining four months until the facility is fully stocked. Following an
initial resting period of 45 to 60 days in order to acclimate and monitor each
group of breeding stock, breeding will be commenced.
Our company implemented an artificial insemination ("AI") program in its
Colorado and Illinois operations and plans to use AI in any future facilities.
Although no assurances can be given, our company believes that the use of AI
will allow more rapid improvements in carcass quality and assist in maintaining
higher health status of the herds.
Our company continually culls a portion of its breeding herd and replaces
these animals with new breeding stock in order to maintain the productivity of
its breeding herd. The selection of animals to be culled is based on subjective
determinations as to the animal's productivity, which generally declines as the
animals mature. In 1997 and 1998, our company engaged in the depopulation of
its operational feeder pig production facilities located in Yuma County,
Colorado in order to repopulate these units with P.I.C. females. Sourcing for
this repopulation was from our company's Illinois facility. The P.I.C. females
were finished into breeding sows on the facilities of independent Colorado
producers. In this regard, our company contracted with Farmland for the use of
facilities as to which Farmland had acquired rights from the owners of such
facilities. See "Certain Relationships and Related Transactions--Farmland"
under Item 12.
PURCHASE OF FEED AND OTHER INPUTS. Farmland Industries has agreed to
assist our company in arranging for the provision of our company's requirements
for feed and other inputs, including animal health products, pursuant to the
Swine Production Services Agreement between our company and Farmland. Our
company intends to continue to purchase a portion of these products from the
Yuma Cooperative upon the prices and terms set forth in the Feed Purchase
Agreement between our company and Yuma Cooperative. Farmland establishes the
specifications of all supplies purchased, as well as the specifications for the
purchase and delivery of all feed requirements, in coordination with our
company. See "Certain Relationships and Related Transactions" under Item 12.
Our company's current Feed Purchase Agreement with the Yuma Cooperative
provides for our company's purchase of feed manufactured by Yuma Cooperative on
a delivered cost basis to be determined based upon a fixed charge for the
grinding, mixing, and delivery of feed ($12.00 per ton as of the date of this
report), in addition to the actual delivered cost of the feed ingredients.
Feed rations which are pelleted are subject to a surcharge ($5.00 per ton as of
the date of this report). The fixed charge and the surcharge will remained
fixed through the expiration of the Feed Purchase Agreement on August 31, 2000.
Corn provided by the Yuma Cooperative for use in feed generally is sold to our
company at delivered cost plus, in the absence of available Company grain
storage facilities, a $.10 per bushel handling fee. Our company has the right
under the Feed Purchase Agreement, in its sole discretion, to purchase and
provide its own corn for feed manufacturing. Corn and soybean meal may be
substituted from time to time with other ingredients meeting equivalent
nutritional requirements based upon temporal price differentials. See
"Description of Business -- Sale of Animals" and "Certain Relationships and
Related Transactions" under Item 12.
Our company believes that feed costs presently account for approximately
35% to 40% of the cost of producing a feeder pig and approximately 20% and 25%
of the cost of producing a weaned pig. The principal components of swine feed
are corn and soybean meal, which are commodities subject to substantial
fluctuations in cost due to changing market conditions, seasonality, and
regional variations. While our company intends to recover changes in feed costs
by making corresponding adjustments in the selling prices for its feeder and
weaned pigs, the actual changes in the sales price of feeder and weaned pigs
will lag changes in feed cost because our company determines the cost of feeder
and weaned pigs on a five month (twelve months prior to September 1, 1998 with
respect to feeder pigs) historical rolling average basis. This pricing method
may adversely impact our company's operations in the event of sudden movements,
or continual increases, in the cost of feed or other inputs. See "Certain
Relationships and Related Transactions" under Item 12, "Description of Business
- -- Sale of Animals" and "Description of Business -- Pig Purchase Agreement."
SALE OF ANIMALS. Our company intends to sell its feeder and weaned pigs to
its members. Accordingly, our company contracts with its members for the sale
of the feeder and weaned pigs produced at our company's facilities. The terms of
the Pig Purchase Agreements under which members of our company are required to
purchase qualifying pigs are described below under the caption "Pig Purchase
Agreement." Under the Pig Purchase Agreements, members of our company are
required to purchase, and our company is required to sell, lots of feeder pigs
produced by our company in amounts proportionate to the respective member's pro
rata share of our company's Class A common stock, but in no event greater than
two and seven-tenths (2.7) lots per share of Class A common stock on a
prospective rolling 12-month basis. Presently, each share of Class A common
stock held in our company will entitle the respective member to contract to
purchase one delivery allotment per 136-allotment block made available under the
Pig Purchase Agreements to the members owning Class A common stock. Similarly,
members in our company are required to purchase, and our company is required to
sell, lots of weaned pigs produced by our company that are to be sold to members
in amounts proportionate to the respective member's pro rata share of our
company's Class B or Class C common stock, as the case may be, but in no event
greater than two and seven-tenths (2.7) lots per share of Class B common stock
on a prospective rolling 12-month basis and in no event greater than two and
one-tenth (2.1) lots per share of Class C common stock on a prospective rolling
12-month basis. Presently, each share of Class B common stock held in our
company will entitle the respective member to contract to purchase one delivery
allotment per 54-allotment block made available under the Pig Purchase
Agreements to the members owning Class B common stock. Our company intends to
allocate its production of weaned pigs from all facilities between those that
are to be sent to nurseries and developed by our company into feeder pigs, on
the one hand, and those that are to be sold as weaned pigs, on the other hand,
in the same proportion that the number of our company's operating feeder pig
production facilities bears to the number of our company's operating weaned pig
production facilities. The lots of feeder and weaned pigs purchased by the
respective member from time to time will not necessarily be produced from the
same feeder or weaned pig production facility. In the event that our company
issues additional shares of common stock for the construction of additional
feeder or weaned pig production facilities, the number of participants in the
allotment of feeder or weaned pigs, as the case may be, will be increased,
although such increase is not anticipated to materially change an investor's
right to receive his anticipated allotment of pigs. Casualty to our company's
facilities, diminished breeding stock productivity or extreme mortality or
morbidity, among other adverse circumstances, could reduce the number of feeder
or weaned pigs available for purchase by members and increase the price of pigs
under the Pig Purchase Agreements. See "Factors That May Affect Future Results
of Operations, Financial Condition or Business" under Item 6.
In anticipation of the sale of one or more minimum blocks of common stock,
our company, from time to time, may borrow funds from Farmland Industries to
commence the development or acquisition of one or more pig production
facilities. In that event, it is anticipated that Farmland would contract to
purchase, until the first to occur of the expiration of ten years and the date
on which Farmland is repaid on its loan, the marginal increase in our company's
production of pigs resulting from the development of the facility constructed
using the proceeds of such financing. Farmland's purchase of such pigs would be
under substantially the same terms required of our company's members pursuant to
the Pig Purchase Agreements, except that the purchase price for pigs would not
include any production margin. See "Description of Business--Pig Purchase
Agreement."
COMPETITION. The feeder and weaned pig production business is competitive
and fragmented among family-owned and investor-owned farms and large-scale
agribusiness pig production operations. Feeder and weaned pigs are available at
sale barn auction, electronic pig auction markets, and under contract from
producers. Competition is based upon price, product consistency and quality,
ability to deliver the required quantities and ability to meet delivery
schedules. Although there are a great number of operations that compete with
our company, as discussed elsewhere in this report our company contracts with
its members for the sale of feeder and weaned pigs produced at our company's
facilities. If our company produces pigs in excess of its supply commitments to
members, however, our company may sell such excess production to non-members.
Our company believes that its most important competitive strengths are its
ability to provide competitive pricing and the quality and consistency of the
pigs produced by it. See "Description of Business--Business Environment" and
"Description of Business--Pig Purchase Agreement."
EXPANSION. Expansion is an important element of our company's business
plan. Our company's present intent is to construct or acquire additional 2,450-
sow feeder pig production facilities (which facilities may exist as stand-alone
units or as part of 5,000-sow production complexes) and additional 2,450-sow
weaned pig production facilities (which facilities may exist as stand-alone
units or as part of 5,000-sow production complexes). The ability of our company
to construct or acquire each such feeder pig production facility is subject to
it obtaining at least $3,940,000 of net financing proceeds, and the ability of
our company to construct or acquire each such weaned pig production facility is
subject to it obtaining at least $3,100,000 of net financing proceeds.
Our company believes that substantial economies of scale will be realized
in the event that our company is able to expand beyond its existing feeder pig
and weaned pig production facilities. These additional economies are expected to
include economies in the production of feed and enhancement of management and
labor productivity. Our company intends to pursue expansion of its operations
as financial, managerial and other resources become available. No assurance can
be given as to when or if such resources will become available to our company so
as to allow it to proceed with such expansion.
Hog production operations require the availability of ample pure water at
reasonable cost. Although our company has obtained access to water necessary
for it to conduct its current operations in Colorado and Illinois, our company
has been advised that it will be unable to obtain any new commercial well
permits in Colorado. Accordingly, our company 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 our company
will be able to obtain the water permits necessary to enable it to expand its
operations in Colorado, Illinois or other locations selected by our company.
See "Factors that May Affect Future Results of Operations, Financial Condition
or Business."
FINANCING. The ability of our company to implement its business strategy
and (a) construct or acquire additional feeder pig production facilities having
the capacity of 2,450-sow units is subject to it obtaining at least $3,940,000
of net financing proceeds with respect to each such facility, and (b) construct
or acquire new weaned pig production facilities having the capacity of a 2,450-
sow unit is subject to it obtaining at least $3,100,000 of net financing
proceeds with respect to each such facility. In this regard, our company has
engaged in the offering of shares of its common stock. In addition to the
proceeds to be received from the possible issuance and sale of one or more
minimum blocks of shares, our company would be required to obtain additional
funds through secured debt financing. Our company anticipates that (a) with
respect to each 17-share minimum block of Class A common stock issued by our
company at an aggregate price of $1,360,000, our company would be required to
borrow approximately $2,720,000 of debt financing in order to construct one new
feeder pig production facility having the capacity of a 2,450-sow unit, to
purchase breeding stock, and to provide working capital for operations, (b) with
respect to each 18-share minimum block of Class B common stock issued by our
company at an aggregate price of $1,080,000, our company would be required to
borrow approximately $2,160,000 of debt financing in order to construct or
acquire one new weaned pig production facility having the capacity of a 2,450-
sow unit, to purchase breeding stock, and to provide working capital for
operations, and (c) with respect to each 24-share minimum block of Class C
common stock issued by our company at an aggregate price of $1,080,000, our
company would be required to borrow approximately $2,160,000 of debt financing
in order to construct or acquire one new weaned pig production facility having
the capacity of a 2,450-sow unit, to purchase breeding stock, and to provide
working capital for operations. The amount of this proposed financing has been
determined based upon the anticipated capital expansion and business operations
needs of our company and the anticipated net proceeds from the issuance of the
shares.
On March 18, 1998, our company entered into various loan documents with
CoBank related to a secured credit facility which provides for up to $26,846,700
of non-revolving term debt, $7,660,000 of revolving term credit and $18,400,00
of construction financing. Proceeds from the term debt were used for
refinancing the then existing non-revolving term debt, and will be used to
finance the construction or acquisition of additional pig production facilities.
Proceeds from the revolving term credit were used for refinancing the existing
revolving term credit, and will be used to provide working capital. Proceeds
from the construction loan may be used for the construction or acquisition of
pig production facilities and are advanced by CoBank as construction costs are
incurred by our company. The actual advance of funds under this credit facility
is subject to the satisfaction of certain conditions precedent and may be
withdrawn or terminated by CoBank under certain circumstances. No assurances
can be given that the funding conditions precedent will be satisfied and that
our company will be able to obtain sufficient financing when needed, or that
alternative sources of financing will be available on acceptable terms. In
addition, the unused portion of the credit facility expires August 31, 2001 with
respect to the revolving term credit, with the amount outstanding on such date
being due and payable by September 30, 2011, and the unused portion of the
credit facility expires December 31, 2001 with respect to the non-revolving term
debt and September 30, 2001 with respect to the construction financing.
The availability of non-revolving term debt, revolving term credit and
construction debt under the CoBank credit facility is subject to specified
equity investment levels in our company being satisfied. As of August 31, 1999,
$4,879,550 was immediately available to our company under its credit facility.
The availability of $13,484,900 of unused term loans, $3,645,000 of revolving
term credit and $13,520,000 of construction loans under the CoBank credit
facility is restricted and may be made available to our company to the extent
that: (a) with regard to a feeder pig production facility having the capacity of
a 2,450-sow unit (i) an additional equity investment of $1,360,000 (e.g., 17
shares of Class A common stock sold for at least $80,000 each) is made in our
company; or (ii) our company secures a $1,360,000 subordinated non-revolving
term loan from Farmland (representing an amount equal to an equity investment)
(a "Feeder Equity Loan"), or (b) with regard to a weaned pig production facility
having the capacity of a 2,450 sow unit (i) an additional equity investment of
$1,080,000 (e.g., 18 shares of Class B common stock sold for at least $60,000
each or 24 shares Class C common stock sold for at least $45,000 each) is made
in our company; or (ii) our company secures a $1,080,000 subordinated non-
revolving term loan from Farmland (representing an amount equal to an equity
investment) (a "Weaned Equity Loan"). With respect to each additional equity
investment or Feeder Equity Loan of $1,360,000 obtained by our company for the
construction of a feeder pig unit, our company is entitled to obtain advances
under the credit facility of $2,720,000 ($2,110,000 of term loans and $610,000
of revolving term credit), up to an aggregate of $5,440,000. With respect to
each additional equity investment or Weaned Equity Loan of $1,080,000 obtained
by our company for the construction of a weaned pig unit, our company is
entitled to obtain advances under the credit facility of $2,160,000 ($1,675,000
of term loans and $485,000 of revolving term credit) up to an aggregate of
$8,640,000.
Prior to any advance being made by CoBank under the credit facility,
certain conditions precedent must be addressed to CoBank's satisfaction,
including but not limited to (i) provision of a survey of our company's realty
upon which the construction will take place, including any effluent and water
easements servicing the realty, (ii) provision of environmental audits
respecting our company's realty, (iii) obtaining performance bonds and lien
payment bonds and builder's risk casualty insurance respecting such
construction, (iv) obtaining a chain of title and title insurance respecting our
company's realty, (v) provision of evidence that CoBank has a perfected first
priority lien on all security for our company's obligations, (vi) submission of
a construction budget and schedule, along with the plans and specifications for
the proposed facility, and (vi) an appraisal of the proposed facility to be
constructed based upon the plans and specifications. As of August 31, 1999, the
outstanding balance of loans made by CoBank under this credit facility was
$17,377,250.
It is anticipated that the Feeder Equity Loans and Weaned Equity Loans
would be provided on terms substantially identical to those applicable to the
facilities expansion loans previously made by Farmland to our company. See
"Certain Relationships and Related Transactions--Farmland--Real Estate Loans"
under Item 12. In this regard, such loans would accrue interest at a variable
rate equal to CoBank's then national variable rate plus 1.25%. The payment
schedule for a Feeder Equity Loan would require our company to make
interest-only payments for the life of the loan, with a final balloon payment of
the outstanding loan balance to be made upon the earlier of (i) our company's
issuance and sale of a 17-share minimum block of Class A common stock, or (ii)
the expiration of ten years. The payment schedule for a Weaned Equity Loan
would require our company to make interest-only payments for the life of the
loan, with a final balloon payment of the outstanding loan balance to be made
upon the earlier of (i) our company's issuance and sale of a 18-share minimum
block of Class B common stock or 24-share minimum block of Class C common stock,
or (ii) the expiration of ten years. Our company's obligation to Farmland would
be secured by a mortgage on the facilities constructed with the proceeds of the
loan, which mortgage would be second in priority to that of CoBank. In
addition, it is anticipated that Farmland would contract to purchase all feeder
and weaned pigs, as the case may be, produced at the facility that was
constructed using the proceeds of the Farmland loan until the first to occur of
the expiration of ten years and the date on which Farmland is repaid. See
"Business--Sale of Animals." As a result of the larger portion of indebtedness
associated with this financing alternative (and the higher debt service related
thereto) as compared with the debt and equity alternative discussed above, the
net proceeds from the issuance of common stock that would be required must be
correspondingly greater in order to provide for the balloon payment of principal
and required installments of interest under each Feeder Equity Loan and Weaned
Equity Loan. The CoBank credit facility limits the number of outstanding equity
loans, including Feeder Equity Loans and Weaned Equity Loans, at any one time,
to eight. No assurances can be given that Farmland will now, or in the future,
make an Equity Loan, either Feeder or Weaned, on acceptable terms or terms that
are comparable to those described herein.
In connection with our company's acquisition of certain real property in
Yuma County, Colorado, our company borrowed $760,000 from Farmland. This loan
is evidenced by a promissory note providing for accrual of interest at a
variable rate equal to CoBank's prime rate. The payment schedule for this loan
requires our company to make interest-only payments for the life of the loan,
with a final balloon payment of all principal to be made upon the expiration of
the ten-year term in September 30, 2005. See "Description of Property" under
Item 2 and "Certain Relationships and Related Transactions--Farmland--Real
Estate Loans" under Item 12.
The CoBank credit facility provides for the monthly payment of principal
and interest. Principal payments pursuant to the loan terms with respect to the
existing non-revolving term debt are to be made in equal monthly installments of
$128,600, commencing April 20, 1998 and continuing thereafter until and
including August 20, 1998, and thereafter in equal monthly installments of
$151,000, with the remaining unpaid balance being due and payable on that date
which is ninety-nine months after the final advance under the non-revolving term
loan. Principal payments pursuant to the loan terms with respect to each
$2,110,000 of new non-revolving term loans are to be made in monthly
installments of $21,800 each, beginning on the 20th day of the eighteenth month
following the date of the initial advance of such $2,110,000 loan. Pursuant to
the loan terms, with respect to each $2,720,000 of new construction loans,
payment of the entire outstanding principal balance is to be made on that date
that is sixteen (16) months after the date of the initial advance for
construction of the proposed facility. According to the loan terms, the
revolving loan commitment will be reduced in 40 equal payments commencing on
August 31, 2001, such that after the fortieth reduction, the revolving loan
commitment will be zero. To the extent that the outstanding principal balance
under the revolving loan exceeds the revolving loan commitment, our company will
be required to immediately make a principal payment in a amount sufficient to
reduce the outstanding principal balance under the revolving loan to an amount
not exceeding the revolving loan commitment. Interest accrues on the
outstanding principal balance of the loan at a rate equal to either (i) a
variable rate equal to CoBank's then national variable rate plus a base rate
margin of 1.25% for non-revolving term loans, 1.25% for revolving loans or 2.25%
for construction loans, or (ii) CoBank's then quoted rates for fixed rate loans,
as may be elected from time to time by our company, and is payable monthly in
arrears by the 20th day of the following month. Each future advance under the
non-revolving term loan will automatically bear interest at CoBank's then quoted
rates unless our company has, prior to the ninety-first day following such an
advance, entered into a swap, hedge or other similar agreement designed to
artificially fix the interest rate. During the period in which principal under
the loan is outstanding, portions of such principal may bare interest at such
variable rate while other portions may bear interest at such fixed rate. As of
August 31, 1999, interest accrued on the outstanding principal balance on the
respective loans at a rate of 9.50% per annum for non-revolving term loans,
9.50% per annum for revolving term loans, 10.50% per annum for construction
loans and between 8.01% and 9.14% for our various fixed rate loans. The
interest rates applicable to the loan are subject to reduction at specified
times upon our company's satisfaction of certain conditions relating to our
company's equity level and debt service coverage ratio. As of August 31, 1999,
no reductions in our company's interest rate had been made. Our company is
permitted to prepay the loan at any time without penalty, except that in the
event that fixed rate balances are prepaid, our company is required to pay
CoBank a surcharge in an amount equal to CoBank's funding losses with respect
thereto.
In obtaining the secured credit facility, and for each year in which the
credit facility is effective, our company is required to pay a commitment fee
equal to 0.5% on the outstanding revolving loan commitment and 0.25% on the
unadvanced amount of the construction loan commitment. In addition, our company
will be required to pay a activation fee equal to 1% on the amount withdrawn
under the construction loan, along with a $6,000 fee with respect to the
origination of each $2,110,000 of new non-revolving term loans. During the
course of the loan, our company may be required to make additional equity
investments at a rate not to exceed 1% of the average five-year principal loan
balance (which additional equity investments may be satisfied out of CoBank's
non-cash patronage distributions) until our company meets CoBank's target level
of equity investment, which currently is 11.5% of our company's average
five-year principal loan balance. In addition, our company was required to
grant a first perfected lien and security interest on all of its properties and
assets to CoBank and to assign to CoBank all of our company's rights in and to
existing and future Pig Purchase Agreements. Our company is required to comply
with various affirmative and negative covenants, including but not limited to
(i) maintenance of at least a 0.25 ratio of total equity to total assets for
the period ending August 31, 1998, and thereafter 0.35 ratio of total equity to
total assets, (ii) maintenance of a debt service coverage ratio (calculated by
dividing average annual cash flow by the current debt) of not less than one,
(iii) provision of monthly financial statements and audited annual financial
statements to CoBank, (iv) restrictions on the incurrence of additional
indebtedness, (v) restrictions on certain liens, mergers, sales of assets,
investments, guaranties, loans, advances and business activities unrelated to
existing operations, and (vi) restrictions on the declaration and payment of the
cash portion of patronage distributions and other distributions or allocations
of our company's earnings, surplus or assets. Our company was in compliance
with each of these covenants as of August 31, 1999.
WASTE DISPOSAL AND ENVIRONMENTAL MATTERS.
General. Several environmental requirements potentially are applicable to
feeder and weaned pig production operations such as those conducted or proposed
to be conducted by our company. Generally, these requirements take the form of
federal statutory and regulatory requirements that are, in some cases, reflected
in similar state requirements. In other instances, state or local requirements
may exist separately and without federal precedent.
The principal environmental regulations with which our company must comply
are related to the handling and disposal of waste water generated at our
company's facilities. The federal Clean Water Act generally prohibits the
discharge of pollutants into the waters of the United States. The Environmental
Protection Agency, or "EPA", has further issued regulations that prohibit the
discharge of waste water from animal feedlot operations into the waters of the
United States, except under certain circumstances when excessive rainfall runoff
added to existing process waste water exceeds the design capacity of the waste
water handling and treatment facilities. These regulations therefore generally
require that waste water handling and treatment facilities for "animal feedlots"
(which term is defined broadly enough to cover our company's operations) be of a
non-discharge nature.
To comply with these federal requirements, animal feedlot operators, such
as our company, must either obtain a permit from the EPA for its operations, or,
in the case of a state which has been granted authority by EPA to carry out a
Clean Water Act program, application must be made to the state. The State of
Colorado and the State of Illinois each has been granted such authority by the
EPA. The Colorado and Illinois regulations generally adopt the format of the
EPA provisions for animal feedlots, and generally require concentrated animal
feeding operations to be operated as no-discharge facilities. These regulations
require that our company design, construct, and operate waste water control
structures capable of retaining and processing all waste water and storm runoff
which enter the facility, with the exception of water generated from rainfall in
excess of certain prescribed parameters. Moreover, these regulations authorize
the state agency to require the removal of accumulated manure and process waste
water as necessary to prevent the overflow of the containment and processing
structure. Our company uses lagoon containment and processing systems at its
production facilities to comply with these regulations.
Land application of manure and process waste water also is regulated by
Colorado and Illinois regulations. Generally, these regulations authorize the
state agency to require that manure and process waste water not be distributed
on lands in a manner that affects the quality of waters, impairs existing
beneficial uses, or exceeds estimated soil infiltration rates, and shall not be
applied when the land is frozen, saturated or during rainfall. Sprinkler
irrigation equipment must include a back flow prevention device. Land
application rates are established on a case-by-case basis after taking into
account the nature and type of manure or process waste water and the
characteristics of the area to which it is to be applied.
Each feeder or weaned pig production facility is or will be designed to
enable the removal of animal waste by means of emptying shallow pits located
under the slatted floors of each facility. Animal waste falls through the
slatted floor into the pit which is filled with water. Periodically, each pit
is drained and refilled. Waste water drained from a pit is moved into a lagoon
system for treatment. All lagoons must be of a size adequate to accommodate the
anticipated volume of waste water to be generated together with storm water
runoff. Further, each lagoon must be lined with a material that prevents or
inhibits the seepage of waste water into the ground water below.
Cost of design and construction of waste water treatment systems vary by
facility based upon the characteristics of each individual site. Our company
has estimated that the cost of construction of lagoons and the attendant pumps
and piping required to handle the waste water generated at each feeder or weaned
pig production facility will range from approximately $100,000 to $135,000.
Ongoing expenditures to handle waste water consist principally of expenditures
for utilities and maintenance. Such ongoing expenditures do not constitute a
significant operating cost to our company.
Colorado Regulation of Commercial Swine Operations. In the November 1998
general election, Colorado voters adopted amendments to the Colorado Revised
Statutes concerning the regulation of housed commercial swine feeding
operations, which amendments may have material and adverse consequences to our
company and its business. These amendments mandate certain water and air
quality control measures that must be implemented by commercial swine feeding
operations housing at least 800,000 pounds of swine or which are deemed
commercial under local law. Commercial swine feeding operations are defined
broadly to include operations in which swine are fed in buildings for at least
45 days in any 12-month period, and include two or more operations under common
ownership that are located on land overlying the same groundwater aquifer (or
are otherwise adjacent to one another). The amendments, and the related
regulations, are applicable to our company's Colorado operations.
In general, the amendments to the Colorado Revised Statutes:
(i) condition the operation, construction or expansion of a housed
commercial swine feeding operation on receipt of an individual
discharge permit from the Colorado department of public health and
environment;
(ii) direct the Colorado water quality control commission to adopt
rules regarding the construction, operation and management of, and
waste disposal by, such operations;
(iii) provide that such rules shall require that land application of
waste from such operations must not exceed the nutritional
requirements of the plants on that land and must minimize runoff and
seepage of such waste;
(iv) provide that such rules shall require that such operations not be
permitted to degrade the physical attributes or value of Colorado
trust lands, make immediate reports of spills or contamination to
state and county health departments, and monitor land-applied waste
from such operations and provide periodic reports to the state health
department;
(v) authorize fees on such operations (of up to $0.20 per animal) to
offset direct and indirect costs of the program;
(vi) authorize local governments to impose more restrictive
requirements;
(vii) require that such operations employ technology to minimize odor
emissions;
(viii) require operations to cover waste impoundments that do not use
air or oxygen in their waste treatment method, and to recover,
incinerate or manage odorous gases from such operations;
(ix) establish minimum one mile distances between new land waste
application sites or impoundments and occupied dwellings, schools and
municipal boundaries; and
(x) provide for enforcement of these provisions by the state or any person
who may be adversely affected.
Our company has obtained the initial operating permits required to comply
with the new provisions. These permits include requirements to manage the
application of manure as a fertilizer according to specified agronomic crop
production requirements, to control off-site odors and to evaluate covers for
anaerobic treatment lagoons. Our company has implemented and is evaluating the
use of an experimental biological feed and lagoon additive in an effort to
comply with applicable requirements governing odor management. We are permitted
to continue with this experimental odor-control measure until January 1, 2000,
after which time the applicable regulatory authorities will determine whether
the experimental measure is an acceptable alternative to rigid lagoon covers.
Although our company continues to evaluate the impact that the new statutes
and regulations may have on it, our company presently is unable to estimate the
costs that reasonably could be expected to be incurred by it in complying with
them. Our company believes, however, that the new statutes and regulations may
have a material and adverse impact on our company and its business, particularly
if we are required to place rigid covers over our waste lagoons.
EMPLOYEES. Operating management of each of our company's existing and
future facilities will be the responsibility of each respective production
facility's general manager. The general manager will have overall responsibility
for the operation of the facility. Additional department managers likely will
oversee the breeding/gestation, farrowing, and nursery departments. It is
anticipated that each facility under development or proposed will employ eleven
persons in breeding through farrowing operations, including management and
laborers.
Pursuant to the Swine Production Services Agreement between our company and
Farmland, Farmland has agreed to assist in providing certain administrative
services to our company, including the coordination of our company's training of
personnel to be employed by our company and the selection of employees.
Although our company presently believes that Farmland's provision of these
administrative services is in our company's best interests, our company may in
the future choose to provide these services for itself or seek an alternative
provider of such services. See "Certain Relationships and Related Transactions-
- -Farmland--Swine Production Consulting and Services Agreement" under Item 12.
As of August 31, 1999, our company employed 148 persons, of whom 148 were
full-time employees and none were part-time employees. Of our company's full-
time employees, 12 employees are assigned to perform various facilities
operation services for Pig Producers I, L.P., a limited partnership in which
Farmland holds a 12.5% interest. Pig Producers I is engaged in the production
of feeder pigs from a 2,450-sow feeder pig production facility located in Yuma
County, Colorado. Our company is reimbursed by Pig Producers I for all wages,
benefits and other costs attributable to the our company employees performing
services for Pig Producers I. See "Certain Relationships and Related
Transactions--Farmland" under Item 12. Our company is not a party to any
collective bargaining agreement and considers its relationship with employees to
be satisfactory.
GOVERNMENT REGULATION. Our company is subject to various federal, state
and local government regulations, including those restricting certain types of
investor-owned livestock production and those concerning the environment,
occupational safety and health and zoning. In addition, its employment
practices are governed by minimum wage, overtime and other working condition
regulations. Our company has not experienced significant difficulty in
complying with applicable regulations and compliance generally has not had an
adverse effect on our company's business. The recent adoption of amendments to
the Colorado Revised Statutes concerning the regulation of housed commercial
swine feeding operations, and the related regulations however, may have material
and adverse consequences to our company and its business. See "Description of
Business -- Waste Disposal and Environmental Matters."
PIG PURCHASE AGREEMENTS.
General. The rights and obligations of the parties with respect to the
sale of feeder pigs and weaned pigs by our company to its members will be
governed by the Pig Purchase Agreements. Although the following summary
describes the material provisions of the Pig Purchase Agreement, it does not
purport to be a complete statement of all provisions of the Pig Purchase
Agreement and in no way modifies or amends the Pig Purchase Agreement.
Purchase. Our company intends to sell feeder pigs and weaned pigs that
meet particular minimum weight, health, nutrition and genetic quality standards
to members of our company who have entered into a Pig Purchase Agreement with
our company. Feeder pigs and weaned pigs that meet such standards, as set forth
in the Pig Purchase Agreement, are referred to as "Qualifying Pigs." Pursuant
to the terms of the Pig Purchase Agreement:
(a) a member of our company owning Class A common stock is required to
purchase, and our company is required to sell, feeder pigs
constituting Qualifying Pigs in lots having 900 to 1,000 pigs per lot,
as determined by our company, and
(b) a member of our company owning Class B and Class C common stock is
required to purchase, and our company is required to sell, weaned pigs
constituting Qualifying Pigs in lots having 925 to 1,025 pigs per lot,
as determined by our company.
Lots of feeder pigs are to be made available to members of our company
owning Class A common stock on a rotating schedule determined and implemented by
our company, with the number of lots and the frequency of availability being
based upon the member's proportionate ownership interest in our company's
outstanding Class A common stock and the actual production of qualifying feeder
pigs from our company's facilities. Lots of weaned pigs are to be made
available to members of our company owning Class B or Class C common stock on a
rotating schedule determined and implemented by our company, with the number of
lots and the frequency of availability being based upon the member's
proportionate ownership interest in our company's outstanding Class B or Class C
common stock, as the case may be, and the actual production of pigs that are to
be sold to members of our company as qualifying weaned pigs. Our company
intends to divide all weaned pigs produced by our facilities between those to be
developed into feeder pigs and those to be sold as weaned pigs in the same
proportion as the number of our feeder pig production facilities bears to the
number of our weaned pig production facilities.
If we produce more than 2.7 lots of feeder pigs per share of Class A common
stock, more than 2.7 lots of weaned pigs per share of Class B common stock or
more than 2.1 lots of weaned pigs per share of Class C common stock, each on a
prospective rolling 12-month basis, we may sell this excess production to
members or non-members, or may retain it for own purposes. Members are neither
required nor entitled to purchase any excess production of pigs. We intend to
retain any excess weaned pigs for development into feeder pigs.
Price. Our company intends to sell qualifying feeder and weaned pigs,
subject to adjustment for weight as described below, pursuant to a pricing
formula consisting of the sum of the following factors:
o the financing cost per pig
o the operating cost per pig, and
o a $0 to $4.50 per pig production margin as determined by our company
in its discretion.
The financing cost per pig applicable to a member is to be determined on a
rolling 12-month prospective basis and will be equal to the quotient of:
(i) the sum of the anticipated required payments of principal and interest
(including any scheduled sinking fund payments) for the ensuing 12-
month period with respect to the debt financing incurred by our
company in connection with the consummation of the sale of common
stock to such member (or his predecessor in interest), which debt
financing (except with respect to certain existing Pig Purchase
Agreements) shall be deemed to be at least $1,970,000 per feeder pig
production facility and $1,600,000 per weaned pig production facility,
divided by
(ii) the total number of qualifying feeder pigs or weaned pigs, as the
case may be, anticipated to be produced and shipped by our company
during such 12-month period from the one or more pig production
facilities developed through the use of such debt financing and the
net proceeds from the sale of common stock to such member (or his
predecessor in interest); this estimate is based on the total
estimated number of qualifying feeder pigs or weaned pigs, as the case
may be, to be produced and shipped by our company during such 12-month
period from all pig production facilities of our company.
The operating cost per pig is to be determined on a rolling five-month
(changed from 12-month effective September 1, 1998 with respect to feeder pigs)
historical basis and will be equal to the quotient of:
(i) the sum of
o all expenses (excluding interest expense, depreciation and
amortization) of our company, plus
o the net cash flow cost of all capital expenditures of our company
(including any capital sinking fund payments) for production
facility and breeding stock improvements and replacements, in
each case, for the five months (changed from 12-month effective
September 1, 1998 with respect to feeder pigs) preceding the then
present month of shipment,
divided by
(ii) the number of Qualifying Pigs produced and shipped by our company
during such five-month (12-month) period.
At the time our company notifies a member that a lot is available for purchase
by the member pursuant to the member's Pig Purchase Agreement, our company will
furnish to the member an estimate of the total purchase price of all Qualifying
Pigs included in the lot, and the member is required to pay such estimated total
purchase price to our company at least one day prior to the scheduled shipment
date. The actual total purchase price of all qualifying pigs included in a lot
sold to a member will be based upon weight at the time of loading and settlement
of any adjustments shall be made within five days following delivery.
Weight Adjustment.
Feeder Pigs. The purchase price for qualifying feeder pigs is subject to
adjustment based upon the extent of any variation in the average weight of
qualifying feeder pigs from 45 pounds. To the extent that the average
weight of a shipment of qualifying feeder pigs exceeds 45 pounds per pig,
the purchaser will pay an additional $.25 per pound per pig on the first
five pounds by which the average weight exceeds 45 pounds per pig and an
additional $.15 (or $.20 under some existing Agreements) per pound per pig
for the average weight between 50 pounds and 60 pounds. To the extent that
the average weight of qualifying feeder pigs is less than 45 pounds per
pig, the purchase price will be decreased by $.25 per pound per pig.
Weaned Pigs. The purchase price for qualifying weaned pigs is subject to
adjustment based upon the extent of any variation in the average weight of
qualifying weaned pigs from 8 to 12 pounds. To the extent that the average
weight of a shipment of qualifying weaned pigs exceeds 12 pounds per pig,
the purchaser will pay an additional $1.00 per pound per pig. To the
extent that the average weight of a shipment of qualifying weaned pigs is
less than 8 pounds per pig, the purchase price will be decreased by $1.00
per pound per pig.
Delivery of Pigs. Our company will be responsible for obtaining, at our
company's expense, all health permits necessary to qualify the pigs for
interstate shipment. It is anticipated that all lots of Qualifying Pigs will be
weighed at our company's expense at a state-inspected scale near our company's
production facility. Delivery is to be FOB shipping point, with the members
bearing the risk of loss during transit, and the trucks used to haul Qualifying
Pigs from our company's production facility must be cleaned and disinfected
prior to loading. A member may inspect the lot of Qualifying Pigs to be
purchased by such member prior to loading. After the delivery of pigs at their
destination, a member will have the right to seek an appropriate price
adjustment for any pig which is found not to be a Qualifying Pig. Such
adjustment will be made following our company's inspection of the subject pigs,
and will be determined through mutual agreement of our company and the member.
Term and Termination. A member's Pig Purchase Agreement will be for an
initial term commencing on the date entered into and continuing for a period of
120 months after the date the first delivery of Qualifying Pigs is made to the
member (or his predecessor in interest) thereunder, subject to earlier
termination upon the occurrence of certain events. A member's agreement will be
extended automatically for succeeding one-year terms unless the member gives
notice to our company, at least one year prior to the expiration of the initial
or any extended term, that the member desires to terminate the agreement as of
the expiration of such initial or extended term.
A member may terminate the agreement only under the following
circumstances:
o at the end of the initial or any extended term by giving our company
notice at least one year prior to the expiration of that term,
o if our company materially breaches any obligation or covenant in the
agreement and does not cure the breach within 30 days after the member
notifies us of the breach,
o if our company does not make the first delivery of qualifying pigs
within 24 months of the date of the agreement, in which case the
member may terminate the agreement within the three months following
the expiration of the 24-month period, or
o if the member assigns or transfers all shares of common stock from
which the member's right to purchase lots of qualifying pigs under the
agreement derives.
If a member fails to purchase, pay for, and take delivery of any two lots
of qualifying pigs, our company may terminate the member's Pig Purchase
Agreement in addition to recovering any resulting damages and expenses that our
company incurs. For each ten shares of common stock owned by a member, the
member is permitted one additional failure before we may terminate the member's
agreement.
If either our company or the member is prevented from performing under the
Pig Purchase Agreement because of reasons beyond its control which make it
commercially impossible to perform, then that party is relieved from such
performance so long as it remains commercially impossible to perform. No member
has the right to receive or demand the return of the member's capital as a
result of termination of the agreement, and our company is under no obligation
to redeem or repurchase its common stock at any time.
Effect of Purchaser Default. If a member fails to purchase, pay for, and
take delivery of any lot of Qualifying Pigs when and as made available to the
member pursuant to the Pig Purchase Agreement, the member is responsible for the
damages and expenses incurred by our company as a result of such failure,
including (i) the difference between the price payable by the member for pigs
under the agreement and the then current market price for pigs, (ii) $3,000,
which is intended to cover our administrative and other costs and expenses
associated with the member's failure, and (iii) all costs of collection,
enforcement, and prosecution of our rights and remedies. If a member fails to
pay promptly such damages and expenses, the member will not be permitted to
purchase any other lots unless and until such damages and expenses are paid, and
will be responsible for all damages and expenses accruing to our company for
lots that the member is not permitted to purchase as a result thereof. Our
company also may pursue other remedies, including the termination of the
member's Pig Purchase Agreement. If the member is prevented from performing
under the Pig Purchase Agreement because of reasons beyond the member's control
which make it commercially impossible to perform, however, then the member is
relieved from such performance so long as it remains commercially impossible to
perform. See "Description of Business--Pig Purchase Agreement--Term and
Termination" and "--Grant of Security Interest."
Grant of Security Interest. Pursuant to the Pig Purchase Agreement, a
member grants to our company, as security for the performance of all of the
member's obligations under the Pig Purchase Agreement, a security interest in
all of the member's equity interest in our company. In this regard, the
certificates representing shares of common stock will be retained by our company
and members will be required to endorse appropriate stock powers with respect to
such certificates. Our company's security interest in the member's shares of
common stock is to be senior to all others, except for any permissible pledge or
other security interest granted in such shares by the member to any financial
institution for purposes of securing a loan used in financing the member's
acquisition of such shares and as otherwise agreed by our company in its
discretion. A member's failure to perform his purchase obligation under the Pig
Purchase Agreement, among other occurrences, may result in our company's
foreclosure on the security interest in the member's common stock. See "Absence
of Market" under Item 5.
Warranties. Our company makes no warranties, express or implied, with
respect to feeder pigs and weaned pigs produced by it, except as expressly
provided in the Pig Purchase Agreement. Our company specifically disclaims any
warranties of merchantability or fitness for a particular purpose and makes no
warranty as to any specific level of performance with respect to any pigs sold
thereunder.
Arbitration. Any controversy arising out or relating to a Pig Purchase
Agreement or any breach thereof (other than certain controversies that include,
but are not limited to, controversies arising out of a member's failure to
purchase, pay for, and take delivery of any lot of Qualifying Pigs and our
company's exercise of any rights or remedies related thereto) is required to be
submitted to binding arbitration under the Pig Purchase Agreement. Arbitration
hearings are to take place in Denver, Colorado, or at such other location as our
company and such member may agree, with judgment upon the award rendered by the
arbitrator being entered in any court having jurisdiction.
ITEM 2. DESCRIPTION OF PROPERTY.
As of the date of this report, our company conducted operations from its:
o five 2,450-sow feeder pig production facilities located in Yuma
County, Colorado, which is approximately 150 miles east of Denver
o two 2,450-sow feeder pig production facilities located in Wayne
County, Illinois, which is approximately 100 miles east of St. Louis,
Missouri
o one 2,450-sow weaned pig production facility in Yuma County, Colorado
o one 2,450-sow weaned pig production facility in Wayne County, Illinois
o one 5,000-sow pig production facility in Yuma County, Colorado
The original Yuma County, Colorado feeder pig production facility was
constructed in a configuration different than that employed with respect to our
company's other facilities and is anticipated to be different than that employed
for future pig production facilities. The original facility consists of six
separate buildings, including two breeding buildings, two gestation buildings,
and two farrowing buildings, all of which are situated together on an
approximately 160 acre site with a separately accessed nursery building, while
each of our company's other facilities consist of a three-building sow breeding,
gestation and farrowing complex situated together, with a separately accessed
nursery building. Management believes that the condition of its facilities
presently is adequate for our company's business, and that its facilities are
adequately covered by insurance. Each of the existing facilities, including
land and buildings, was constructed for between $2,243,000 and $2,495,000, and
has been or will be pledged as security for our company's loan from CoBank under
the terms of a deed of trust/mortgage.
Between September and December 1995, our company purchased approximately
1,000 acres of real property in Yuma County, Colorado, upon which our company
has developed one feeder pig production facility and holds the remaining acreage
for the development of additional production facilities (the "Additional
Colorado Property"). The acquisition cost of this Additional Colorado Property
was approximately $760,000. Our company obtained funding for the purchase of
the Additional Colorado Property from the proceeds of a loan obtained from
Farmland. In conjunction with this loan, our company delivered to Farmland a
promissory note evidencing the debt providing for the amortization of the loan
over a ten-year period, at a variable rate equal to CoBank's prime rate. As of
August 31, 1999, CoBank's prime rate was 8.25%. The payment schedule of the
promissory note requires that our company make interest-only payments for the
life of the loan, with a final balloon payment of the principal at the
expiration of the ten-year term. To secure the obligations of the promissory
note, our company has executed a deed of trust in favor of Farmland covering all
of the Additional Colorado Property, which deed of trust is second in priority
to that of CoBank with respect to the production facility constructed thereon.
See "Certain Relationships and Related Transactions--Farmland--Real Estate
Loans" under Item 12.
As of the date of this report, our company has acquired approximately 475
acres of real property in Wayne County, Illinois, including a 90 acre tract
acquired pursuant to the exercise of the option referred to below. Our company
has developed two feeder pig production facilities and one weaned pig production
facility on this property.
In November 1996, our company entered into a contract pursuant to which our
company has been granted the option to purchase approximately 500 acres of real
property in Wayne County, Illinois (the "Option Property"). Under the terms of
this option contract, if our company failed to fully exercise the option as to
the entire Option Property prior to November 1, 1998, our company would be
responsible for a $150,000 liquidated damages payment to the owner of the Option
Property. Our company's responsibility for this liquidated damages payment was
secured by a stand-by letter of credit issued by CoBank. In November 1998, the
option to purchase the Option Property expired and our company became obligated
to make the $150,000 liquidated damages payment. Our company did not make this
payment, however, and instead entered into negotiations with the owner of the
Option Property to arrive at a different resolution. In July 1999, our company
entered into an agreement with the owner of the Option Property under which our
company was released from making the $150,000 liquidated damages payment.
Our company maintains offices at 503 East 8th Avenue in Yuma, Colorado.
Farmland and our company share equally the cost for this office space.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which our company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders of our company
during the fourth quarter of the fiscal year ended August 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ABSENCE OF MARKET
There is no public trading market for our company's common stock. The
common stock is subject to provisions of the Colorado Cooperative Association
Law and our company's Articles of Incorporation and Bylaws which restrict the
transferability of the common stock. In particular, the Colorado Cooperative
Association Law and the Articles of Incorporation provide that the certificates
of membership in our company (which also represent shares of common stock of our
company) shall not be assignable or transferable except upon consent of the
Board of Directors, and that our company shall have the right in its Bylaws to
limit the transfer or assignment of membership and the terms and conditions upon
which transfers or assignments may be allowed. Our company's Bylaws provide
that the equity interests issued by our company may not be assigned or
transferred, except upon the consent of our company's Board of Directors, and
that our company's Board of Directors may not give such consent unless any such
assignee or transferee of common stock executes and delivers to our company a
Pig Purchase Agreement. Only producers of agricultural products, associations
of such producers, and federations of such associations may own common stock of
our company.
In addition to the foregoing transfer restrictions, our company's Bylaws
give our company the right to purchase a member's common stock under certain
circumstances, which may adversely affect transferability. Such right is in
addition to any right our company may have to foreclose on the security interest
in member's common stock pursuant to the Pig Purchase Agreement. In particular,
our company has the option under its Bylaws to purchase a member's common stock
upon the occurrence of certain specified events by tendering to the member:
(a) the lesser of (i) the price paid to our company for such investor's
shares, and (ii) the book value of the shares and capital credits
associated therewith, in each case, reduced by any indebtedness due
our company from the member, or
(b) a nonvoting certificate of participation representing the member's
interest at the time of such tender in a face amount equal to the
amount specified in clause (a) above.
The occurrences giving rise to the option to purchase a member's common
stock include the following events:
(a) a member's termination of a Pig Purchase Agreement without having
executed and delivered a replacement for such Agreement or the
member's failure to be a party to such Agreement, and
(b) our company's Board of Directors by resolution finds that a member
has:
(i) intentionally or repeatedly violated any provision of our
company's Articles of Incorporation or Bylaws,
(ii) breached a Pig Purchase Agreement or materially breached any
other contract with our Company,
(iii) remained indebted to our company for 90 days after such
indebtedness first becomes payable, or
(iv) willfully obstructed any lawful purpose or activity of our
company.
In the event our company exercises any option, the voting stock of the
member shall be canceled, and the member shall thereafter have no voting rights
in our company. Our company is under no obligation, however, to redeem or
repurchase an investor's common stock at any time. See "Description of
Business--Pig Purchase Agreement " under Item 1.
HOLDERS
The authorized capital stock of our company consists of 5,000 shares of
(Class A) common stock, $.01 par value per share, 2,500 shares of Class B common
stock, $.01 par value per share, and 2,500 shares of Class C common stock, $.01
par value per share. As of the date of this report, there were 136 shares of
Class A common stock outstanding, which were held of record by 28 stockholders;
54 shares of Class B common stock outstanding, which were held of record by ten
stockholders; and no shares of Class C common stock outstanding. Only
producers of agricultural products, associations of such producers, and
federations of such associations who have executed and delivered to our company
a Pig Purchase Agreement may own common stock. Only stockholders of our company
may be members of our company. Except as otherwise specifically described under
this "Holders" caption, the powers, preferences and rights of the Class A, Class
B and Class C common stock are in all respects identical. To the extent
permitted by applicable law, the Board of Directors of the Association is
authorized to provide by resolution for the issuance of shares of stock of any
class or of any series of any class at any time and to determine, prior to the
issuance of any shares of stock of that class or series, the designations,
preferences, limitations and relative rights, if any, thereof.
Except as described in the immediately following sentence, holders of Class
A and Class B common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and holders of Class C common stock
are entitled to three-fourths of one vote for each share held on all matters
submitted to a vote of stockholders. During any period in which our company has
borrowed money from a lender subject to regulations of the Farm Credit
Administration regarding loan policies and operations (such as our company's
current lender), (i) no cooperative association stockholder is permitted to vote
shares of common stock representing 25% or more of the shares then outstanding
with respect to any matter as to which members are not entitled to vote
separately as a group or class and (ii) no cooperative association stockholder
is permitted to vote shares of common stock representing 25% or more of the
shares of any class then outstanding with respect to any matter as to which
members are entitled to vote separately as a group or class. A majority of the
outstanding shares of common stock entitled to vote constitutes a quorum at any
stockholder meeting, except that if any class of capital stock is entitled to
vote separately as a class or group, such a quorum must also be obtained with
respect to such class. The affirmative vote of at least two-thirds of the
shares represented at a meeting at which a quorum is present is required to
amend our company's Articles of Incorporation, to approve certain mergers,
consolidations or sales of all or substantially all of our company's assets and
to approve certain other matters. Holders of the Class A common stock, holders
of the Class B common stock and holders of the Class C common stock must vote
separately as groups or classes with respect to amendments to the Articles of
Incorporation that alter or change the designation, preferences, limitations or
relative rights of their respective classes of stock so as to affect them
adversely and with respect to such other matters as may require group or class
votes under applicable law. Holders of the common stock do not have cumulative
voting rights in the election of directors or preemptive rights to purchase
additional shares of common stock, and have no subscription, redemption or
conversion rights.
PATRONAGE DISTRIBUTIONS AND ABSENCE OF DIVIDENDS
No dividends have been, or will be, paid by our company on its common
stock. Our company intends to distribute, however, at least annually, all of
its net margins, if any, as patronage distributions to its stockholders on the
basis of the quantity or value of business done by our company with or for each
stockholder with respect to pigs sold pursuant to the Pig Purchase Agreements or
the Swine Production Services Agreement. Our company's "net margins" for this
purpose generally are equal to our company's net income under generally accepted
accounting principles (taxable income prior to September 1, 1997) attributable
to patronage sourced business done with or for our company's members (determined
before reduction for patronage distributions paid by our company). In this
regard, our company will compute its net income separately for each group of
members (including successors and permitted assigns) whose shares of our
company's common stock originally were issued in connection with our company's
acquisition or development of one or more feeder or weaned pig production units
financed in part thereby. A stockholder's share of our company's net margins
will be payable to him or her after the close of each fiscal year. Our
company's Board of Directors has the right to pay the patronage distribution in
qualified written notices of allocation, non-qualified written notices of
allocation, cash or any combination thereof. The written notices of allocation
will be issued in the form of capital credits. The extent of the cash portion
of the patronage distributions will be determined annually and will depend upon
our company's financial condition, results of operation, capital commitments and
other factors deemed relevant by the Board of Directors. Our company has
entered into various loan agreements and other documentation with its existing
lender which restrict our company's ability to pay patronage distributions in
cash. See "Description of Business -- Financing" under Item 1.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN
THIS REPORT ON FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. AS USED IN THIS REPORT, THE WORDS "SHOULD," "EXPECT,"
"ANTICIPATE," "BELIEVE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. OUR COMPANY'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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL. Our company commenced operations in July, 1994, following its
acquisition of the entire equity ownership rights and interest in Yuma Feeder
Pig, a Colorado limited liability company in which Farmland and Yuma Cooperative
owned 71.5% and 28.5%, respectively, of the outstanding equity interests.
Subsequent to our company's acquisition of Yuma Feeder Pig, Yuma Feeder Pig was
dissolved and liquidated and our company received all assets and liabilities of
Yuma Feeder Pig and continued the feeder pig production operations of Yuma
Feeder Pig as described herein.
FISCAL YEARS ENDED AUGUST 31, 1999 AND 1998. Our company shipped 299,980
feeder pigs and 99,966 weaned pigs during fiscal 1999 compared to 304,049 feeder
pigs and 4,337 weaned pigs shipped during fiscal 1998, a decrease of
approximately 1% in the number of feeder pigs shipped and an increase of
approximately 2,205% in the number of weaned pigs shipped. Net sales for the
fiscal year ended August 31, 1999 increased to $18,998,096 from $17,731,585 for
the prior year, an increase of $1,266,511 or approximately 7%. This increase in
volume and sales dollars is primarily due to 11 units operating during all or
part of the fiscal year ended August 31, 1999 versus eight units for the fiscal
year ended August 31, 1998. Net sales for the fiscal year ended August 31,
1999 consisted of $15,221,964 feeder pig sales and $3,776,132 weaned pig sales.
Our company earned gross margins of $3,778,601 and $4,351,131 for fiscal
1999 and 1998, respectively. This decline in gross margin is primarily due to
the nature of the contractual pricing arrangements applicable to our company's
sale of feeder and weaned pigs to its members. The selling price for our feeder
and weaned pigs is based on, among other things, the twelve-month (five-month
effective September 1, 1998) and five-month rolling average of operating costs
per pig for feeder and weaned pigs, respectively. The decline in gross margin
from fiscal 1998 to fiscal 1999 of $572,530 or $4.66 per head sold is due mainly
to the elimination of the $4.50 per pig production margin charged in fiscal
1998, but not in fiscal 1999.
Sales to Farmland Industries (including sales to Farmland of Yuma Farmers
Milling and Mercantile Cooperative's share of feeder pigs produced by our
company) for fiscal 1999 and 1998 were $9,187,729 and $10,251,093, respectively.
The average feeder pig net sales price per head was $50.74 and $57.82 and the
average feeder pig industry market price per head was $36.84 and $35.32 during
1999 and 1998, respectively. The average weaned pig net sales price per head
was $37.77 and $34.96 and the average weaned pig industry market price per head
was $23.14 and $29.04 during 1999 and 1998, respectively.
Our company incurred start-up costs of $132,410 and $1,051,481 relating to
the operation of new production facilities during the fiscal years ended August
31, 1999 and 1998, respectively. All of the costs for the fiscal year ended
August 31, 1999 and all of the costs for the fiscal year ended August 31, 1998
were comprised of utilities, feed, labor and other general expenses prior to the
operation of the new feeder pig production facilities.
Loss on sale of breeding stock was $914,419 for the fiscal year ended
August 31, 1999 as compared to a loss of $266,602 and for the prior year period.
This loss is attributable to much lower sale prices in fiscal 1999 compared to
fiscal 1998. Although fewer animals were culled in fiscal 1999 compared to
fiscal 1998 (14,204 animals compared to 17,160 animals), losses increased.
Losses increased from $266,602 ($15.54 per head) to $914,419 ($64.38 per head)
due primarily to the average sales price decreasing from $101.56 per head to
$49.53 per head.
Administrative expenses were $1,211,260 for the fiscal year ended 1999
compared to $745,400 for the prior year period. This increase is due to
increased bank fees, higher management fees because of increased volume and
increased lagoon pumping charges.
Interest expense of $1,452,393 for fiscal 1999 compared to $1,389,312 for
fiscal 1998 was incurred in financing the development of the six existing and
two new pig production facilities. The increase reflects an increase in average
outstanding borrowings in fiscal 1999.
Our company earned net income of $182,251 for the fiscal year ended August
31, 1999 compared to net income of $1,124,403 for the prior year period. The
decreased fiscal 1999 net income was attributable to lower gross margins, which
were due mainly to the removal of the $4.50 per pig production margin, higher
administrative expenses referred to above, higher losses on the sale of breeding
stock due mainly to lower market prices, offset by lower startup expenses of
$919,071 due to decreased startup activities in fiscal 1999. In addition to
operating risks and uncertainties associated with any business, our company's
ability to generate net income is limited by any start-up expenses that are
incurred with respect to facilities development and our company's selling price
formula that contains a production margin.
FISCAL YEARS ENDED AUGUST 31, 1998 AND 1997. Shipments of feeder pigs and
weaned pigs were higher for the fiscal year ended August 31, 1998 than in the
prior year. Our company shipped 304,049 feeder pigs and 4,337 weaned pigs
during fiscal 1998 compared to 231,598 feeder pigs and no weaned pigs shipped
during fiscal 1997, an increase in the number of feeder pigs shipped of
approximately 31%. Net sales for the fiscal year ended August 31, 1998
increased to $17,731,585 from $13,669,706 for the prior year, an increase of
$4,061,879 or approximately 30%. This increase in volume and sales dollars is
primarily due to eight units operating for the fiscal year ended August 31, 1998
versus six units for the fiscal year ended August 31, 1997. Net sales for the
fiscal year ended August 31, 1998 consisted of $17,579,963 feeder pig sales and
$151,622 weaned pig sales.
Our company earned gross margins of $4,351,131 and $2,447,537 for fiscal
1998 and 1997, respectively. This improvement in gross margin is primarily due
to the nature of the contractual pricing arrangements applicable to our
company's sale of feeder and weaned pigs to its members. The selling price for
our feeder and weaned pigs is based on, among other things, the twelve-month
(five-month effective September 1, 1998) and five-month rolling average of
operating costs per pig for feeder and weaned pigs, respectively. For the month
ended August 31, 1998, our company's operating costs at the time pigs were sold
(the then current operating costs) exceeded the historical rolling average of
operating costs by $1.73 per head sold. For the month ended August 31, 1997,
our company's operating costs at the time pigs were sold (the then current
operating costs) were lower than the historical rolling average of operating
costs by $1.39 per head sold.
Sales to Farmland Industries (including sales to Farmland of Yuma Farmers
Milling and Mercantile Cooperative's share of feeder pigs produced by our
company) for fiscal 1998 and 1997 were $10,251,093 and $7,924,763, respectively.
The average feeder pig net sales price per head was $57.82 and $59.02 and the
average feeder pig industry market price per head was $35.32 and $56.84 during
1998 and 1997, respectively. The average weaned pig net sales price per head
was $34.96 and the average weaned pig industry market price per head was $29.04
during 1998.
Our company incurred start-up costs of $1,051,481 and $281,025 relating to
the operation of new production facilities during the fiscal years ended August
31, 1998 and 1997, respectively. All of the costs for the fiscal year ended
August 31, 1998 and all of the costs for the fiscal year ended August 31, 1997
were comprised of utilities, feed, labor and other general expenses prior to the
operation of the new feeder pig production facilities.
Loss on sale of breeding stock was $266,602 for the fiscal year ended
August 31, 1998 as compared to a gain of $94,123 for the prior year period.
This loss is attributable to an accelerated cull rate during the third and
fourth quarter of fiscal 1998, partially offset with the existence of more
mature facilities culling animals as compared to an unusually strong market for
hogs, and the culling by our company of a larger percentage of its herd, which
consists of a higher quality of animal. In connection with the repopulation of
our Colorado facilities completed in October 1998, our company culled all of its
DeKalb breeding stock and replaced it with P.I.C. genetics.
Administrative expenses were $745,400 for the fiscal year ended 1998
compared to $424,565 for the prior year period. This increase reflects the
increased operations and includes higher administrative, payroll and
professional fees.
Interest expense of $1,389,312 for fiscal 1998 compared to $1,321,984 for
fiscal 1997 was incurred in financing the development of the six existing and
two new pig production facilities. The increase reflects an increase in
outstanding borrowings in fiscal 1998.
Our company earned net income of $1,124,403 for the fiscal year ended
August 31, 1998 compared to net income of $658,295 for the prior year period.
The increased fiscal 1998 net income was attributable to eight units operating
as of August 31, 1998 versus six units operating as of August 31, 1997 and
improved gross margins resulting from the per pig sales price exceeding
operating costs for most of fiscal 1998. This was partially offset by
$1,051,481 of start-up expenses related to the development of two pig production
facilities. The fiscal 1997 net income was attributable to improved gross
margins resulting from the per pig sales price exceeding operating costs, caused
in part by improved productivity as well as lower corn prices from fiscal 1996.
The selling price for our feeder and weaned pigs is based on the twelve-month
(five-month effective September 1, 1998) and five-month rolling average of
operating costs per pig for feeder and weaned pigs, respectively, the debt
service financing cost per pig, and a production margin of $4.50 per pig (in the
case of feeder pigs) and $0 to $4.50 per pig as determined by the Board of
Directors (in the case of weaned pigs). Effective September 1, 1998 this fixed
amount per pig of $4.50 for feeder pigs was changed to $0 to $4.50 per pig as
determined by the Board of Directors at its discretion. In addition to
operating risks and uncertainties associated with any business, our company's
ability to generate net income is limited by any start-up expenses that are
incurred with respect to facilities development and our company's selling price
formula that contains a production margin.
LIQUIDITY AND CAPITAL RESOURCES. At August 31, 1999, the Company reported
a working capital deficit of $614,767 and total assets of $32,519,546. The
Company issued 17 shares of Class A common stock in February 1999 for net
proceeds of $1,352,244. Our company used these funds, in combination with
$2,720,000 of borrowings through August 31, 1999 for the development,
population, and start-up of a pig facility in Yuma County, Colorado. Our
company issued 18 shares of Class B common stock in February 1999 for net
proceeds of $1,073,842. Our company used these funds, in combination with
$2,160,000 of borrowings through August 31, 1999, for the development,
population, and start-up of one pig production facility in Yuma County,
Colorado.
As of the date of this report, our company has 136 shares of Class A common
stock issued and outstanding, 54 shares of Class B common stock issued and
outstanding, no issued and outstanding shares of Class C common stock, and is
offering an additional 51 Class A shares, 54 Class B shares and 72 Class C
shares to qualified prospective investors. At August 31, 1999, our company had
$4,879,550 immediately available under its credit facility with CoBank,
consisting of $864,550 of loans and $4,015,000 of revolving term credit. An
additional $30,649,900 is available under the CoBank credit facility, subject to
specified equity investment levels in our company being satisfied. As of August
31, 1999, our company has borrowed $333,172 from Farmland to purchase land for
future expansion. See "Business-Financing." In the opinion of management,
these arrangements for debt capital are adequate for our company's present
operating and capital plans.
During the fiscal year ended August 31, 1999, our company had capital
expenditures of $6,759,990 for construction of facilities in Yuma County,
Colorado, for replacement breeding stock and for miscellaneous equipment needs.
Major uses of cash during the fiscal year ended August 31, 1999 include
$6,759,990 for capital expenditures on new and existing facilities, $1,393,296
decrease in revolving term credit, $1,812,000 of principal payments on long term
debt, and $633,400 paid to Farmland pursuant to a $760,000 loan agreement, and
payment of cash patronage of $433,115. Major sources of cash include $2,426,086
of proceeds, net of offering costs, from the issuance of capital stock,
$3,740,343 of proceeds from the issuance of long term debt, $3,739,824 in cash
provided by operating activities, and an increase in bank overdraft of $421,891.
The decrease in net cash provided by operating activities was primarily due to
lower net income in 1999.
On March 18, 1998, our company 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 production facilities then 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 our
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 our company. 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 changed 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 our
company's fiscal quarters based on the amount of available commitment at August
31, 2001.
Our company 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 0.25 for the period ended August 31, 1998, and thereafter a ratio of total
equity to total assets of 0.35, (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
August 31, 1999, our company was in compliance with all covenants. Our company
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 our company meets
CoBank's target level of equity investment, which is currently 11.5% of the
average five-year principal loan balance. As of August 31, 1999, substantially
all assets of our company were pledged to CoBank.
INCOME TAXES. Our company operates as a cooperative that is not exempt from
federal income taxes and, therefore, is subject to taxes on all income not paid
or allocated to members. Deferred income taxes have not been provided because
virtually all sales since inception have been to members and virtually all
future sales are anticipated to be to members. For the years ended August 31,
1999 and 1998, our company has not provided income taxes, as member-sourced
losses incurred in prior years have been carried forward to offset member-
sourced income in 1999 and 1998. At August 31, 1999, our company has member-
sourced loss carryforwards amounting to $2,891,000 available to offset future
member-sourced taxable income and $4,270,000 available to offset future
patronage refunds.
Patronage refunds for reinvestment for the years ended August 31, 1999 and
1998 represent nonqualified written notices of allocation which are deductible
by our company for Federal income tax purposes upon redemption of the equities
issued.
INFLATION. Inflation is believed to have a relatively minor impact on the
operations of the Company. While certain costs, such as salaries, are affected
by inflation, the Company believes that the factors which most affect its
results of operations are the cost of feed and other inputs and the productivity
of the breeding stock herd which are each influenced by a variety of factors.
Further, the Company will sell its feeder and weaned pig production under terms
which cause the sales price of pigs to be adjusted for changes in the cost of
production per unit, including increases in costs caused by inflation. The
precise impact of inflation on the Company's costs is not readily ascertainable.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement supersedes and expands on
the segment disclosure requirements of SFAS No. 14. The statement requires
certain financial disclosures about business segments. The definition of
business segments has been changed from an industry definition to that of a
management definition. SFAS No. 131 was effective August 31, 1999. This
statement had no effect on the Company's financial reporting, as our company
operates in a single segment.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 is effective
August 31, 1999. The statement will not effect the Company's financial
reporting.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as amended, is effective
for all fiscal quarters beginning after June 15, 2000. The Company currently
has no derivative instruments subject to SFAS No. 133.
YEAR 2000. Our company has completed an assessment of the changes needed to
make its financial system, operational system and equipment year 2000 compliant.
A plan has been developed to implement such changes. A software application that
should meet the financial and reporting needs of our company and that is year
2000 compliant has been purchased and was placed into use by May 31, 1999. The
cost of replacement software was approximately $20,000. Our company has
reviewed the non-information technology related systems. At this time, no
equipment that is date sensitive has been identified. Our company has evaluated
its reliance on third parties to determine and minimize the extent to which its
operations may be dependent on such third parties to remediate year 2000 issues
in their systems. In addition, after testing its systems our company developed
a contingency backup plan for systems which exhibit possible year 2000 problems.
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.
EVALUATING OUR BUSINESS IS DIFFICULT BECAUSE WE ARE AT AN EARLY STAGE OF
DEVELOPMENT AND OUR ABILITY TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN IS
UNCERTAIN. Our company was formed in May 1994 (with our predecessor, Yuma Feeder
Pig, being formed in October, 1991) and is at an early stage of development.
Although we have been engaged in the production of feeder pigs since July 1994
(which process includes the production of weaned pigs), we did not engage at all
in the production of weaned pigs for sale until 1998. Our company is subject to
all of the risks inherent in the establishment of a new business, including the
need for substantial capital to support our facilities development efforts, the
need to attract and retain qualified personnel and experienced management, and
the risks related to facility location and construction. These risks may impede
the successful implementation of our business plan to develop or acquire
additional pig production facilities and realize significant economies of scale
or to make feeder and weaned pigs available to our members in sufficient
quantities and at prices that are less than otherwise could be obtained from
other sources.
WE MAY NOT BE ABLE TO OPERATE SUCCESSFULLY IF WE CANNOT ACQUIRE
SATISFACTORY BREEDING STOCK AT ACCEPTABLE PRICES. The availability of
genetically consistent breeding stock that satisfies the characteristics we
require and that can be obtained on acceptable terms and prices is crucial to
our operations. We cannot give assurances that our requirements for breeding
stock will be satisfied on acceptable terms and prices, if at all. See
"Business" under Item 1.
PROBLEMS WITH THE HEALTH OF OUR BREEDING HERD AND OF THE PIGS WE PRODUCE
ADVERSELY IMPACTS OUR PROFITABILITY AND OPERATIONS AND RESULTS IN HIGHER PRICES
FOR THE FEEDER AND WEANED PIGS THAT OUR MEMBERS PURCHASE. The health of our
breeding herd and of the pigs we produce can greatly impact, and has greatly
impacted, our profitability. In the event that our breeding herd or feeder or
weaned pig population contracts a disease causing diminished breeding stock
productivity or death, we may face a substantial cost or loss that could
adversely affect our operating results. In addition, herd health problems may
result in an increase in the price for pigs that our members are required to
purchase. Although we anticipate that each of the new facilities developed or
acquired with the proceeds from this offering will be 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. We have encountered
herd health problems in the past. We cannot assure you that we will be able to
avoid herd health problems in the future. See "Business--Pig Purchase
Agreement" under Item 1.
A SUBSTANTIAL INCREASE IN THE COST OR A DECLINE IN AVAILABILITY OF FEED AND
SUPPLIES, COULD HAVE A SERIOUS ADVERSE IMPACT ON OUR BUSINESS AND COULD RESULT
IN THE PRICES PAID BY OUR MEMBERS FOR THE FEEDER AND WEANED PIGS BEING HIGHER
THAN COULD BE OBTAINED FROM OTHER SOURCES. The cost of feed and other supplies
makes up a substantial portion of the cost of producing pigs, particularly
feeder pigs which require more feed. These costs fluctuate substantially based
upon changes in regional and seasonal availability and demand, including those
attributable to crop conditions, weather and other factors, most of which are
beyond our control. A substantial increase in the cost of these inputs, or a
substantial decline in the availability of these inputs, could materially
adversely affect our performance and result in the price paid by our members for
pigs being higher than may be charged by other pig suppliers.
The price paid by our members for feeder or weaned pigs is based in part on
the five-month average of our operating costs. As a result, any change in the
sale price for our pigs will lag five months behind the corresponding change in
the related operating costs. Because we will not immediately recover operating
cost increases, this lag may adversely affect our operating results,
particularly in the event of sudden movements, or continual increases, in such
operating costs. See "Business--Purchase of Feed and Other Inputs" and "--Pig
Purchase Agreement " under Item 1.
THE INABILITY TO OBTAIN THE WATER WELL PERMITS REQUIRED FOR THE EXPANSION
OF OUR OPERATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. Our
operations are dependent upon the availability of an ample supply of pure water
at reasonable cost. Although we have the necessary permits to obtain water for
our current operations, we have been advised that we will not be able to obtain
any new commercial well permits in Colorado. Accordingly, to secure the water
supply necessary for an expansion of our Colorado operations, we may need to
purchase more expensive irrigated land or other real property already having
commercial well permits. We cannot assure you that we will be able to obtain
the permits necessary to expand our operations in Colorado, Illinois, or other
locations we select at a reasonable cost, if at all. The expansion of our
operations is an important part of our business plan. See "Description of
Business - Expansion."
MEMBERS ARE REQUIRED TO PURCHASE THEIR PROPORTIONATE SHARE OF FEEDER OR
WEANED PIGS EVEN THOUGH THE AVAILABILITY OR QUANTITY MAY NOT MEET THE MEMBER'S
NEEDS OR CAPACITY, AND THE PRICE WE CHARGE FOR PIGS MAY BE HIGHER THAN COULD BE
OBTAINED ELSEWHERE. Each of our members must purchase his or her proportionate
share of our feeder weaned pig production, as the case be, for a term of at
least ten years. Pigs will be made available to members on a rotating schedule
that we establish, with the number of lots made available to a member and the
frequency of availability being based upon the member's proportionate ownership
interest in the applicable class of common stock and our actual production of
qualifying pigs. We cannot provide any assurance that the availability of
feeder or weaned pigs will coincide with a member's needs or capacity to take
delivery.
The price paid by our members for feeder or weaned pigs is equal to the sum
of three factors described in the Pig Purchase Agreement: the financing cost
per pig, the operating cost per pig, and a production margin of $0 to $4.50 per
pig, as determined by our company. We believe the effect of this pricing
structure is to shift the risks of increasing production costs and lower market
prices for pigs from our company and to the member. We can give no assurance
that the price for feeder or weaned pigs under the Pig Purchase Agreement will
be less than may be charged by other pig suppliers. In this regard, our
company's average net sales price for its pigs exceeded the average industry
market price for pigs for the 1997, 1998 and 1999 fiscal years.
If a member fails to purchase, pay for, and take delivery of any two lots
of pigs (increased by one lot for each ten shares of common stock owned by the
member) as they are made available, we may terminate the member's Pig Purchase
Agreement and foreclose on our security interest in the member's common stock.
In addition, the member will be responsible for any resulting damages and
expenses we incur, to the extent specified in the Pig Purchase Agreement. The
failure of one or more of our members to purchase pigs under the Pig Purchase
Agreements, particularly during periods in which the market price for pigs is
depressed, would have a material and adverse effect on our company and the
members who continue to purchase pigs under such agreements. See "Business--
Pig Purchase Agreement" under Item 1.
THE DEVELOPMENT OF PIG PRODUCTION FACILITIES REQUIRES UP FRONT EXPENDITURES
THAT MAY RESULT IN OPERATING LOSSES. The development of 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, the development of new facilities has resulted in losses
for our company that may occur again in the future if additional facilities are
developed. We cannot assure you that we will become profitable after we cease
development activities.
OUR COMPANY HAS SUBSTANTIAL INDEBTEDNESS WHICH COULD ADVERSELY AFFECT ITS
FINANCIAL CONDITION. Our company is highly leveraged and will continue to be so
after our anticipated borrowing of term and revolving debt in connection with
any sale and issuance of shares in this offering. The degree to which we are
leveraged could have serious adverse consequences, including:
o increasing our difficulty in meeting our debt service payments
o increasing our vulnerability to adverse general economic and market
conditions
o impairing our ability to obtain additional financing for future
working capital, capital expenditures, general corporate or other
purposes
o reducing the amount of funds available for operations or distribution
since a significant portion of cash produced by operating activities
must be dedicated to the payment of debt obligations
o placing us at a competitive disadvantage compared to our competitors
that have less debt
IF WE ARE UNABLE TO COMPLY WITH OUR CURRENT LOAN AGREEMENTS AND FAIL TO
OBTAIN A WAIVER FROM OUR LENDER, OUR DEFAULT WOULD PERMIT THE LENDER TO
FORECLOSE ON COLLATERAL PLEDGED BY OUR COMPANY. We have entered into various
loan agreements with our current lender under which we are or will be required
to grant liens on substantially all of our properties and assets to CoBank. We
also are required to comply with various covenants, including the following:
o maintenance of minimum levels of working capital
o restrictions on the incurrence of additional indebtedness
o restrictions on certain liens, mergers, sales of assets, investments,
guaranties, loans, advances and business activities unrelated to
existing operations
o restrictions on the declaration and payment of patronage distributions
We cannot guarantee that we will be able to comply with all loan covenants.
While we have successfully sought and received consents, waivers, and amendments
to our loan covenants in the past, we cannot give any assurance that our lender
will grant such requests in the future. The failure to comply with the
covenants or to obtain such requests would reduce our flexibility to respond to
adverse industry conditions and could have a material adverse effect on our
operating results, financial condition and business. In the event of default,
the lender will have the right to foreclose upon collateral pledged by our
company. No person has guaranteed our obligation to make timely debt service
payments.
IF WE ARE UNABLE TO SECURE DEBT FINANCING ON ACCEPTABLE TERMS OR TO MEET
REQUIRED CONDITIONS FOR OBTAINING LOANS, WE MAY BE REQUIRED TO CURTAIL A
SIGNIFICANT PORTION OF OUR EXPANSION. We will be required to borrow substantial
amounts of term and revolving debt for each minimum block of shares offered in
order to further our strategy of developing or acquiring each additional pig
production facility. As of the date of this report, we have obtained from
CoBank, ABC, our current lender, a commitment until December 31, 2001 for the
loans required for the development or acquisition of at least four additional
pig production units having a 2,450-sow capacity. However, we cannot give
assurances that we will be able to obtain an extension of such commitment after
that date on favorable terms, if at all, or that we will be able to obtain
additional loan commitments to fund additional facilities expansion.
Any loan commitment, including our commitment from our current lender, will
require certain conditions to be met before funds will actually be advanced. In
addition, any loan commitment may be withdrawn or terminated by the lender under
certain circumstances. We cannot guarantee that we will be able to satisfy the
necessary conditions and that the loan funds will be made available when needed.
We also cannot assure you that alternative sources of financing will be
available on acceptable terms or that our total borrowing needs will not exceed
those anticipated.
AN INABILITY TO BE COMPETITIVE IN DEVELOPING AND IMPROVING PIG PRODUCTION
TECHNOLOGIES OR TO RESPOND TO A DROP IN THE MARKET PRICE FOR PIGS, MAY HAVE AN
ADVERSE EFFECT ON OUR PROFITABILITY AND REQUIRE MEMBERS TO PAY HIGHER PRICES FOR
PIGS. Many of our existing or potential competitors have substantially greater
financial, technical and personnel resources than our company, and may be more
successful than us in raising feeder and weaned pigs in an economical manner.
As more competitors begin operations, the supply of feeder or weaned pigs may
exceed demand and result in downward pressure on the market prices for such
pigs. Accordingly, if we are not successful in developing and improving pork
production technologies relative to our competitors or if the prevailing market
price drops below those applicable under the pig purchase agreement, members may
be required to purchase feeder or weaned pigs, as the case may be, at prices
higher than those available from other sources. See "Business--Business
Environment," "-- Competition" and "-- Pig Purchase Agreement " under Item 1.
THE WIDESPREAD OPPOSITION TO LARGE-SCALE HOG PRODUCTION FACILITIES AND
CORPORATE FARMING OPERATIONS COULD RESULT IN LEGISLATION AND OTHER MEASURES THAT
COULD HAVE A DETRIMENTAL EFFECT ON OUR BUSINESS AND OPERATING RESULTS. The
increase in the number of large corporate farming operations, such as ours, has
generated opposition from residents of the states in which those operations are
conducted. This opposition may reflect various 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. As a
result, we may face a variety of consequences that could adversely effect our
company and business, including:
o legal proceedings to obtain monetary awards, injunctive orders or
other legal or equitable remedies
o potential employees being dissuaded from accepting a position with our
company
o the reluctance of property owners to sell parcels to us
o costly compliance or violation of national, state and local
regulations enacted as a result of public opposition
See "Recent Development--Colorado Regulation of Commercial Swine Operations,"
"Business--Business Environment" and "--Water Disposal and Environmental
Matters" under Item 1.
DESPITE VOTING LIMITATIONS IMPOSED BY OUR CURRENT LENDER, SEVERAL MAJOR
SHAREHOLDERS COULD EXERCISE A SIGNIFICANT DEGREE OF CONTROL BY DECIDING TO VOTE
TOGETHER. As of the date of this report, Farmland Industries, Yuma Farmers
Milling and Mercantile Cooperative Company, Corn Plus II, and Welko, L.L.C.
collectively own 58.1% of the outstanding shares of our Class A common stock and
51.9% of the outstanding shares of our Class B common stock. While no single
cooperative association member is permitted to vote shares of common stock
representing 25% or more of shares outstanding, the members listed above could
continue to exercise a significant degree of influence or control in the
election of directors and other matters if they choose to vote together. See
"Security Ownership of Certain Beneficial Owners and Management" under Item 11.
WE ARE INVOLVED IN VARIOUS AGREEMENTS OR TRANSACTIONS WITH SOME OF OUR
LARGER MEMBERS, WHICH MAY PRESENT CONFLICTS OF INTEREST. We have contracted with
Farmland Industries and Yuma Farmers Milling and Mercantile Cooperative for the
supply of feed and other inputs, breeding stock and administrative services.
Our agreements may be modified or terminated or we may enter into new agreements
or conduct new transactions with these shareholders. However, Farmland, through
its various business divisions, subsidiaries and affiliates, is engaged in the
production of livestock elsewhere, in the sale of feed, stock and administrative
services to other parties, and the slaughter and processing of hogs. In light
of such business activities, Farmland may have conflicting interests in
providing necessary goods and services to our company. Yuma may have similar
conflicting interests. In addition, we are unable to determine what effect, if
any, the proposed combination of Farmland and Cenex Harvest States Cooperatives
will have on our agreements with Farmland and on our business. See "Certain
Relationships and Related Transactions - Farmland."
NO DIVIDENDS WILL BE PAID BY OUR COMPANY ON ITS COMMON STOCK. We will not
pay dividends on our common stock. Investors who anticipate the need for an
immediate return on their investment should not purchase our common stock.
However, we intend to make annual patronage distributions of our net margins, if
any, to our members on the basis of the quantity or value of business we do with
or for the member-patrons. These distributions may be paid in cash, qualified
or non-qualified written notices of allocation, or a combination as determined
by our board of directors in their sole discretion. Our ability to pay
patronage distribution in cash is restricted by our loan agreements and other
documentation with our current lender.
THE FAILURE OF OUR COMPANY TO COMPLY WITH FEDERAL, STATE OR LOCAL
REGULATION AND CHANGES IN SUCH REGULATION COULD RESULT IN FINES, RESTRICTIONS OR
PROSECUTIONS, AND NEGATIVELY AFFECT OUR BUSINESS. We are 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 we
attempt to monitor all aspects of our regulatory compliance responsibilities, we
cannot provide assurances that we will be able to satisfy all applicable
governmental regulations or obtain required approvals. Our failure to comply
with applicable regulations may result in fines, suspensions of regulatory
approvals, operating restrictions and criminal prosecution. Changes in or
additions to applicable regulations also could adversely affect our company and
our business. In this regard, recently adopted amendments to the Colorado
statutes and regulations concerning housed commercial swine feeding operations
may have material and adverse consequences to our company and its business. See
"Recent Development--Colorado Regulation of Commercial Swine Operations,"
"Business--Government Regulation" and "--Waste Disposal and Environmental
Matter" under Item 1.
THE FAILURE OF OUR COMPANY TO BE YEAR 2000 COMPLIANT COULD SEVERELY DISRUPT
OUR BUSINESS AND ADVERSELY EFFECT OUR OPERATING RESULTS. While we have made an
assessment of our key financial, informational and operational systems and do
not expect significant issues or difficulties related to the Year 2000, we
cannot grant assurances in this regard. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000."
ADDITIONAL RISKS AND UNCERTAINTIES MAY AFFECT OUR FUTURE RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND BUSINESS. Additional risks and
uncertainties that may affect our future results of operations, financial
condition and business include, but are not limited to: the effect of economic
and industry conditions on prices for our feeder and weaned pigs and our cost
structure; the ability to keep pace with technological change in a timely and
cost-effective manner and to provide better service and remain competitive;
adverse publicity, news coverage by the media, or negative reports by industry
analysts regarding our company or our feeder or weaned pigs which may have the
effect of reducing our reputation and goodwill; and the ability to attract and
retain capital for growth and operations on competitive terms.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this Item are located at the back of
this report on the pages indicated in Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The names of the current directors and executive officers of our company
(and all persons nominated or chosen to become such as of the date of this
report), their ages and present positions and offices with our company are as
follows:
Name Age Position and Offices Held
Wayne N. Snyder 55 Chairman of the Board, President and
Director
Merl A. Daniel 54 Director
Loren Keppy 38 Director
Larry Welsh 46 Director
Set forth below is a description of the business experience of each
director and executive officer of our company.
Wayne N. Snyder has served as Chairman of the Board, President and Director
of our company since its formation in May 1994, and has served as General
Manager of Yuma Feeder Pig, our company's predecessor, from October 1991 to July
1994. Mr. Snyder has served as Vice President of Livestock Production for
Farmland since July 1997 and as a Director of Livestock Production for Farmland
from 1989 to June 1997. In his present capacity, he is responsible for all
activities of Farmland's livestock production department. His professional
career includes over 20 years of experience with Farmland in a variety of
positions, including Regional Manager and Vice President--Sales.
Merl A. Daniel has served as a Director of our company since March 1995.
Mr. Daniel has been employed by Farmland since 1968, and has served in his
present capacity of Vice President and Controller for Farmland since July 1992.
From October 1990 to July 1992, he served as Farmland's Director MIS, Operations
and Technical Support, in which capacity he managed Farmland's computer
operations. Prior to October 1990, Mr. Daniel served Farmland in a variety of
other capacities.
Loren Keppy has served as a Director of our company since June 1996. Mr.
Keppy has been self-employed as a farmer since 1984. In this regard, he
currently operates a 5,000 head per year hog finishing operation near Durant,
Iowa, in addition to farming 470 acres of crops. Mr. Keppy received a Bachelor
of Science degree in Industrial Technology from the University of Northern Iowa,
and is a member of the River Valley Coop.
Larry Welsh has served as a Director of our company since November 1997.
Mr. Welsh has engaged in farming since 1976 through family partnerships with
1,100 acres of crops. Mr. Welsh serves as President of Welkco, L.L.C., a
family-owned hog enterprise capable of finishing 50,000 market hogs per year as
a member of Effingham Equity Cooperative. He has a Bachelor of Science degree
in Mechanical Technology and Business Administration from Indiana State
University.
Officers are elected annually by the Board of Directors and serve until
their respective successors are duly elected and qualified. Our company's Board
of Directors currently consists of five directors: Messrs. Snyder, Daniel,
Keppy and Welsh and as of the date of this report there is one vacancy on the
Board. The members of the Board of Directors are elected for one year terms
expiring at the annual meeting of stockholders or until their respective
successors are duly elected and qualified, unless sooner removed or
disqualified. Our company's Articles of Incorporation and Bylaws provide that
at least a majority of the directors constituting the Board of Directors shall
be, and less than a majority of the directors need not be, members or duly
authorized representatives of members of our company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
With respect to any company having a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange
Act"), Section 16(a) of the Exchange Act requires the directors, executive
officers and persons who own more than 10% of any class of equity securities of
the company registered pursuant to Section 12 of the Exchange Act to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership in such securities and other equity securities of the
company. During the fiscal year ended August 31, 1999, our company did not have
any class of equity securities registered pursuant to Section 12 of the Exchange
Act. Accordingly, no Section 16(a) filing requirements were applicable to its
directors, executive officers and greater than 10% shareholders during such year
with respect to our company's equity securities.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
No compensation has been awarded, earned by or paid to Wayne N. Snyder, the
chief executive officer of our company, by our company for services rendered to
our company as such during the period from our company's organization on May 3,
1994 through August 31, 1999. Mr. Snyder is employed by Farmland, which has
agreed to provide certain administrative, advisory and consulting services to
our company under the terms of a Swine Production Services Agreement. No
executive officer of our company at August 31, 1999 was awarded, earned or was
paid compensation in excess of $100,000 for services rendered to our company as
such during the fiscal year ended August 31, 1999. See "Directors and Executive
Officers" under Item 9 and "Certain Relationships and Related Transactions"
under Item 12.
DIRECTOR COMPENSATION
Although our company's Bylaws provide that directors may be compensated for
their services, no compensation has been awarded to, earned by or paid to
members of our company's Board of Directors for service to our company as such.
Each director may be reimbursed for such director's reasonable out-of-pocket
expenses incurred in the performance of service to our company as a director if
authorized by the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of the date of this
report regarding the beneficial ownership of Class A common stock and Class B
common stock by each person known to the Board of Directors to own beneficially
5% or more of our capital stock, by each director and executive officer of our
company owning any shares of our company's capital stock and by all directors
and executive officers of our company as a group. As of that date, no shares of
our Class C common stock were outstanding. All information with respect to
beneficial ownership has been furnished by the respective stockholders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF COMMON
NAME AND ADDRESS OF BENEFICIAL STOCK OUTSTANDING
BENEFICIAL OWNER
OWNER<F1>(1)
<S> <C> <C> <C> <C> <C>
CLASS A COMMON CLASS B CLASS A CLASS B ALL
COMMON COMMON COMMON CLASSES
Farmland Industries, Inc.<F2> (2)
57 10 41.9% 18.5% 35.3%
3315 North Oak Trafficway
Kansas City, MO 64116
Yuma Farmers Milling and Mercantile 12 -- 8.81% -- 6.3%
Cooperative Company <F3>(3)
101 South Detroit
Yuma, CO 80759
Corn Plus II, L.C. <F3>(3) 10 -- 7.4% -- 5.3%
212 North Agora Street
Marathon, IA 50565
Larry Welsh/Welkco, L.L.C. <F3>(3)<F4>(4) -- 18 -- 33.3% 9.5%
21101 East 1950 Road
Marshall, IL 62441
Loren Keppy 1 -- 0.7% -- 0.5%
21641 First Avenue
Durant, IA 52747
All directors and executive officers 1 18 0.7% 33.3% 10.0%
as a group
_________________
<F1>
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally
attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with
respect to those securities. Unless otherwise indicated, the persons or entities identified in this table have sole voting and
investment power with respect to all shares shown as beneficially owned by them. Percentage ownership calculations are based
on 136 shares of Class A common stock outstanding and 54 shares of Class B common stock outstanding.
<F2>
(2) The voting and disposition of the shares of Class A and Class B common stock held by Farmland are subject to the discretion of
the board of Directors of Farmland. Pursuant to our company's Articles of Incorporation, Farmland is prohibited from voting
shares of common stock representing 25% or more of the shares outstanding during any period in which our company has borrowed
money from a lender subject to regulations of the Farm Credit Administration regarding loan policies and operations (such as
our company's current lender). As of the date of this report, our company had borrowed funds from such a lender. See
"Description of Business -- Financing" under Item 1 and "Holders" under Item 5.
<F3>
(3) The voting and disposition of the shares of Class A and Class B common stock held by these beneficial owners are subject to the
discretion of the Board of Directors (manager in the case of Corn Plus II, L.C.) of the applicable beneficial owner.
<F4>
(4) Includes 18 shares of Class B common stock held by Welkco, L.L.C. Mr. Welsh is President and one of the two largest members of
Welkco, L.L.C., and therefore may be deemed to be the indirect beneficial owner of such shares.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
GENERAL
As of August 31, 1999, Farmland and Yuma Farmers Milling and Mercantile
Cooperative own approximately 35.3% and 6.3%, respectively, of the outstanding
common stock of our company. In connection with the formation of our company as
a Colorado cooperative association on May 3, 1994, one share of our company's
Class A common stock was issued to Farmland for the purchase price of $100. On
July 13, 1994, our company acquired the entire equity ownership rights and
interests in Yuma Feeder Pig, a Colorado limited liability corporation in which
Farmland and Yuma Cooperative owned approximately 71.5% and 28.5%, respectively,
of the outstanding equity interests. In exchange for their respective equity
interests in Yuma Feeder Pig, Farmland and Yuma Cooperative were issued 30
shares and 12 shares, respectively, of our company's Class A common stock. Yuma
Feeder Pig thereupon was dissolved and liquidated and its assets and liabilities
were assigned to and assumed by our company. As of the date of this report, our
company has consummated its issuance and sale to Farmland of additional shares
of our capital stock. Our company has entered into various contractual
arrangements with both Farmland and Yuma Cooperative for the provision of
specific goods and services. All future transactions between our company and
its officers, directors, employees and affiliates, including Farmland and Yuma
Cooperative, will be on terms no less favorable to our company than can be
obtained from unaffiliated parties. All such transactions will be subject to
the approval of a majority of the independent outside members of the Board of
Directors who do not have an interest in the transactions. See Item 11.
FARMLAND
Farmland is a Kansas cooperative association engaged in regional farm
supply and marketing operations, including the processing and marketing of pork
and beef. Farmland's livestock production department is directly engaged in the
production of feeder pigs and finished hogs through contractual arrangements
with independent producers, the ownership of pig production operations in joint
venture with both agricultural cooperatives and independent producers, as well
as other activities including the operation of feeder pig brokerage services.
Wayne N. Snyder and Merl Daniel each are employed by Farmland and presently
serve as directors or executive officers of our company.
Farmland, through its various business divisions and interests, is engaged
in providing to competitors of our company certain goods and services, including
the supply of feed and other inputs, breeding stock and administrative services,
among others, which are comparable to those being provided by Farmland to our
company. Moreover, Farmland also is directly engaged in the production of hogs
through the direct ownership of animals and facilities, through contractual
arrangements with other producers, and through joint venture arrangements
established with other parties. Because of Farmland's various activities, there
may arise conflicts of interest between Farmland and our company. Our company
anticipates that Farmland may continue to engage and invest in activities and
businesses other than those of our company. Thus, Farmland may have conflicts
of interest in allocating its resources and management time, services and
functions among our company and such other activities. Similarly, with respect
to the employees of Farmland serving as officers or directors of our company,
Farmland's other business interests may result in competition for their time,
services and functions.
Farmland and Cenex Harvest States Cooperatives have announced their
intention to combine their companies. Cenex is an agricultural foods
cooperative which operates oil refineries and pipelines and provides a variety
of products and services ranging from grain marketing to food processing. We
are unable to determine what effect, if any, a Farmland-Cenex combination would
have on our company or its members.
Swine Production Consulting and Services Agreement. Our company has entered
into various contractual arrangements with Farmland for the provision of
specific goods and services. Under the terms of a Swine Production Services
Agreement with our company, Farmland, acting as independent contractor, has
agreed to provide certain administrative, advisory and consulting services to
our company, including the following:
o performing various ministerial services, including data entry of
transactions for accounting purposes and computer generation of
financial and operational reports and checks;
o compilation of the production records with respect to each feeder and
weaned pig production facility;
o logistical backup and coordination, including facilitating the
acquisition, servicing, transportation and sale of genetic stock,
breeding stock, feeder pigs and weaned pigs;
o facilitating the purchase of inputs for our company; assistance in
sourcing feed ingredients, animal health products and veterinarian
services;
o assistance in arranging financing; assistance in selection of suitable
sites for our company's facilities;
o assistance in obtaining appropriate permits for the construction and
operation of facilities for our company;
o assistance in the recruitment, selection and training of general
managers for our company; and
o advice and consultation with respect to management practices, feed
formulations and other aspects of our company.
Farmland has agreed to assist our company in acquiring the necessary
management and labor to adequately staff and operate our company's pig
production facilities. Our company will cause the new pig production facilities
to be constructed, provide initial and replacement breeding stock purchased from
Farmland or other sources which, under normal circumstances, will be sufficient
to keep the facilities in full production and provide adequate record keeping to
allow Farmland to provide the accounting and reporting functions required of it
under the Swine Production Services Agreement. Finally, our company will grant
Farmland reasonable access to the facilities, in accordance with good
bio-security practices, to allow Farmland to provide its required services.
Farmland will be paid one dollar ($1.00) for each feeder or weaned pig sold by
our company as partial compensation for Farmland's duties under the agreement.
Such amount is subject to adjustment annually commensurate with, and based upon,
changes in the Consumer Price Index. For the years ended August 31, 1999 and
1998, our company paid Farmland a total of $455,904 and $344,269, respectively,
for its provision of administrative, advisory and consulting services pursuant
to the Swine Production Services Agreement. Farmland also may provide a
significant portion of the feed ingredients, nutritional supplements and animal
health supplies required by our company at Farmland's customary rates. For the
years ended August 31, 1999 and 1998, our company purchased $256,696 and
$207,518, respectively, of feed ingredients, nutritional supplements and animal
health supplies from Farmland.
Our company presently acquires gilts from Farmland for use as breeding
stock by our company. The purchase price to be paid by our company to Farmland
for finished gilts will be based upon Farmland's cost of acquiring and producing
such gilts, plus a handling fee of $10 per weaned pig that is acquired for
finishing into breeding stock. A royalty fee to Triumph or other genetics
supplier is also paid and passed on to our members in the sales price for feeder
or weaned pigs. This fee may instead be payable by our members directly. For
the years ended August 31, 1999 and 1998, our company purchased finished gilts
from Farmland at an aggregate price of $2,217,369 and $3,355,357, respectively.
In the event that our company does not purchase any such finished gilts,
Farmland may either market such gilts for slaughter or retain such gilts for use
as breeding stock. Farmland has agreed to pay a $10.00 per head fee to our
company for any such finished gilts that are retained by Farmland for use as
breeding stock. For the years ended August 31, 1999 and 1998, Farmland paid $0
and $34,810, respectively, of such fees to our company.
It is anticipated that Farmland may provide hybrid gilts from additional
multiplier facilities to meet a portion of our company's initial stocking and
ongoing requirements for breeding stock with respect to each pig production
facility in existence, under development or proposed. The actual number of
replacement gilts purchased from Farmland will be affected by our company's
requirements and the availability of animals from Farmland's facilities. The
purchase price of replacement hybrid breeding stock is to be based upon the
prevailing market price of breeding stock at the time of purchase.
In the Swine Production Services Agreement, our company agreed to provide
Farmland the first opportunity to purchase any feeder and weaned pigs produced
by our company in excess of our company's supply commitments to other members or
that other members have failed to purchase during the five-year period ending
July 13, 1999. This right to purchase excess pigs expired on July 13, 1999 and
has not been renewed. Our company also has granted Farmland an option to
purchase any shares of common stock reacquired by our company.
Pig Purchase Agreements. As a member of our company, Farmland has
contracted with our company to purchase a share of the feeder and weaned pigs to
be produced by our company under the same terms required of our company's other
members. Commencing on August 11, 1995, the date our company first produced and
shipped feeder pigs pursuant to the Pig Purchase Agreements with our company's
existing members (other than Farmland and Yuma Cooperative), the price paid by
Farmland for pigs has been under terms comparable to those applicable to our
company's other members. For the years ended August 31, 1999 and 1998, Farmland
purchased feeder and weaned pigs from our company (including Yuma Cooperative's
share of feeder pigs produced by our company) at an aggregate price of
$9,187,729 and $10,251,093, respectively. See "Description of Business--Pig
Purchase Agreement " under Item 1.
Real Estate Loans. Between September and December 1995, our company
purchased approximately 1,000 acres of real property in Yuma County, Colorado.
Our company obtained funding for the purchase of this property from the proceeds
of a loan obtained from Farmland. In conjunction with this loan, our company
delivered to Farmland a promissory note evidencing the debt providing for the
amortization of the loan over a ten-year period, at a variable rate equal to
CoBank's prime rate. As of August 31, 1999, CoBank's prime rate was 8.25%. The
payment schedule of the promissory note requires that our company make
interest-only payments for the life of the loan, with a final balloon payment of
the principal at the expiration of the ten-year term. To secure the obligations
of the promissory note, our company has agreed to execute a deed of trust in
favor of Farmland covering all of the subject property, which deed of trust is
second in priority to that of CoBank with respect to the production facility
constructed thereon. See "Business--Facilities."
In November 1997, our company obtained a $1,360,000 loan from Farmland to
provide for facilities expansion. In conjunction with this loan, our company
delivered to Farmland a promissory note evidencing the debt providing for
amortization over a ten-year period, at a variable rate equal to CoBank's then
national variable rate plus 1.25%. This loan was repaid by our company in full
in November 1997, and the promissory note has been canceled. In May 1998, our
company obtained a $2,160,000 loan from Farmland to provide for the development
of a 5,000-sow pig production facility in Yuma County, Colorado. In conjunction
with this loan, our company delivered to Farmland a promissory note evidencing
the debt providing for amortization over a ten-year period, at a variable rate
equal to CoBank's then national variable rate plus 1.25%. The payment schedule
for the Farmland loan requires our company to make interest-only payments for
the life of the loan, with a balloon payment of one-half of the principal and
interest to be made upon our company's issuance and sale of a minimum block of
common stock. The remaining principal and interest is payable upon our
company's issuance and sale of a second minimum block of common stock. This loan
was repaid by our company in full in February 1999, and the promissory note has
been canceled.
Pig Producers I, L.P. Farmland holds a 12.5% interest in Pig Producers I,
L.P., a limited partnership engaged in the production of feeder pigs from a
2,450-sow feeder pig production facility located in Yuma County, Colorado. Our
company has assigned approximately 12 of its employees to perform various
facilities operation services for Pig Producers. Pig Producers reimburses our
company for all wages, benefits and other costs attributable to these employees
of our company. From time to time, our company and Pig Producers also engage in
various commercial transactions related to the sale of genetic stock, breeding
stock, feed ingredients and animal health supplies. See "Description of
Property" under Item 2.
Colorado Repopulation. In connection with the repopulation of our
company's feeder pig production facilities located in Yuma County, Colorado, our
company arranged for the finishing of new breeding sows on facilities of
independent producers. In this regard, our company contracted with Farmland for
the use of facilities as to which Farmland acquired rights from the owners of
such facilities. During the approximately 14 months that our company used such
facilities, our company had approximately 9,240 pig spaces available to it. Our
company was obligated to pay the facilities owner a monthly fee equal to $31.50
per pig space divided by 12. In addition, Farmland was entitled to a monthly
fee from our company equal to $1.00 per pig space divided by 12.
YUMA COOPERATIVE
Yuma Farmers Milling and Mercantile Cooperative is a Colorado cooperative
association engaged in farm supply and grain marketing activities.
Yuma Cooperative is engaged in providing to competitors of our company and
other users certain goods and services, including the supply of feed and animal
health products, which are comparable to those provided by Yuma Cooperative to
our company. Because of its other business activities, conflicts of interest
may arise between Yuma Cooperative and our company. With respect to the
employees of Yuma Cooperative serving as officers or directors of our company,
Yuma Cooperative's other business interests may result in competition for their
time, services and functions.
Feed Purchase Agreement. Our company has entered into a Feed Purchase
Agreement with Yuma Cooperative respecting the supply of manufactured feed and
animal health products. In this capacity, Yuma Cooperative has agreed to
purchase feed-grains and feed additives for the production of feed which,
together with animal health products, will be sold to our company. In exchange
for providing these goods and services, Yuma Cooperative is entitled to
compensation based upon a fixed charge for the grinding, mixing, and delivery of
feed ($12.00 per ton as of the date of this report), in addition to the actual
delivered cost of the feed ingredients. Feed rations which are pelleted are
subject to a surcharge ($5.00 per ton as of the date of this report). The fixed
charge and the surcharge will remain fixed through the expiration of the Feed
Purchase Agreement on August 31, 2000. Corn provided by Yuma Cooperative for
use in feed generally is sold to our company at delivered cost plus, in the
absence of available Company grain storage facilities, a $.10 per bushel
handling fee. Our company has the right under the Feed Purchase Agreement, in
its sole discretion, to purchase and provide its own corn for feed
manufacturing. For the years ended August 31, 1999 and 1998, our company
purchased $3,006,731 and $3,660,337, respectively, of feed from Yuma
Cooperative. See "Description of Business--Purchase of Feed and Other Inputs"
under Item 1.
Pig Purchase Agreement. As a member of our company, Yuma Cooperative has
contracted with our company to purchase a share of the feeder pigs to be
produced by our company under the same terms required of our company's other
members. Commencing on August 11, 1995, the date our company first produced and
shipped feeder pigs pursuant to the Pig Purchase Agreements with our company's
existing members (other than Farmland and Yuma Cooperative), the price paid by
Yuma Cooperative for feeder pigs has been under terms comparable to those
applicable to our company's other members. For the years ended August 31, 1999
and 1998, Yuma Cooperative's share of feeder pigs produced by our company was
purchased from our company by Farmland. See "Certain Relationships and Related
Transactions -- Farmland" and "Description of Business -- Pig Purchase Agreement
" under Item 1.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
1. The following financial statements of the Company and reports of the
Company's independent auditors appear on the pages indicated in this report.
Page
Independent Auditors' Report 38
Balance Sheets as of August 31, 1999 and 1998 39
Statements of Earnings for the years ended August 31, 1999 and 1998 40
Statements of Shareholders' Equity for the years ended
August 31, 1999 and 1998 41
Statements of Cash Flows for the years ended
August 31, 1999 and 1998 42
Notes to Financial Statements 43
2. The following exhibits are filed as part of this report:
Exhibit
No. Description
3.1 Articles of Incorporation (filed on May 23, 1997 as Exhibit 3.1 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
3.1.1 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.1 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
3.1.2 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.2 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
3.1.3 Articles of Amendment (filed on May 23,, 1997 as Exhibit 3.1.3 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
3.1.4 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.4 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
3.2 Amended and Restated Bylaws (filed on May 23, 1997 as Exhibit 3.2 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
3.2.1 Amendments to Amended and Restated Bylaws (filed on May 23, 1997 as
Exhibit 3.2.1 to Amendment No. 1 to the Company's Registration on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.1 Articles of Incorporation (filed on May 23, 1997 as Exhibit 3.1 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
4.1.1 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.1 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
4.1.2 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.2 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.1.3 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.3 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.1.4 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.4 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.2 Amended and Restated Bylaws (filed on May 23, 1997 as Exhibit 3.2 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
4.2.1 Amendments to Amended and Restated Bylaws (filed on May 23, 1997 as
Exhibit 3.2.1 to Amendment No. 1 to the Company's Registration on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.3 Specimen Form of Certificate Representing Membership in the Company and the
Class A Common Stock (filed on November 7, 1994 as Exhibit 4.3 to the
Company's Registration on Form SB-2 (Registration No. 33-86068) and
incorporated herein by reference).
4.4 Specimen Form of Certificate Representing Membership in the Company and the
Class B Common Stock (filed on April 18, 1997 as Exhibit 4.4 to the
Company's Registration Statement on Form SB-2 (Registration No. 333-25501)
and incorporated herein by reference).
4.5 Specimen Form of Certificate Representing Membership in the Company and the
Class C Common Stock (filed on May 23, 1997 as Exhibit 4.15 to Amendment
No. 1 to the Company's Registration Statement on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
4.6 Master Loan Agreement, dated as of March 18, 1998, between CoBank, ACB and
the Registrant (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended February 28, 1998 and incorporated
herein by reference).
10.1 Form of Pig Purchase Agreement (filed on October 9, 1998 as Exhibit 10.1 to
Post-Effective Amendment No. 1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-25501) and incorporated herein by
reference).
10.2 Swine Production Services Agreement, dated July 13, 1994, between Farmland
Industries, Inc. and the Registrant (filed on November 7, 1994 as Exhibit
10.2 to the Company's Registration on Form SB-2 (Registration No. 33-86068)
and incorporated herein by reference).
10.2.1 First Amendment to Swine Production Services Agreement, dated as of
July 26, 1996, between Farmland Industries, Inc. and the Company (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the
quarter ended February 28, 1997 and incorporated herein by reference).
10.2.2 Second Amendment to Swine Production Services Agreement, dated as of
April 14, 1997, between Farmland Industries, Inc. and the Registrant (filed
on April 18, 1997 as Exhibit 10.2.2 to the Registrant's Registration
Statement on Form SB-2 (No. 333-25501) and incorporated herein by
reference).
10.3 Feed Purchase Agreement, dated August 27, 1999, between the Yuma Farmers
Milling-Mercantile Cooperative Company of Yuma, Colorado and the
Registrant.
10.4 Interim Pig Purchase Agreement, dated July 13, 1994, between Farmland
Industries, Inc. and the Registrant (filed on November 7, 1994 as Exhibit
10.4 to the Company's Registration on Form SB-2 (Registration No. 33-86068)
and incorporated herein by reference).
10.4.1 First Amendment to Interim Pig Purchase Agreement, dated July 13,
1994, between Farmland Industries, Inc. and the Registrant (filed on
November 7, 1994 as Exhibit 10.4.1 to the Company's Registration on Form
SB-2 (Registration No. 33-86068) and incorporated herein by reference).
10.5 Interim Pig Purchase Agreement, dated July 13, 1994, between the Yuma
Farmers Milling-Mercantile Cooperative Company of Yuma, Colorado and the
Registrant (filed on November 7, 1994 as Exhibit 10.5 to the Company's
Registration on Form SB-2 (Registration No. 33-86068) and incorporated
herein by reference).
10.5.1 First Amendment to Interim Pig Purchase Agreement, dated July 13,
1994, between the Yuma Farmers Milling-Mercantile Cooperative Company of
Yuma, Colorado and the Registrant (filed on November 7, 1994 as Exhibit
10.5.1 to the Company's Registration on Form SB-2 (Registration No.
33-86068) and incorporated herein by reference).
10.6 Master Loan Agreement, dated as of March 18, 1998, between CoBank, ACB and
the Registrant (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended February 28, 1998 and incorporated
herein by reference).
10.7 The Registrant's Promissory Note, dated August 30, 1995, to Farmland
Industries, Inc. (filed with the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1995 as Exhibit 10.16 and incorporated
herein by reference).
10.8 Camborough-22 Closed Herd Multiplier Agreement, dated March 1, 1996,
between Pig Improvement Company, Inc. and the Registrant (filed with the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended February
28, 1997 as Exhibit 10.2 and incorporated herein by reference)
24.1 Power of Attorney
27 Financial Data Schedule
_____________________________
No management contracts or compensatory plans or arrangements required to be
identified by Item 13(a) are included among the exhibits filed as part of this
report.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
Independent Auditors' Report
The Board of Directors
Alliance Farms Cooperative Association:
We have audited the accompanying balance sheets of Alliance Farms Cooperative
Association as of August 31, 1999 and 1998 and the related statements of
earnings, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Association's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits 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 audits provide 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 Alliance Farms Cooperative
Association as of August 31, 1999 and 1998 and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Kansas City, Missouri
October 29, 1999
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
BALANCE SHEETS
August 31, 1999 and 1998
August 31, 1999 August 31, 1998
ASSETS
<S> <C> <C>
Current Assets:
Receivables, trade $14,701 $4,620
Receivables, non-trade (Note 3) 17,215 145,832
Inventory (Note 4) 4,260,949 3,591,665
Other current assets 85,612 50,160
Total current assets $4,378,477 $3,792,277
Property, plant and equipment, at cost (Note 5) $29,896,188 $25,140,867
Less accumulated depreciation 4,686,614 3,266,290
$25,209,574 $21,874,577
Breeding stock $3,707,900 $4,515,230
Less accumulated depreciation 1,166,528 1,027,749
$2,541,372 $3,487,481
Other assets, net of $142,695 and $109,218
accumulated amortization $390,123 $370,220
$32,519,546 $29,524,555
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft $700,960 $279,069
Current maturities of long-term debt (Note 6) 1,812,000 1,812,000
Accounts payable (Note 3) 1,052,504 917,338
Patronage refund payable 200,000 433,115
Accrued property tax 481,796 332,587
Accrued payroll 157,503 145,118
Other accrued expenses 588,481 389,010
Total current liabilities $4,993,244 $4,308,237
Long-term debt (Note 6) $15,898,422 $15,996,775
Shareholders' equity:
Class A common stock of $.01 par value; authorize
5,000 shares, issued and outstanding 136 shares $1 $1
at
August 31, 1999 and 119 shares at August 31, 199
Class B common stock of $.01 par value; authorize
2,500 shares, issued and outstanding 54 shares a 1 0
August 31, 1999 and 36 shares at August 31, 1998
Class C common stock of $.01 par value; authorize
2,500 shares, none issued 0 0
Additional paid-in capital 13,177,409 10,751,324
Patronage refund for reinvestment 1,379,116 1,031,533
Accumulated deficit (2,928,647) (2,563,315)
Total shareholders' equity $11,627,880 $9,219,543
Commitments and Contingencies (Notes 6, 7 and 8 ------ -------
$32,519,546 $29,524,555
<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
STATEMENTS OF EARNINGS
For the years ended August 31, 1999 and 1998
1999 1998
<S> <C> <C>
Net sales (Notes 2 and 3) $18,998,096 $17,731,585
Cost of goods sold (Note 3) 15,219,495 13,380,454
Gross margin $3,778,601 $4,351,131
Expenses related to start-up
of new production facilities $132,410 $1,051,481
Administrative expenses 1,211,260 745,400
Loss on sale of breeding stock 914,419 266,602
Operating income $1,520,512 $2,287,648
Other income (expense):
Interest expense ($1,452,393) ($1,389,312)
Other 114,132 226,067
($1,338,261) ($1,163,245)
Net income $182,251 $1,124,403
Distribution of net income:
Patronage refunds $547,583 $1,464,648
Accumulated deficit (365,332) (340,245)
$182,251 $1,124,403
<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended August 31, 1999 and August 31, 1998
Common Additional Patronage Total
stock paid-in refund for Accumulated Shareholders'
capital reinvestment equity
<S> <C> <C> <C> <C> <C>
$1 $8,719,237 $0 ($2,223,070) $6,496,168
Balance at August 31, 1997
Sale of 36 shares of Class B
common stock - $.01 par per
share, net of $127,913 offering --- 2,032,087 --- --- 2,032,087
costs
Net income --- --- --- 1,124,403 1,124,403
Patronage refund payable in cash
transferred to current liabilities --- --- --- (433,115) (433,115)
Patronage refund allocable --- --- 1,031,533 (1,031,533) 0
in equities
$1 $10,751,324 $1,031,533 ($2,563,315) $9,219,543
Balance at August 31, 1998
--- 1,352,244 --- --- 1,352,244
Sale of 17 shares of Class A
common stock -$ .01 par per
share, net of $7,756 offering costs
1 1,073,841 --- --- 1,073,842
Sale of 18 shares of Class B
common stock -$ .01 par per
share, net of $6,158 offering costs
--- --- --- 182,251 182,251
Net Income
--- --- --- (200,000) (200,000)
Patronage refund payable in
cash transferred to current
liabilities
--- --- 347,583 (347,583) ---
Patronage refund allocable in
equities
Balance at August 31, 1999 $2 $13,177,409 $1,379,116 ($2,928,647) $11,627,880
<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1999 and 1998
1999 1998
<S> <C> <C>
Cash flow from operating activities:
Net income $182,251 $1,124,403
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization 2,786,503 2,597,200
Loss on sale of breeding stock 914,419 266,602
Changes in assets and liabilities:
Receivables 118,536 119,235
Inventory (669,284) (412,263)
Other current assets (35,452) (50,160)
Other assets (53,380) (83,190)
Accounts payable 135,166 340,232
Accrued expenses 361,065 249,129
Net cash provided by operating activities $3,739,824 $4,151,188
Cash flows from investing activities:
Capital expenditures ($6,759,990) ($9,269,112)
Proceeds from sale of breeding stock 703,657 1,742,739
Net cash used in investing activities ($6,056,333) ($7,526,373)
Cash flows from financing activities:
Proceeds from issuance of long term debt $3,740,343 $10,404,276
Net decrease in revolving term credit (1,393,296) (1,048,573)
Payment on long term debt (1,812,000) (7,480,500)
Increase (decrease) in note payable to Farmland (633,400) 350,148
Loan origination fees 0 (55,200)
Payment of patronage refund (433,115) 0
Issuance of common shares, net of offering costs 2,426,086 2,032,087
Increase (decrease) in bank overdraft 421,891 (827,053)
Net cash provided by
financing activities $2,316,508 $3,375,185
Change in cash $0 $0
Cash at beginning of period 0 0
Cash at end of period $0 $0
Supplemental schedule of cash paid for interest $1,697,562 $1,688,494
Supplemental schedule of noncash financing activities -
appropriation of current year's net income as
patronage refunds $547,583 $1,464,648
<FN>
See accompanying notes to financial statements
</FN>
/TABLE>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
Notes to Financial Statements
1. Description of the Business and Summary of Significant Accounting Policies
Alliance Farms Cooperative Association (Alliance) is a cooperative
association engaged in the production of feeder pigs and weaned pigs for
sale to its members. As of August 31, 1999, Alliance owned and was
operating five 2,450-sow feeder pig production facilities in Yuma County,
Colorado, two 2,450-sow feeder pig production facilities in Wayne County,
Illinois, one 2,450-sow weaned pig production facility in Yuma County,
Colorado, one 2,450-sow weaned pig production facility in Wayne County,
Illinois, and one 5,000-sow (2,500 feeder and 2,500 weaned pig production
facility) unit in Yuma County, Colorado.
( a ) Inventory
Inventories are stated at the lower of cost or market. Cost has been
determined by the average cost method for feeder and weaned pigs and under
the FIFO method for other inventories.
Inventoriable costs are costs incurred in producing feeder and weaned pigs
at the pig production facility from the time of gestation through sale of
the pig. Such costs include feed, care and a proportionate share of the
depreciation of the breeding stock and facilities. Market value used for
purposes of computing lower of cost or market is based upon the ultimate
sale price of feeder and weaned pigs which is determined contractually
between Alliance Farms and its members/patrons.
( b ) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives of
the assets, generally from three to twenty years. Major repairs that
extend the life of an asset are capitalized. Normal repair and maintenance
costs are expensed.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of the asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
( c ) Breeding Stock
Breeding stock is stated at cost. Depreciation on breeding stock is
calculated on the straight-line method over the estimated breeding life of
the animals, three years.
( d ) Other Assets
Other assets consist principally of patronage equity in CoBank and loan
origination fees which are amortized over the term of the loan.
( e ) Sales
Alliance Farms recognizes sales at the time pigs are shipped.
( f ) Income Taxes
Alliance operates as a cooperative that is not exempt from federal income
taxes and, therefore, is subject to taxes on all income not paid or
allocated to members. Deferred income taxes have not been provided because
virtually all sales since inception have been to members and virtually all
future sales are anticipated to be to members. For the years ended August
31, 1999 and 1998, Alliance has not provided income taxes, as member-
sourced losses incurred in prior years have been carried forward to offset
member-sourced income in 1999 and 1998. At August 31, 1999, Alliance has
member-sourced loss carryforwards amounting to $2,891,000 available to
offset future member-sourced taxable income and $4,270,000 available to
offset future patronage refunds.
Patronage refunds for reinvestment for the years ended August 31, 1999 and
1998 represent nonqualified written notices of allocation which are
deductible by Alliance for Federal income tax purposes upon redemption of
the equities issued.
( h ) Common Stock
The common stock of Alliance is subject to certain restrictions as to
transferability and Alliance has the right to purchase a member's common
stock under certain circumstances.
The authorized common stock of Alliance consists of Class A common stock,
Class B common stock and Class C common stock. Only qualified agricultural
producers who have executed and delivered a Pig Purchase Agreement may own
Class A common stock, Class B common stock, or Class C common stock.
Holders of Class A common stock and Class B common stock are entitled to
one vote for each share held, and holders of Class C common stock are
entitled to three-fourths of one vote for each share held. The
preferences, powers and rights of Class A, Class B and Class C common stock
are otherwise identical.
Alliance computes its patronage-sourced income or loss separately for each
class of stockholders (members).
( i ) Use of Estimates
Management of Alliance has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
2. Sales
Alliance has sold virtually all of its feeder and weaned pigs to its
members for the fiscal years ended August 31, 1999 and 1998 at a
contractual price which is based on Alliance's operating costs, debt
service and an additional amount of $0 to $4.50 per pig sold. Prior to
September 1, 1998 the contractual price for feeder pigs was based on a
twelve month rolling average for operating costs and the additional amount
of $4.50 per pig. Effective September 1, 1998 the contractual price for
feeder pigs is based on a five month rolling average for operating costs,
and an additional amount of $0 to $4.50 as determined periodically by the
Board of Directors at its discretion. The contractual price for weaned
pigs is based on a five month rolling average for operating costs and an
additional amount of $0 to $4.50 as determined periodically by the Board of
Directors at its discretion. For the fiscal year ended August 31, 1999 $0
additional amount per pig was charged in addition to the operating costs
and debt service for feeder and weaned pigs.
Because the contractual price for the sale of a feeder pig and a weaned pig
is determined based upon, among other things, a five 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 and
weaned pigs during periods of rising costs.
Alliance's average net sales price and the average industry market price
were as follows:
Fiscal Year Ended
August 31
1999 1998
Feeder Pig Average Net Sales Price $50.74 $57.82
Feeder Pig Average Industry Market* 36.84 35.32
Weaned Pig Average Net Sales Price $37.77 $34.96
Weaned Pig Average Industry Market* 23.14 29.04
*From the USDA's Market News Service
3. Transactions with Farmland, Yuma Cooperative and Effingham Equity
As of August 31, 1999 and 1998, Farmland Industries, Inc. (Farmland) owned
approximately 35.3% and 36.1%, respectively, of the Common Stock of
Alliance, Yuma Farmers' Milling and Mercantile Cooperative (Yuma
Cooperative) owned approximately 6.3% and 7.7%, respectively, of the Common
Stock of Alliance, and Effingham Equity owned approximately 1.1% and 0%,
respectively, of the Common Stock of Alliance.
Alliance purchased feed from Yuma Cooperative, animal health supplies and
breeding stock from Farmland, and feed and propane from Effingham Equity,
based on market prices. Yuma Cooperative, Farmland and Effingham Equity
are members of Alliance. Alliance also sold feeder or weaned pigs to
Farmland and Yuma Cooperative. Such purchases and sales were as follows:
Fiscal Year Ended
August 31
1999 1998
Feed Purchases $4,962,414 $4,231,934
Propane Purchases 62,455 69,439
Animal Health Purchases 256,696 207,518
Breeding Stock 2,217,369 3,355,357
Feeder and Weaned Pig Sales 9,187,729 10,251,093
Prior to December 31, 1998, Farmland also paid Alliance a royalty for any
pigs raised by Alliance and sold to a Farmland finisher that were then
selected as breeding stock for Farmland's contract herds pursuant to a
swine production services agreement. The royalty, which was $10 per head
selected, paid to Alliance under such agreement was $34,810 for fiscal year
ended August 31, 1998.
Farmland provided Alliance with an administrative office in Yuma, Colorado
through July 31, 1998 at no cost. As of August 1, 1998, Alliance and
Farmland equally share the office rent. 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:
Fiscal Year Ended
August 31
1999 1998
Management Fee $455,904 $344,269
Alliance had $17,215 and $145,832 of non-trade receivables at August 31,
1999 and 1998, respectively. The $17,215 due Alliance at August 31, 1999
was due 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 out of Alliance's shop stock inventory. The $121,220 due Alliance
at August 31, 1998 was due from Farmland for royalty fees incurred and the
remainder was due from Pig Producers I, LP 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 out of Alliance's shop stock inventory.
Alliance owed $318,604, $95,292, and $32,147 at August 31, 1999 and
$278,650, $87,389, and $21,716 at August 31, 1998 to Farmland, Yuma
Cooperative and Effingham Equity, respectively, for goods and services.
Alliance is also obligated under a note payable to Farmland in the amount
of $333,172 at August 31, 1999 for funds to purchase land for future
expansion. See note 6.
4. Inventory
Major components of inventories as of August 31, 1999 and August 31, 1998
are as follows:
1999 1998
Feeder and Weaned Pigs $4,125,765 $3,467,308
Other 135,184 124,357
$4,260,949 $3,591,665
5. Property, Plant and Equipment
Property, plant and equipment at August 31, 1999 and 1998 consisted of the
following:
1999 1998
Land $1,942,211 $1,942,211
Buildings 21,371,440 18,053,348
Site Improvements 2,566,612 1,865,102
Machinery and equipment 3,861,304 2,185,276
Mobile equipment 119,389 70,803
Furniture and office
equipment 35,250 29,545
Construction in progress 0 994,582
$29,896,188 $25,140,867
6. Long-Term Debt
Long term debt at August 31, 1999 and 1998 consisted of the following:
1999 1998
CoBank Term Loan $13,361,800 $11,823,800
CoBank Construction Loan 4,015,450 3,625,107
CoBank Revolving Term Credit 0 1,393,296
Note Payable to Farmland 333,172 966,572
$17,710,422 $17,808,775
Less Current Maturities 1,812,000 1,812,000
$15,898,422 $15,996,775
On March 18, 1998, the Company entered into various loan agreements with
CoBank, ACB ("CoBank") related to a secured credit facility which provides
for up to $26,846,700 of non-revolving term debt, $7,660,000 of revolving
term credit and $18,400,00 of construction financing. Proceeds from the
term debt were used for refinancing the then existing non-revolving term
debt, and will be used to finance the construction or acquisition of
additional pig production facilities. Proceeds from the revolving term
credit were used for refinancing the existing revolving term credit, and
will be used to provide working capital. Proceeds from the construction
loan may be used for the construction or acquisition of pig production
facilities and are advanced by CoBank as construction costs are incurred by
Alliance. The actual advance of funds under this credit facility is
subject to the satisfaction of certain conditions and may be withdrawn or
terminated by CoBank under certain circumstances. The unused portion of
the credit facility expires August 31, 2001 with the unpaid balance on that
date due by September 30, 2011 with respect to the revolving term credit,
December 31, 2001 with respect to the non-revolving term debt and September
30, 2001 with respect to the construction financing.
The availability of non-revolving term debt, revolving term credit and
construction debt under the CoBank credit facility is subject to specified
equity investment levels in the Company being satisfied. As of August 31,
1999, $4,879,550 was immediately available to Alliance under its credit
facility. The availability of $13,484,900 of unused term loans and
$3,645,000 of revolving term credit and $13,520,000 of construction loans
under the CoBank credit facility is restricted and may be 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 Class A common
stock sold and $1,675,000 of term loans and $485,000 of revolving term
credit for every $1,080,000 of Class B or Class C common stock sold).
The CoBank credit facility provides for the monthly payment of principal
and interest. Principal payments pursuant to the existing non-revolving
term debt are to be made in equal monthly installments of $151,000, with
the remaining unpaid balance being due and payable on that date which is
ninety-nine months after the final advance under the non-revolving term
loan. Principal payments pursuant to each $2,110,000 of new non-revolving
term loans are to be made in monthly installments of $21,800 each,
beginning on the 20th day of the eighteenth month following the date of the
initial advance of such $2,110,000 loan. For each $2,720,000 of new
construction loans, payment of the entire outstanding principal balance is
to be made on that date that is sixteen (16) months after the date of the
initial advance for construction of the proposed facility. The revolving
loan commitment will be reduced in 40 equal payments commencing on August
31, 2001, such that after the fortieth reduction, the revolving loan
commitment will be zero. To the extent that the outstanding principal
balance under the revolving loan exceeds the revolving loan commitment, the
Company will be required to immediately make a principal payment in a
amount sufficient to reduce the outstanding principal balance under the
revolving loan to an amount not exceeding the revolving loan commitment.
Interest accrues on the outstanding principal balance of the loan at a rate
equal to either (i) a variable rate equal to CoBank's then national
variable rate plus a base rate margin of 1.25% for non-revolving term loans
and for revolving loans or 2.25% for construction loans, or (ii) CoBank's
then quoted rates for fixed rate loans, as may be elected from time to time
by the Company, and is payable monthly in arrears by the 20th day of the
following month. During the period in which principal under the loan is
outstanding, portions of such principal may bear interest at such variable
rate while other portions may bear interest at such fixed rate. As of
August 31, 1999, interest accrued on the outstanding principal balance on
the respective loan portions under variable rates at 9.5% per annum for
non-revolving term loans, 9.5% per annum for revolving term loans and 10.5%
per annum for construction loans and between 8.01% and 9.14% for those
portions under fixed rates. The interest rates applicable to the loan are
subject to reduction at specified times upon the Company's satisfaction of
certain conditions relating to the Company's equity level and debt service
coverage ratio. As of August 31, 1999, no reductions in the Company's
interest rate had been made. The Company is permitted to prepay the loan
at any time without penalty, except that in the event that fixed rate
balances are prepaid, the Company is required to pay CoBank a surcharge in
an amount equal to CoBank's funding losses with respect thereto. Alliance
capitalized $157,910 and $104,912 of interest on construction for the
fiscal years ended August 31, 1999 and 1998 respectively.
In obtaining the secured credit facility, and for each year in which the
credit facility is effective, the Company is required to pay a commitment
fee equal to 0.5% on the outstanding revolving loan commitment and 0.25% on
the unadvanced amount of the construction loan commitment. In addition,
the Company will be required to pay an activation fee equal to 1% on the
amount withdrawn under the construction loan, along with a $6,000 fee with
respect to the origination of each $2,110,000 of new non-revolving term
loans. During the course of the loan, the Company may be required to make
additional equity investments at a rate not to exceed 1% of the average
five-year principal loan balance (which additional equity investments may
be satisfied out of CoBank's non-cash patronage distributions) until the
Company meets CoBank's target level of equity investment, which currently
is 11.5% of the Company's average five-year principal loan balance. In
addition, the Company was required to grant a first perfected lien and
security interest on substantially all of its properties and assets to
CoBank and to assign to CoBank all of the Company's rights in and to the
existing and future Pig Purchase Agreements. The Company is required to
comply with various affirmative and negative covenants, including but not
limited to (i) maintenance of at least a 0.25 ratio of total equity to
total assets for the period ending August 31, 1998, and thereafter a 0.35
ratio of total equity to total assets, (ii) maintenance of a debt service
coverage ratio (calculated by dividing average annual cash flow by the
current debt) of not less than one, (iii) provision of monthly financial
statements and audited annual financial statements to CoBank, (iv)
restrictions on the incurrence of additional indebtedness, (v) restrictions
on certain liens, mergers, sales of assets, investments, guaranties, loans,
advances and business activities unrelated to existing operations, and (vi)
restrictions on the declaration and payment of the cash portion of
patronage distributions and other distributions or allocations of the
Company's earnings, surplus or assets. The Company was in compliance with
each of these covenants as of August 31, 1999.
As of August 31, 1999, Alliance has borrowed $333,172 from Farmland to
purchase land for future expansion. The loan agreement with Farmland for
the purchase of land is evidenced by a promissory note providing for
amortization over a ten-year period, at a variable rate of interest equal
to CoBank's prime rate (8.25% at August 31, 1999). The payment schedule
for this loan requires the Company to make interest-only payments for the
life of the loan, with a final balloon payment of all principal to be made
upon the expiration of the ten-year term in September 30, 2005.
Long-term debt as of August 31, 1999 matures during the fiscal years ending
August 31 in the following amounts:
2000 $ 1,812,000
2001 2,085,700
2002 2,281,200
2003 2,281,200
Thereafter 9,250,322
$17,710,422
7. Operating Leases
Alliance incurred $46,373 and $333,080 of rent expenses related to
operating lease agreements for facilities and equipment for the fiscal
years ended August 31, 1999 and 1998, respectively. Future minimum lease
payments for fiscal years ending August 31 are as follows:
2000 $41,700
2001 23,467
2002 8,307
2003 and thereafter 3,850
$77,324
8. Commitments and Contingencies
As of August 31, 1999, Alliance Farms was operating five 2,450-sow feeder
pig production facilities in Yuma County, Colorado, two 2,450-sow feeder
pig production facilities in Wayne County, Illinois, one 2,450-sow weaned
pig production facility in Yuma County, Colorado, one 2,450-sow weaned pig
production facility in Wayne County, Illinois, and one 5,000-sow (2,500
feeder and 2,500 weaned pig production facility) unit in Yuma County,
Colorado. At August 31, 1999, commitments for construction of such
facilities totaled $329,786. These commitments will be funded through bank
borrowings. As of August 31, 1998, Alliance Farms was operating seven
2,450-sow feeder pig production units, two 2,450-sow weaned pig production
units and had a 5,000 sow unit under construction.
In the November 1998 general election, Colorado voters adopted amendments
to the Colorado Revised Statutes concerning the regulation of housed
commercial swine feeding operations. Such amendments may have material and
adverse consequences to Alliance Farms and its business. These amendments
mandate certain water and air quality control measures that must be
implemented by commercial swine feeding operations housing at least 800,000
pounds of swine or which are deemed commercial under local law.
Regulations implementing the amendments were recently promulgated and the
amendments are applicable to Alliance's Colorado operations.
Alliance has obtained the initial operating permits required to comply with
the new provisions. These permits include requirements to manage the
application of manure as a fertilizer according to specified agronomic crop
production requirements, to control off-site odors and to evaluate covers
for anaerobic treatment lagoons. Alliance has implemented and is
evaluating the use of an experimental biological feed and lagoon additive
in an effort to comply with applicable requirements governing odor
management. Alliance is permitted to continue with this experimental odor-
control measure until January 1, 2000, after which time the applicable
regulatory authorities will determine whether the experimental measure is
an acceptable alternative to rigid lagoon covers.
Alliance continues to evaluate the impact that the new statutes and
regulations may have; however Alliance presently is unable to estimate the
costs that reasonably could be expected to be incurred to comply with them.
If Alliance is required to place rigid covers over its waste lagoons, it
may have a material adverse impact on Alliance and its business.
9. Fair Value of Financial Instruments
Alliance has financial instruments which are comprised of receivables,
payables, and long-term debt. The fair value of long-term debt is
estimated using current interest rates for similar instruments. The fair
value of long-term debt approximates the carrying amount at August 31, 1999
and 1998. The carrying amounts of receivables and payables approximate fair
value because of the short maturity of these instruments.
10. Employee Benefit Plans
Alliance sponsors a defined contribution plan, which covers substantially
all non-union employees. Alliance contributes fifteen cents for each
dollar of employee contribution, not to exceed 4% of the participant's
contribution. During the fiscal years ended August 31, 1999 and 1998
Alliance contributed $1,636 and $1,600, respectively.
Alliance participates in a multi-employer pension plan for the benefit of
its employees. Alliance made no contributions to the plan during fiscal
years ended August 31, 1999 or 1998
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report to security holders covering the fiscal year ended August
31, 1999 or proxy statement, form of proxy or other proxy soliciting material
has been sent by the Registrant to security holders. The Registrant anticipates
that an annual report will be furnished to security holders subsequent to the
filing of this Annual Report on Form 10-KSB. The Registrant undertakes to
furnish copies of such annual report to the Commission when it is sent to
security holders.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLIANCE FARMS COOPERATIVE ASSOCIATION
By: /s/ Wayne N. Snyder
Wayne N. Snyder, President
Dated: November 23, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature and Title Date
/s/ Wayne N. Snyder November 23, 1999
Wayne N. Snyder
Chairman of the Board, President and Director
(Principal Executive Officer and Principal
Financial and Accounting Officer)
* November 23, 1999
Merl A. Daniel
Director
* November 23, 1999
Larry Welsh
Director
* November 23, 1999
Loren Keppy
Director
* By /s/ Wayne N. Snyder November 23, 1999
Wayne N. Snyder, Attorney-in-Fact
447425 v2
</TABLE>
EXHIBIT 99
EXHIBIT INDEX
The following exhibit is filed as a part of this Form 10-KSB.
Exhibit
No. Description
3.1 Articles of Incorporation (filed on May 23, 1997 as Exhibit 3.1 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
3.1.1 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.1 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
3.1.2 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.2 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
3.1.3 Articles of Amendment (filed on May 23,, 1997 as Exhibit 3.1.3 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
3.1.4 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.4 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
3.2 Amended and Restated Bylaws (filed on May 23, 1997 as Exhibit 3.2 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
3.2.1 Amendments to Amended and Restated Bylaws (filed on May 23, 1997 as
Exhibit 3.2.1 to Amendment No. 1 to the Company's Registration on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.1 Articles of Incorporation (filed on May 23, 1997 as Exhibit 3.1 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
4.1.1 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.1 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
4.1.2 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.2 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.1.3 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.3 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.1.4 Articles of Amendment (filed on May 23, 1997 as Exhibit 3.1.4 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.2 Amended and Restated Bylaws (filed on May 23, 1997 as Exhibit 3.2 to
Amendment No. 1 to the Company's Registration on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
4.2.1 Amendments to Amended and Restated Bylaws (filed on May 23, 1997 as
Exhibit 3.2.1 to Amendment No. 1 to the Company's Registration on Form SB-2
(Registration No. 333-25501) and incorporated herein by reference).
4.3 Specimen Form of Certificate Representing Membership in the Company and the
Class A Common Stock (filed on November 7, 1994 as Exhibit 4.3 to the
Company's Registration on Form SB-2 (Registration No. 33-86068) and
incorporated herein by reference).
4.4 Specimen Form of Certificate Representing Membership in the Company and the
Class B Common Stock (filed on April 18, 1997 as Exhibit 4.4 to the
Company's Registration Statement on Form SB-2 (Registration No. 333-25501)
and incorporated herein by reference).
4.5 Specimen Form of Certificate Representing Membership in the Company and the
Class C Common Stock (filed on May 23, 1997 as Exhibit 4.15 to Amendment
No. 1 to the Company's Registration Statement on Form SB-2 (Registration
No. 333-25501) and incorporated herein by reference).
4.6 Master Loan Agreement, dated as of March 18, 1998, between CoBank, ACB and
the Registrant (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended February 28, 1998 and incorporated
herein by reference).
10.1 Form of Pig Purchase Agreement (filed on October 9, 1998 as Exhibit 10.1 to
Post-Effective Amendment No. 1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-25501) and incorporated herein by
reference).
10.2 Swine Production Services Agreement, dated July 13, 1994, between Farmland
Industries, Inc. and the Registrant (filed on November 7, 1994 as Exhibit
10.2 to the Company's Registration on Form SB-2 (Registration No. 33-86068)
and incorporated herein by reference).
10.2.1 First Amendment to Swine Production Services Agreement, dated as of
July 26, 1996, between Farmland Industries, Inc. and the Company (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the
quarter ended February 28, 1997 and incorporated herein by reference).
10.2.2 Second Amendment to Swine Production Services Agreement, dated as of
April 14, 1997, between Farmland Industries, Inc. and the Registrant (filed
on April 18, 1997 as Exhibit 10.2.2 to the Registrant's Registration
Statement on Form SB-2 (No. 333-25501) and incorporated herein by
reference).
10.3 Feed Purchase Agreement, dated August 27, 1999, between the Yuma Farmers
Milling-Mercantile Cooperative Company of Yuma, Colorado and the
Registrant.
10.4 Interim Pig Purchase Agreement, dated July 13, 1994, between Farmland
Industries, Inc. and the Registrant (filed on November 7, 1994 as Exhibit
10.4 to the Company's Registration on Form SB-2 (Registration No. 33-86068)
and incorporated herein by reference).
10.4.1 First Amendment to Interim Pig Purchase Agreement, dated July 13,
1994, between Farmland Industries, Inc. and the Registrant (filed on
November 7, 1994 as Exhibit 10.4.1 to the Company's Registration on Form
SB-2 (Registration No. 33-86068) and incorporated herein by reference).
10.5 Interim Pig Purchase Agreement, dated July 13, 1994, between the Yuma
Farmers Milling-Mercantile Cooperative Company of Yuma, Colorado and the
Registrant (filed on November 7, 1994 as Exhibit 10.5 to the Company's
Registration on Form SB-2 (Registration No. 33-86068) and incorporated
herein by reference).
10.5.1 First Amendment to Interim Pig Purchase Agreement, dated July 13,
1994, between the Yuma Farmers Milling-Mercantile Cooperative Company of
Yuma, Colorado and the Registrant (filed on November 7, 1994 as Exhibit
10.5.1 to the Company's Registration on Form SB-2 (Registration No.
33-86068) and incorporated herein by reference).
10.6 Master Loan Agreement, dated as of March 18, 1998, between CoBank, ACB and
the Registrant (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended February 28, 1998 and incorporated
herein by reference).
10.7 The Registrant's Promissory Note, dated August 30, 1995, to Farmland
Industries, Inc. (filed with the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1995 as Exhibit 10.16 and incorporated
herein by reference).
10.8 Camborough-22 Closed Herd Multiplier Agreement, dated March 1, 1996,
between Pig Improvement Company, Inc. and the Registrant (filed with the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended February
28, 1997 as Exhibit 10.2 and incorporated herein by reference)
24.1 Power of Attorney
27 Financial Data Schedule
_____________________________
Exhibit 10.3
FEED PURCHASE AGREEMENT
THIS FEED PURCHASE AGREEMENT ("Agreement") is made this day of 27th Aug.,
by and between Alliance Farms and M&M Co-op, located at Yuma, Colorado ("Grain
Processor").
Alliance desires to arrange for a supply of feed to one or more hog
production facility(s); and Grain Processor desires to supply such feed, all in
accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, Alliance desires to issue these Feed Purchase
Specifications:
1. DEFINITIONS. The following words and terms shall have the following
meanings: "Approved Ingredients" shall mean the Ingredients that are obtained
from approved suppliers and listed in the Quality Assurance manual. "Diet"
shall mean the formula, recipe, proportion of ingredients or make-up of the
Feed. "Feed" shall mean the feed that conforms to the specifications and
requirements included in this Agreement.
2. PURCHASE OF FEED. Alliance agrees to purchase Feed from Grain Processor
and Grain Processor agrees to sell Feed to Alliance, all in accordance with the
terms and conditions of this Agreement.
3. TERM. This Agreement commences on September 1, 1999, and shall be in
effect for one (1) calendar year. Either party may cancel this Agreement upon
thirty (30) days notice.
4. QUALITY STANDARDS. All Feed must be (i) manufactured in full accordance
with the Farmland Livestock Production Quality Standards, (ii) of feed types
that have been approved in writing by Alliance, and (iii) manufactured from the
correct and current weekly Brill formulation. Each Grain Processor must be in
full compliance with Livestock Production's then current Quality Standards. All
orders for Feed are subject to meeting necessary requirements and to the final
approval of Alliance or its representative. Only Approved Ingredients may be
used in the mixing of Feeds. Any variations on ingredient or drug option must
be cleared (in writing) previous to manufacture by a member of Farmland's
Livestock Production Division.
5. FEED ORDERS. All nursery and finishing Feed orders must have an SDI
reference number. Any variation from the SDI order must be approved by
Alliance.
6. INVOICES. All invoices must contain the following information: (a)
invoice number, (b) SDI reference number, (c) price per cwt or per ton, (d)
gross weight, (e) tare weight, (f) net weight, (g) grain processor name and
mailing address, (h) lot number, (i) producer name, (j) total price, (k) type of
feed, (l) drug option and strength, (n) date of shipment, (o) and other relevant
terms.
7. DIETS. The Diets will be communicated from Alliance to Grain Processor
from time to time and are the exclusive property of Alliance. Feed that is made
from the Diets may only be manufactured for use feeding animals owned by
Alliance or persons under contract with Alliance, unless prior approval is given
by Alliance. The Diets, including all nutritional specifications that are a
part of the Diets, are strictly confidential, and may not be shared with any
third party without the consent of Alliance.
8. PURCHASE PRICE. All grain used in rations shall be sold in weekly
intervals (unless agreed to otherwise) to Alliance at the price bid to grain
producers by Grain Processor on the day of sale or the day a cash contract is
agreed upon, plus 10 cents per bushel.
9. OTHER GRAIN CONTRACTS. Grain processor agrees to make reasonable efforts
to purchase grain from producers and sell such grain to Alliance on a
competitive basis. In the event that the purchase and sale process described in
Provision 8 is no longer competitive, Alliance may purchase grain directly from
other sources. In such event, Alliance shall pay Grain Processor three (3)
cents per bushel to cover the Grain Processor's put-through costs.
10. SALE BY GRAIN PROCESSOR TO ALLIANCE. Soybean meal, premixes, additives and
supplements shall be sold by Grain Processor to Alliance at the Grain
Processor's inventory cost. This cost is arrived at by adding the ingredient's
cost F.O.B. the manufacturing plant to the lowest possible freight (whether
obtained from Alliance or other sources approved by Grain Processor and
Alliance). All food drugs or medications mixed in the Feed, and all packaged
drugs and treatments (non-feed additives), whether obtained from Alliance or
other source approved by Alliance, shall be sold by Grain Processor to Alliance
at the lowest available price, delivered to Grain Processor.
11. ANIMAL HEALTH PRODUCTS. Alliance, at Alliance's option, shall supply all
animal health products to Alliance Farm operators.
12. SALE OF INGREDIENTS. Alliance retains the right to deliver any ingredients
(including any and all feed additives, premixes, supplements, grain and soybean
meal) to the Grain Processor if Alliance has reasonable grounds to suspect that
Grain Processor is not in accordance with points #8 and #10 above.
13. PURCHASE OF INGREDIENTS BY GRAIN PROCESSOR. In purchasing ingredients for
the Feed, Grain Purchaser must either (a) purchase such ingredients from
Alliance or an affiliate of Alliance, or (b) purchase such ingredients from a
supplier at a price equal to or lower than the price offered by Alliance or an
affiliate of Alliance.
14. INVENTORIES. Alliance shall have the right to maintain inventories of
ingredients at the Grain Processor's location. Shrinkage on Alliance owned
inventories that is in excess of industry standards will be charged to Grain
Processor. Excess Shrinkage is defined as shrinkage that is in excess of 0.75%
inventory loss on the original quantity delivered.
15. PRICING DAY. Pricing day is on Wednesday, with pricing due on Wednesday
morning by 10:00 A.M. Pricing sent in on Wednesday will take effect for the
following Sunday, and continue to be in effect through Saturday of that week.
On weeks prior to holiday weeks, pricing may be due on Tuesday.
16. PRICE LIST. On Monday, a complete finished feed price list (Generated
through the BRILL system) will be sent to the Grain Processor, this pricing will
contain prices at which feed shipped in the that calendar week should be billed.
17. GRIND AND MIX PRICE. Grain processor will receive $8.00/ton for "grind and
mix" on existing feed business for barns in service before August 31, 1999.
After this date, any new business generated from new or relocated barns will be
compensated for at a rate of $5.00/ton.
18. PELLETING FEE. Pelleting fee is $5.00/ton on all feeds. A $3.00/ton
milling premium is associated with the manufacture of pre-starter nursery feeds
(Currently Nursery I and Nursery II).
19. DELIVERY. Grain Processor will charge $6/ton for delivery within 25 miles
of the Grain Processor. In addition, any miles further than 25 loaded miles
will be charged at a rate of 1.75/loaded mile on a 24 ton minimum.
20. AUDIT. Alliance may conduct an review of Grain Processor's feed ingredient
receipts if Alliance has reasonable grounds to suspect that Grain Processor is
not in accordance with points #8 and #10 above.
21. ALLIANCE WARRANTIES. ALLIANCE MAKES NO WARRANTIES EITHER EXPRESSED OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AS TO ANY PRODUCT,
INGREDIENT, FEED, MEDICATION OR PROGRAM PRESCRIBED UNDER THIS AGREEMENT.
ALLIANCE MAKES NO WARRANTIES EITHER EXPRESSED OR IMPLIED RELATIVE TO GRAIN
PROCESSOR'S PROFITABILITY AS A RESULT OF THIS AGREEMENT. GRAIN PROCESSOR
RECOGNIZES AND ACCEPTS THE HAZARDS INHERENT IN ANY FEED PRODUCING VENTURE.
22. FORCE MAJEURE. Either party to this Agreement shall be relieved of his or
its responsibilities and obligations hereunder when performance becomes
commercially impossible because of reasons beyond their reasonable control such
as, but not limited to, fire, explosion, strike, accident, governmental
regulations, or intervention and acts of God. Financial difficulty that may
impact the Feed, however, shall not relieve Grain Processor of his or its
responsibilities and obligations to deliver Feed under this Agreement.
23. ASSIGNMENT. This Agreement may not be assigned by either party without
prior written consent of the other party. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
24. APPLICABLE LAW. This Agreement shall be construed in accordance with the
laws of the State of Missouri, without reference to the conflict of laws
principles of such state.
25. ENTIRE AGREEMENT/MODIFICATION. This Agreement constitutes the entire
agreement between the parties and can be modified only in writing signed by all
parties hereto.
26. NOTICES. All notices, requests, demands and other communications hereunder
shall be deemed to be duly given if delivered by hand or if mailed by certified
or registered mail, postage prepaid, at the addresses set forth above.
27. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original, but all of which together shall
constitute but one and the same instrument.
28. HEADINGS. The headings used in this Agreement are for convenience only and
shall not constitute a part of this Agreement.
29. EXHIBITS. All of the exhibits and appendices attached hereto are
incorporated herein and made a part of this Agreement by reference thereto.
30. ARBITRATION/ENFORCEMENT. Any controversy or claim arising out of or
relating to this contract, or the breach thereof, shall be settled by
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
Arbitrator(s) may be entered in any court having jurisdiction thereof. Subject
to the above, costs and expenses incurred by Alliance in connection with the
enforcement of its rights under this Agreement shall be reimbursed by Grain
Processor.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and year
first above written.
ALLIANCE FARMS:
By: _____________________
Print Name: Wayne Snyder
Title: Vice President, Livestock Production
GRAIN PROCESSOR:
Yuma Farmer's M&M Co-op
By: _____________________
Print Name: Karen Hill
Interim Manager
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints Wayne N. Snyder and Ben Coult,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign the Annual Report on Form 10-KSB of
Alliance Farms Cooperative Association for the fiscal year ended August 31,
1999, together with any and all amendments thereto and all documents relating
therewith, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing necessary or advisable to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
/s/ Wayne N. Snyder November 22, 1999
Wayne N. Snyder
Chairman of the Board, President
and Director
/s/ Merl Daniel November 12, 1999
Merl Daniel
Director
/s/ Loren Keppy November 10, 1999
Loren Keppy
Director
/s/ Larry Welsh November 8, 1999
Larry Welsh
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the August
31, 1999 Form 10-KSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 31,916
<ALLOWANCES> 0
<INVENTORY> 4,260,949
<CURRENT-ASSETS> 4,378,477
<PP&E> 33,604,088
<DEPRECIATION> 5,853,142
<TOTAL-ASSETS> 32,519,546
<CURRENT-LIABILITIES> 4,993,244
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 11,627,880
<TOTAL-LIABILITY-AND-EQUITY> 32,519,546
<SALES> 18,998,096
<TOTAL-REVENUES> 18,998,096
<CGS> 15,219,495
<TOTAL-COSTS> 17,345,174
<OTHER-EXPENSES> (114,132)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,452,393
<INCOME-PRETAX> 182,251
<INCOME-TAX> 0
<INCOME-CONTINUING> 182,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182,251
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
