U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File
February 28, 1999 Number 0000927536
ALLIANCE FARMS COOPERATIVE ASSOCIATION
(Exact name of small business issuer as specified in its charter)
Colorado 84-1270685
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
503 East 8th Avenue, Yuma, Colorado 80759
(Address of principal executive offices)
970-848-3231
(Issuers telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
At April 14, 1999, there were 190 shares of the issuer's common stock
outstanding, of which 136 were shares of Class A common stock and 54 were shares
of Class B common stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
BALANCE SHEETS
UNAUDITED
February 28, 1999 August 31, 1998
ASSETS
<S> <C> <C>
Current Assets:
Receivables, trade $0 $4,620
Receivables, non-trade (Note 3) 45,214 145,832
Inventory (Note 4) 3,969,598 3,591,665
Other current assets 313,122 50,160
Total current assets $4,327,934 $3,792,277
Property, plant and equipment, at cost $28,585,356 $25,140,867
Less accumulated depreciation 3,927,030 3,266,290
$24,658,326 $21,874,577
Breeding stock $4,286,790 $4,515,230
Less accumulated depreciation 1,148,669 1,027,749
$3,138,121 $3,487,481
Other assets, net of $127,603 and $109,218
accumulated amortization $335,458 $370,220
$32,459,839 $29,524,555
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft $461,378 $279,069
Current maturities of long-term debt (Note 5) 1,812,000 1,812,000
Accounts payable (Note 3) 1,048,642 917,338
Patronage refund payable 0 433,115
Accrued property tax 456,907 332,587
Accrued payroll 123,687 145,118
Other accrued expenses 399,957 389,010
Total current liabilities $4,302,571 $4,308,237
Long-term debt (Note 5) $17,067,379 $15,996,775
Shareholders' equity:
Class A common stock of $.01 par value; authorized
5,000 shares, issued and outstanding 136 shares at
February 28,
1999 and 119 shares at August 31, 1998 $1 $1
Class B common stock of $.01 par value; authorized
2,500 shares, issued and outstanding 54 shares at
February 28,
1999 and 36 shares at August 31, 1998 1 0
Class C common stock of $.01 par value;
authorized 2,500 shares, none issued 0 0
Additional paid-in capital 13,182,431 10,751,324
Patronage refund for reinvestment 1,031,533 1,031,533
Accumulated deficit (3,124,077) (2,563,315)
Total shareholders' equity $11,089,889 $9,219,543
Commitments and Contingencies (Note 6) ------ ------
$32,459,839 $29,524,555
<FN>
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
Three Month Periods Six Month Periods
Ended Ended
February 28 February 28
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales (Notes 2 and 3) $4,205,780 $4,808,904 $8,507,687 $8,970,810
Cost of goods sold (Note 3) 3,590,028 3,523,858 7,278,842 6,232,030
Gross margin 615,752 1,285,046 1,228,845 2,738,780
Expenses related to start-up
of new production facilities 0 45,438 85,698 449,047
Administrative expenses 231,816 156,921 496,773 326,659
(Gain) Loss on sale of breedin 288,616 (7,562) 537,267 55,539
stock
Operating income $95,320 $1,090,249 $109,107 $1,907,535
Other income (expense):
Interest expense (374,259) (334,566) (774,500) (716,115)
Other 94,643 25,102 104,631 52,161
(279,616) (309,464) (669,869) (663,954)
Net income (loss) ($184,296) $780,785 ($560,762) $1,243,581
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE FARMS COOPERATIVE ASSOCIATION
STATEMENTS OF CASH FLOWS
UNAUDITED
Six Month Periods Ended
February 28
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($560,762) $1,243,581
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization 1,317,326 1,285,421
Loss on sale of breeding stock 537,267 55,539
Changes in assets and liabilities:
Receivables 105,238 187,856
Inventory (377,933) (512,289)
Other current assets (262,962) (57,949)
Other assets 16,377 (23,751)
Accounts payable 131,304 220,296
Accrued expenses 113,836 184,180
Net cash provided by operating activities $1,019,691 $2,582,884
Cash flows from investing activities:
Capital expenditures ($4,520,308) ($5,660,496)
Proceeds from sale of breeding stock 249,712 794,038
Net cash used in investing activities ($4,270,596) ($4,866,458)
Cash flows from financing activities:
Proceeds from issuance of long term debt $1,531,518 $443,869
Net increase in revolving term credit 1,078,486 410,631
Payment on long term debt (906,000) (603,300)
Decrease in note payable to Farmland (633,400) (116,666)
Loan origination fees 0 12,000
Payment of patronage refund (433,115) 0
Issuance of common shares, net of offering cost 2,431,107 2,104,638
Increase in bank overdraft 182,309 32,402
Net cash provided by
financing activities: $3,250,905 $2,283,574
Change in cash $0 $0
Cash at beginning of period 0 0
Cash at end of period $0 $0
See accompanying notes to financial statements
</TABLE>
Alliance Farms Cooperative Association
Notes to Condensed Financial Statements
(Unaudited)
1. Interim Financial Statements
The accompanying condensed unaudited financial statements reflect all
adjustments (consisting of only normal recurring adjustments) which in the
opinion of management, are necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods presented. Income taxes have not been provided because Alliance
Farms Cooperative Association (Alliance) expects to derive nearly 100% of
its net income from the sale of feeder and weaned pigs to its members which
will be apportioned and distributed to members of Alliance on a patronage
basis in accordance with its by-laws.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying unaudited
condensed financial statements should be read in conjunction with the
financial statements and notes in Alliance's August 31, 1998 Annual Report
on Form 10-KSB.
2. Sales
Alliance sold nearly 100% of its feeder and weaned pigs to its members for
the three and six month periods ended February 28, 1999 and 1998
respectively, 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
fixed 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 six
months ended February 28, 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 or weaned pig is
determined based upon, among other things, a five month historical rolling
average of operating costs (twelve month historical rolling average prior
to September 1, 1998) 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28 February 28
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Feeder Pig Average Net Sales Price 51.76 59.86 50.96 59.82
Feeder Pig Average Industry Market* 39.91 38.83 34.83 40.26
Weaned Pig Average Net Sales Price 37.71 N/A 37.41 N/A
Weaned Pig Average Industry Market* 23.23 N/A 20.12 N/A
<FN>
* Provided by the USDA - Iowa Department of Ag Market News
</TABLE>
3. Transactions with Effingham, Farmland and Yuma
Alliance purchased feed and propane from Effingham Equity (Effingham), feed
from Yuma Farmers' Milling and Mercantile Cooperative (Yuma), and animal
health supplies and breeding stock from Farmland Industries, Inc.
(Farmland) based on market prices. Effingham, Farmland and Yuma are members
of Alliance. Alliance also sold feeder pigs to Farmland and Yuma and
weaned pigs to Farmland. Such purchases and sales were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28 February 28
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Feed Purchases $1,233,500 $1,524,908 $2,366,195 $2,894,087
Propane Purchases 30,146 33,240 46,221 50,996
Animal Health Purchases 115,189 41,490 212,540 87,038
Breeding Stock Purchases 709,992 914,821 1,106,410 1,512,560
Feeder & Weaned Pig Sales 1,987,558 2,962,334 4,211,722 5,715,787
</TABLE>
Farmland also pays Alliance a royalty for any pigs raised by Alliance and
sold to a Farmland finisher that are then selected as breeding stock for
Farmland's contract herds pursuant to a swine production services
agreement. The royalty, which is $10 per head selected, paid to Alliance
under such agreement was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28 February 28
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Royalty Income $0 $14,730 $3,540 $21,100
</TABLE>
Farmland provided Alliance with an administrative office in Yuma, Colorado
at no cost through July 31, 1998. Commencing August 1, 1998 Alliance and
Farmland began to 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28 February 28
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Management Fee $98,810 $89,225 $201,161 $167,067
</TABLE>
Alliance had $45,214 and $145,832 of non-trade receivables at February 28,
1999 and August 31, 1998, respectively. The $45,214 due Alliance at
February 28, 1999 was due in part from Farmland for royalty fees incurred
and for items received out of Alliance's shop stock inventory, and the
remainder 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 $145,832 due Alliance
at August 31, 1998 was due in part from Farmland for royalty fees incurred
and the remainder 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 $284,111, $97,438 and $31,096 at February 28, 1999 and
$278,650, $87,389 and $61,768 at August 31, 1998 to Farmland, Yuma and
Effingham, respectively, for goods and services. Alliance is also obligated
to Farmland in the amount of $333,172 at February 28, 1999 for funds used
to purchase land for future expansion. See note 5.
4. Inventories
Major components of inventories as of February 28, 1999 and August 31, 1998
are as follows:
February 28 August 31
1999 1998
Feeder and Weaned Pigs $ 3,863,880 $ 3,467,308
Other 105,718 124,357
$ 3,969,598 $ 3,591,665
5. Long-Term Debt
Long term debt at February 28, 1999 and August 31, 1998 consisted of the
following:
February 28 August 31
1999 1998
CoBank Term Loan $10,917,800 $11,823,800
CoBank Construction Loan 5,156,625 3,625,107
CoBank Revolving Term 2,471,782 1,393,296
Credit
Note Payable to Farmland 333,172 966,572
$18,879,379 $17,808,775
Less Current Maturities 1,812,000 1,812,000
$17,067,379 $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 precedent 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 February
28, 1999, $4,541,593 was immediately available to Alliance under its credit
facility. The availability of $15,928,900 of unused term loans and
$4,130,000 of revolving term credit and $9,760,000 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 an
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
February 28, 1999, interest accrued on the outstanding principal balance on
the respective loan portions under variable rates at 8.75% per annum for
non-revolving term loans, 8.75% per annum for revolving term loans and
10.00% 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. For the quarter ended February 28, 1999,
the Company's interest rates charged on the non-revolving and revolving
term loans had been reduced by 25 basis points. 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 $68,142 and $33,042 of interest on
construction for the three months ended February 28, 1999 and 1998
respectively and $102,852 and $38,606 of interest on construction for the
six months ended February 28, 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. As of February 28, 1999 the Company
was in compliance with each of these covenants except for maintaining a
total equity to total assets ratio of 0.35. CoBank has provided a waiver
for this violation.
As of February 28, 1999, Alliance has borrowed $333,172 from Farmland to
purchase land for future expansion. This loan agreement with Farmland is
evidenced by a promissory note providing for amortization over a ten-year
period, at a variable rate of interest equal to CoBank's prime rate (7.75%
at February 28, 1999). The payment schedule for this loan requires the
Company to make interest-only payments for the life of the loan, with a
final balloon payment of all principal to be made upon the expiration of
the ten-year term on September 30, 2005.
Long-term debt as of February 28, 1999 matures during the fiscal years
ending August 31 in the following amounts:
1999.............$ 906,000
2000............. 2,227,200
2001............. 2,288,995
2002............. 2,474,378
Thereafter....... 10,982,806
.................$18,879,379
6. Commitments and Contingencies
As of February 28, 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, and one 2,450-sow weaned
pig production facility in Wayne County, Illinois. A 5,000-sow unit is
under construction at February 28, 1999. At February 28, 1999, commitments
for construction of said facility totaled $776,056. These commitments will
be funded through bank borrowings.
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 lease 800,000
pounds of swine or which are deemed commercial under local law.
Regulations implementing the amendments were recently promulgated and the
amendments almost certainly are applicable to Alliance's Colorado
operations.
Although Alliance has begun to evaluate the impact that the amendments
would have, Alliance presently is unable to estimate the costs that
reasonably could be expected to be incurred to comply with the amendments
and any related regulations that may be promulgated.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
STATEMENTS MADE IN THIS REPORT THAT ARE NOT HISTORICAL IN NATURE, OR THAT
STATE ALLIANCE'S, OR MANAGEMENT'S INTENTIONS, HOPES, BELIEFS, EXPECTATIONS, OR
PREDICTIONS OF THE FUTURE, ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
INVOLVE RISKS AND UNCERTAINTIES. IT IS IMPORTANT TO NOTE THAT ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE CAPTION *FACTORS
THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS*
IN ALLIANCE'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED AUGUST
31, 1998, AS WELL AS THOSE DISCUSSED ELSEWHERE IN ALLIANCE'S REPORTS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1999, Alliance reported working capital of $25,363 and
total assets of $32,459,839. Alliance issued 17 shares of Class A common stock
and 18 shares of Class B common stock in February 1999 for net proceeds of
$2,431,107. Alliance used these funds to repay the balance owed Farmland
pursuant to a $2,160,000 loan agreement, and for the development, population,
and start-up of a 5,000-sow unit in Yuma County, Colorado.
As of February 28, 1999, Alliance 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 17 shares of Class A Common Stock and 72 shares of Class
C Common Stock to qualified prospective investors. As of February 28, 1999,
Alliance had $4,541,593 immediately available under its credit facility with
CoBank, consisting of $3,483,376 of construction loans and $1,058,217 of
revolving term credit. The availability of non-revolving term debt and revolving
term credit under the CoBank credit facility is subject to specified equity
investment levels in the Company being satisfied.
As of February 28, 1999, Alliance has borrowed $333,172 from Farmland to
purchase land for future expansion. During the six month period ended February
28, 1999, Alliance incurred capital expenditures of $386,228 for construction of
its two weaned pig production facilities in located in Yuma County, Colorado and
Wayne County, Illinois and $3,399,123 for construction of the 5,000-sow pig
production facility in Yuma County, Colorado currently under construction. The
remaining capital expenditures were for replacement breeding stock and building
construction for the first seven production facilities.
Major uses of cash during the six months ended February 28, 1999 include
$4,520,308 for capital expenditures on new and existing facilities, $906,000 of
principal payments on long term debt, $633,400 payment on Farmland note and
$433,115 payment of patronage refunds. Major sources of cash include
$1,531,518 of proceeds from the issuance of long term debt, $1,078,486 increase
in revolving term credit, $2,431,107 of net proceeds from issuance of common
stock and $1,019,691 in cash provided by operating activities. The decrease in
cash provided by operating activities in 1999 is primarily attributable to the
net loss incurred of $560,762 compared to net income of $1,243,581 for the prior
period.
THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
Shipments of feeder pigs were lower for the three months ended February 28,
1999 than in the prior year. Alliance began shipping weaned pigs in August
1998. Alliance shipped 67,506 feeder pigs and 18,866 weaned pigs for the
quarter ended February 28, 1999 compared to 80,331 feeder pigs and no weaned
pigs shipped for the quarter ended February 28, 1998 for a decrease in the
number of feeder pigs shipped of approximately 16%. Shipments are down due to
a decline in farrowing rates and born alive. Net sales for the quarter ended
February 28, 1999 decreased to $4,205,780 from $4,808,904 for the prior year
period, a decrease of $603,124 or 13%. The above decrease in volume and sales
dollars occurred, despite the fact that seven feeder pig units were in
operation for the quarter ended February 28, 1999, whereas only six feeder pig
units were in operation for six weeks and seven feeder pig units were in
operation for seven weeks of the quarter ended February 28, 1998. The first two
weaned pig units began operation in the quarter ended February 28, 1999. The
sales price per feeder pig pursuant to Alliance's Pig Purchase Agreements was
lower for the quarter ended February 28, 1999 due to the five month rolling
average of operating costs being less than the twelve month rolling average of
operating costs for the quarter ended February 28, 1998. Also, during the
quarter ended February 28, 1998, an additional $4.50 margin was charged on every
feeder pig sold. Effective September 1, 1998, the margin was changed to $0 to
$4.50, as determined periodically by the Board of Directors at its discretion.
For the quarter ended February 28, 1999 $0 margin per pig was charged in
addition to the operating costs and debt service. Average net sales prices for
feeder and weaned pigs were $51.76 and $37.71 during the quarter ended February
28, 1999 and $59.86 and $0 during the quarter ended February 28, 1998,
respectively. Net sales for the quarter ended February 28, 1999 consisted of
$3,494,339 feeder pig sales and $711,441 weaned pig sales.
Alliance earned gross margins of $615,752 and $1,285,046 for the three
month periods ended February 28, 1999 and 1998, respectively. This decline in
gross margin is partially due to the $4.50 additional margin per pig no longer
being charged. As previously described, the selling price for Alliance's 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 second quarter of
fiscal 1999, Alliance's average net sales price for feeder and weaned pigs
exceeded then current production costs by $7.13 per pig sold. For the second
quarter of fiscal 1998, the net sales price exceeded then current production
costs by $16.00 per pig sold.
Sales to Farmland and Yuma for the three month periods ended February 28,
1999 and 1998 were $1,987,558 and $2,962,334, respectively. The average feeder
pig net sales price per head was $51.76 and $59.86 and the average feeder pig
industry market price per head was $39.91 and $38.83 during the quarters ended
February 28, 1999 and 1998, respectively. The average weaned pig net sales
price per head was $37.71 and the average weaned pig industry market price per
head was $23.23 during the quarter ended February 28, 1999.
No start-up costs were recorded during the three months ended February 28,
1999. Alliance recorded start-up costs of $45,438 relating to the operation of
the weaned pig production facilities in both Yuma County, Colorado and Wayne
County, Illinois under construction during the three months ended February 28,
1998. All costs for the three month period ended February 28, 1998 were
comprised of utilities, feed, labor and other general expenses prior to the
operation of the new pig production facilities.
Administrative expenses were $231,816 for the three months ended February
28, 1999 compared to $156,921 for the prior year period. This increase reflects
the increased operations and includes higher administrative, payroll and
professional fees. Alliance also incurred expenses of $50,000 related to the
Colorado regulation of housed commercial swine feeding operations.
Interest expense of $374,259 for the three months ended February 28, 1999
as compared to $334,566 for the prior year period, was incurred in financing the
development of nine existing and one new pig production facilities. This
increase is primarily due to the increase in the outstanding loan balance. As
of February 28, 1999, Alliance had borrowed $18,546,207 from CoBank for
construction and start up costs and $333,172 from Farmland for the purchase of
land which is intended to be used for future expansion.
Alliance incurred a net loss of $184,296 for the three months ended
February 28, 1999 compared to a net income of $780,785 for the prior year
period. The net loss for the second quarter of fiscal 1999 was attributable to
the current costs per pig exceeding the rolling average cost that per pig sales
are based on by $2.13 per feeder and weaned pig shipped, caused primarily by the
elimination of the additional $4.50 margin charged on every feeder pig sold as
well as a decline in production and approximately $289,000 of losses incurred on
the sale of breeding stock due to market conditions. The net income for the
second quarter of fiscal 1998 was attributable to the rolling average cost that
per pig sales prices are based on exceeding then current costs per pig by $9.72
per pig shipped, caused primarily by an improvement in productivity. In
addition to operating risks and uncertainties associated with any business,
Alliance's ability to generate net income is limited by any start-up expenses
that are incurred with respect to facilities development and the Company's
selling price formula that contains a production margin.
SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
Shipments of feeder pigs were lower for the six months ended February 28,
1999 than in the prior year. Alliance began shipping weaned pigs in August
1998. Alliance shipped 138,506 feeder pigs and 38,762 weaned pigs for the six
months ended February 28, 1999 compared to 149,975 feeder pigs and no weaned
pigs shipped for the six months ended February 28, 1998 for a decrease in the
number of feeder pigs shipped of approximately 8%. Shipments are down due to a
decline in farrowing rates and born alive. Net sales for the six months ended
February 28, 1999 decreased to $8,507,687 from $8,970,810 for the prior year
period, a decrease of $463,123, or 5%. The above decrease in volume and sales
dollars occurred, despite the fact that seven feeder pig units were in operation
for twenty six weeks of the first half of fiscal 1999, whereas six feeder pig
units were in operation for nineteen weeks and seven feeder pig units were in
operation for seven weeks of the first half of fiscal 1998. One weaned pig unit
was in operation for five weeks and two weaned pig units were in operation for
twenty-one weeks of the first half of fiscal 1999, whereas no weaned pig units
were in operation for the first half of fiscal 1998. The sales price per feeder
pig pursuant to Alliance's Pig Purchase Agreements was lower due to the five
month rolling average of operating costs for the first half of fiscal 1999 being
less than the twelve month rolling average of operating costs for the first half
of fiscal 1998. Also, during the first half of fiscal 1998, an additional $4.50
margin was charged on every feeder pig sold. Effective September 1, 1998, the
margin was changed to $0 to $4.50, as determined periodically by the Board of
Directors at its discretion. For the first half of fiscal 1999 $0 margin per
pig was charged in addition to the operating costs and debt service. Average
net sales prices for feeder and weaned pigs were $50.96 and $37.41 during the
six months ended February 28, 1999 and $59.82 and $0 during the six months ended
February 28, 1998, respectively. Net sales for the six months ended February
28, 1999 consisted of $7,057,741 feeder pig sales and $1,449,946 weaned pig
sales.
Alliance earned gross margins of $1,228,845 and $2,738,780 for the six
month periods ended February 28, 1999 and 1998, respectively. This decline in
gross margin is partially due to the $4.50 additional margin per pig no longer
being charged. As previously described, the selling price for Alliance's 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 first half of fiscal
1999, Alliance's average net sales price for feeder and weaned pigs exceeded
then current production costs by $6.93 per pig sold. For the first half of
fiscal 1998, Alliance's net sales price exceeded then current production costs
by $18.26 per pig sold.
Sales to Farmland and Yuma for the six month periods ended February 28,
1999 and 1998 were $4,211,722 and $5,715,787, respectively. The average feeder
pig net sales price per head was $50.96 and $59.82 and the average feeder pig
industry market price per head was $34.83 and $40.26 during the six month
periods ended February 28, 1999 and 1998, respectively. The average weaned pig
net sales price per head was $37.41 and the average weaned pig industry market
price per head was $20.12 during the six month period ended February 28, 1999.
Alliance recorded $85,698 of start-up costs relating primarily to the
operation of the weaned pig production facility under construction in Yuma
County, Colorado during the six months ended February 28, 1999 and $449,047 of
start-up costs relating to the operation of the weaned pig production facilities
in both Yuma County, Colorado and Wayne County, Illinois under construction
during the six months ended February 28, 1998. All costs for the six month
periods ended February 28, 1999 and 1998 were comprised of utilities, feed,
labor and other general expenses prior to the operation of the new pig
production facilities.
Administrative expenses were $496,773 for the six months ended February 28,
1999 compared to $326,659 for the prior year period. This increase reflects the
increased operations and includes higher administrative, payroll and
professional fees. Alliance also incurred expenses of $100,000 related to the
Colorado regulation of housed commercial swine feeding operations.
Loss on sale of breeding stock was $537,267 for the six months ended
February 28, 1999 compared to $55,539 for the prior year period. This increase
is attributable to lower market conditions during the first half of fiscal 1999
as compared to the first half of fiscal 1998.
Interest expense of $774,500 for the six months ended February 28, 1999 as
compared to $716,115 for the prior year period, was incurred in financing the
development of nine existing and one new pig production facilities. This
increase is primarily due to the increase in the outstanding loan balance,
partially offset by the capitalization of $102,852 of interest in the first half
of fiscal 1999 compared to $38,606 in the first half of fiscal 1998. As of
February 28, 1999, Alliance had borrowed $18,546,207 from CoBank for
construction and start up costs and $333,172 from Farmland for the purchase of
land which is intended to be used for future expansion.
Alliance incurred a net loss of $560,762 for the six months ended February
28, 1999 compared to a net income of $1,243,581 for the prior year period. The
net loss for the first half of fiscal 1999 was attributable to the current costs
per pig exceeding the rolling average cost that per pig sales are based on by
$3.16 per feeder and weaned pig shipped, caused primarily by the elimination of
the additional $4.50 margin charged on every feeder pig sold as well as a
decline in production and approximately $537,000 of losses incurred on the sale
of breeding stock due to market conditions. The net income for the first half
of fiscal 1998 was attributable to the rolling average cost that per pig sales
prices are based on exceeding then current costs per pig by $8.29 per pig
shipped, caused primarily by an improvement in productivity. In addition to
operating risks and uncertainties associated with any business, Alliance's
ability to generate net income is limited by any start-up expenses that are
incurred with respect to facilities development and the Company's selling price
formula that contains a production margin.
YEAR 2000. The 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 will meet the financial and reporting needs of the Company and
that is year 2000 compliant has been purchased. Installation, testing and
training has begun and are anticipated to be completed in the third quarter of
fiscal 1999. The cost of the replacement software was approximately $20,000.
Currently, the Company is reviewing the non-information technology related
systems. At this time, no equipment that is date sensitive has been identified.
The time frame and cost associated with becoming year 2000 compliant is based on
management's best estimates, although no assurances can be given in this regard.
The Company intends to evaluate 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, as systems
are tested the Company intends to develop a contingency backup plan for systems
which exhibit possible year 2000 problems.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Members of Alliance Farms Cooperative Association was
held on December 8, 1998. The following matters were submitted to a vote of the
members:
Item 1. Election of Directors
Wayne N. Snyder, Doug Brown, Merl Daniel, Loren Keppy and Larry Welsh each
were elected as directors of Alliance Farms for a term expiring at the 1999
Annual Meeting of Members and until their respective successors are duly
elected and qualified or until their earlier resignation or removal. The
vote with respect to the election of directors was as follows:
Nominee Affirmative Votes Withheld Authority
Mr. Snyder 118 2
Mr. Brown 116 4
Mr. Daniel 120 0
Mr. Keppy 120 0
Item 2. Selection of Independent Auditors
KPMG LLP (formerly (KPMG Peat Marwick LLP) was selected as the
Association's independent auditors for the fiscal year ending August 31,
1999. The vote with respect to the approval of KPMG LLP was as follows:
Affirmative Votes 120
Negative Votes 0
Abstentions 0
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
The exhibits listed below are filed as part of Form 10-QSB for the quarter
ended February 28, 1999.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended February 28,
1999.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ALLIANCE FARMS COOPERATIVE ASSOCIATION
(Registrant)
/s/ WAYNE SNYDER
Wayne Snyder
Chairman of the Board, President
and Director
(Principal Executive Officer and Principal
Financial and Accounting Officer)
Dated: April 9, 1999
EXHIBIT 99
EXHIBIT INDEX
The following exhibit is filed as a part of this Form 10-Q.
Exhibit No. Description of Exhibits
27 Financial Data Schedule
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<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the February
28, 1999 Form 10Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 45,214
<ALLOWANCES> 0
<INVENTORY> 3,969,598
<CURRENT-ASSETS> 4,327,934
<PP&E> 28,585,356
<DEPRECIATION> 3,927,030
<TOTAL-ASSETS> 32,459,839
<CURRENT-LIABILITIES> 4,302,571
<BONDS> 0
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0
<COMMON> 2
<OTHER-SE> 11,089,889
<TOTAL-LIABILITY-AND-EQUITY> 32,459,839
<SALES> 8,507,687
<TOTAL-REVENUES> 8,507,687
<CGS> 7,278,842
<TOTAL-COSTS> 8,398,580
<OTHER-EXPENSES> (104,631)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 774,500
<INCOME-PRETAX> (560,762)
<INCOME-TAX> 0
<INCOME-CONTINUING> (560,762)
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<EXTRAORDINARY> 0
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<NET-INCOME> (560,762)
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