UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File
February 28, 1998 Number 0000927536
ALLIANCE FARMS COOPERATIVE ASSOCIATION
(Exact name of registrant as specified in its charter)
Colorado 84-1270685
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
302 Idlewild Street, Yuma, Colorado 80759
(Address of principal executive offices)
970-848-3231
(Issuers telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
At April 14, 1998, there were 155 shares of the issuers common stock
outstanding, of which 119 were shares of Class A common stock and 36 were shares
of Class B common stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
ALLIANCE FARMS COOPERATIVE ASSOCIATION
BALANCE SHEETS
UNAUDITED
February 28, 1998 August 31, 1997
ASSETS
Current Assets:
Receivables, trade 11,590 69,550
Receivables, non-trade (Note 3) 70,241 200,137
Inventory (Note 4) 3,691,691 3,179,402
Other current assets 57,949 0
Total current assets 3,831,471 3,449,089
Property, plant and equipment, at cost (Note 5) 23,535,797 19,610,833
Less accumulated depreciation 2,697,632 2,193,650
20,838,165 17,417,183
Breeding stock 4,777,400 4,603,996
Less accumulated depreciation 1,407,164 1,353,650
3,370,236 3,250,346
Other assets, net of $92,634 and $77,261
accumulated amortization 260,166 263,788
$28,300,038 $24,380,406
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft 1,138,524 1,106,122
Current maturities of long-term debt (Note 5) 1,434,600 1,262,700
Accounts payable (Note 3) 1,172,727 952,431
Accrued expenses 426,441 242,261
Total current liabilities 4,172,292 3,563,514
Long-term debt (Note 5) 14,283,358 14,320,724
Shareholders' equity
Class A common stock of $.01 par value;
authorized
5,000 shares, issued and outstanding 119 shares 1 1
Class B common stock of $.01 par value;
authorized
2,500 shares, issued and outstanding 36 shares 0 0
Class C common stock of $.01 par value;
authorized 2,500 shares, none issued 0 0
Additional paid-in capital 10,823,876 8,719,237
Accumulated deficit (979,489) (2,223,070)
Total shareholders' equity 9,844,388 6,496,168
Commitments (Note 6) ------ ------
$28,300,038 $24,380,406
See accompanying notes to financial statements
ALLIANCE FARMS COOPERATIVE ASSOCIATION
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
Three Month Periods Six Month Periods Ended
Ended
February 28 February 28
1998 1997 1998 1997
Net sales (Note 2) $4,808,904 $3,316,983 $8,970,810 $6,519,998
Cost of goods sold 3,523,858 2,969,586 6,232,030 5,549,049
Gross income 1,285,046 347,397 2,738,780 970,949
Expenses related to start-up
of new production facilities 45,438 0 449,047 75,668
Administrative expenses 156,921 122,027 326,659 214,996
(Gain) Loss on sale of breeding stock (7,562) 21,362 55,539 81,020
Operating income $1,090,249 $204,008 $1,907,535 $599,265
Other income (expense):
Interest expense (334,566) (357,932) (716,115) (680,584)
Other 25,102 43,254 52,161 85,786
(309,464) (314,678) (663,954) (594,798)
Net income (loss) $780,785 ($110,670) $1,243,581 $4,467
See accompanying notes to condensed financial statements
ALLIANCE FARMS COOPERATIVE ASSOCIATION
STATEMENTS OF CASH FLOWS
UNAUDITED
Six Month Periods Ended
February 28
1998 1997
Cash flows from operating activities:
Net income 1,243,581 4,467
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization 1,285,421 1,046,591
Loss on sale of breeding stock 55,539 81,020
Changes in assets and liabilities:
Receivables 187,856 (9,216)
Inventory (512,289) (313,598)
Other current assets (57,949) (15,444)
Other assets (23,751) 0
Accounts payable 220,296 1,320,760
Accrued expenses 184,180 18,387
Net cash provided by operating activities 2,582,884 2,132,967
Cash flows from investing activities:
Capital expenditures (5,660,497) (2,681,508)
Proceeds from sale of breeding stock 794,038 393,390
Net cash used in investing activities (4,866,459) (2,288,118)
Cash flows from financing activities:
Proceeds from issuance of long term debt 443,869 211,000
Net increase in revolving term credit 410,631 487,000
Payment on long term debt (603,300) (435,000)
Increase (decrease) in note payable to Farmland (116,666) 180,000
Loan origination fees 12,000 0
Issuance of common shares, net of offering cost 2,104,638 0
Increase (decrease) in bank overdraft 32,402 (287,849)
Net cash provided by
financing activities: 2,283,574 155,151
Change in cash and cash
equivalents 0 0
Cash and cash equivalents at beginning of period 0 0
Cash and cash equivalents at end of period 0 0
See accompanying notes to financial statements
Alliance Farms Cooperative Association
Notes to Condensed Financial Statements
(Unaudited)
1. Interim Financial Statements
The accompanying condensed unaudited financial statements reflect all
adjustments (consisting of only normal recurring adjustments) which in the
opinion of management, are necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods presented.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying unaudited
condensed financial statements should be read in conjunction with the
financial statements and notes in Alliance's August 31, 1997 Annual Report
on Form 10-KSB.
2. Sales
Alliance sold nearly 100% of its feeder pigs to its members for the three
and six month periods ended February 28, 1998 and February 29, 1997 at a
contractual price which is based on Alliance's operating costs (which are
based on a twelve month rolling average), debt service and an additional
$4.50 per pig sold.
Because the contractual price for the sale of a feeder pig is determined
based upon, among other things, a twelve month historical rolling average
of operating costs and to the extent that current operating costs per pig
exceed the historical average operating costs, Alliance may incur a
negative gross margin on the sale of its feeder pigs during periods of
rising costs. Conversely, in periods of falling costs, Alliance may earn
higher than normal gross margins.
Alliance's average net sales price and the average industry market price
for feeder pigs were as follows:
Three Months Ended Six Months Ended
February 28 February 28
1998 1997 1998 1997
Average Net Sales
Price 59.86 57.44 59.82 57.80
Average Industry
Market* 38.83 56.20 40.26 53.99
*As published by the USDA's Market News Service
3. Transactions with Farmland and Yuma
Alliance purchased feed from Yuma Farmers' Milling and Mercantile
Cooperative (Yuma), and animal health supplies and breeding stock from
Farmland Industries, Inc. (Farmland) based on market prices. Yuma and
Farmland are members of Alliance. Alliance also sold feeder pigs to
Farmland and Yuma. Such purchases and sales were as follows:
Three Months Ended Six Months Ended
February 28 February 28
1998 1997 1998 1997
...............................
Feed Purchases....................$ 1,084,819 $ 983,028 $ 2,068,772 $2,095,440
Animal Health Purchases........... 41,490 165,698 87,038 377,247
Breeding Stock.................... 914,821 351,062 1,512,560 494,756
Feeder Pig Sales.................. 2,962,334 1,956,704 5,715,787 3,961,082
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 $10 per head selected, paid to Alliance
under such agreement was as follows:
Three Months Ended Six Months Ended
February 28 February 28
1998 1997 1998 1997
...............................
Royalty Income....................$ 14,730 $ 40,000 $ 21,100 $ 72,600
Alliance had $70,241 and $200,137 of non-trade receivables at February 28,
1998 and August 31, 1997, respectively. The $70,241 due to Alliance at
February 28, 1998 was due from Farmland for royalties as described above
and for items received by Farmland out of Alliance's shop stock inventory,
and from Pig Producers I, LP ("Pig Producers"), a limited partnership in
which Farmland holds a 12.5% interest, for the reimbursement of wages,
benefits and other costs attributable to Alliance employees that are
assigned to perform various duties at Pig Producers, as well as for items
received by Pig Producers out of Alliance's shop stock inventory. Of the
$200,137 due to Alliance at August 31, 1997, $120,195 was due from Yuma
Cooperative as a result of a feed pricing adjustment and the remainder was
due for wages and benefits as described above from Pig Producers, in
addition to charges for items received out of Alliance's shop stock
inventory by both Pig Producers and Farmland.
Farmland performs administrative, advisory and consulting services on
behalf of Alliance pursuant to a contractual agreement. The agreement
provides that Farmland will be compensated for such services in an amount
equal to one dollar per pig shipped adjusted annually for inflation for a
term of ten years commencing July 13, 1994. Amounts paid by Alliance to
Farmland under such agreement were as follows:
Three Months Ended Six Months Ended
February 28 February 28
1998 1997 1998 1997
...............................
Management Fee $ 89,225 $ 63,980 $ 167,067 $ 121,596
Alliance owed $195,285 and $136,669 at February 28, 1998 and $197,755 and
$185,413 at August 31, 1997 to Farmland and Yuma, respectively, for goods
and services. Alliance is also obligated to Farmland in the amounts of
$499,758 and $616,424 at February 28, 1998 and August 31, 1997,
respectively, pursuant to promissory notes. See note 5.
4. Major components of inventories as of February 28, 1998 and August 31, 1997
are as follows:
February 28 August 31
1998 1997
Feeder Pigs............$ 3,529,039 $ 2,922,594
Other.................. 162,652 256,808
$ 3,691,691 $ 3,179,402
5. Long-Term Debt
Long term debt at February 28, 1998 and August 31, 1997 consisted of the
following:
February 28 August 31
1998 1997
CoBank Term Loan.................$ 12,365,700 $ 12,525,131
CoBank Revolving
Term Credit..................$ 2,852,500 $ 2,441,869
Note Payable, Farmland...........$ 499,758 616,424
$ 15,717,958 $ 15,583,424
Less Current Maturities..........$ 1,434,600 $ 1,262,700
$ 14,283,358 $ 14,320,724
On May 19, 1995, Alliance entered into a $23,600,000 secured credit
facility with CoBank. This agreement provides for $18,850,000 of term
loans and $4,750,000 of revolving term credit. Proceeds from the term
loans are used for construction of feeder pig production facilities and are
advanced by CoBank as Alliance incurs construction costs. Proceeds from
revolving term credit may be used for working capital and other purposes.
The expiration date for the unused commitments for the term loans was
extended from December 31, 1997 to March 31, 1998. On March 18, 1998,
Alliance entered into a new $34,506,700 secured credit facility with CoBank
to provide financing for the debt portion of the construction of up to six
2,450-sow weaned and/or feeder pig production facilities, related support
facilities and initial breeding stock associated with each unit and to
restate and modify the terms and conditions of the existing loan
agreements, including the commitments for financing the debt portion of the
two 2,450-sow weaned pig facilities already under construction, along with
these units related support facilities, initial breeding stock and
capitalized start-up costs. This agreement provides for $18,400,000 of
construction loans, $26,846,700 of term loans and $7,660,000 of revolving
term credit. The availability of non-revolving term debt and revolving
term credit under the CoBank credit facility is subject to specified equity
investment levels in the Company being satisfied. There is no assurance
that additional shares of common stock will be sold and the specified
equity investment levels satisfied. Under this new credit facility,
proceeds from the construction loan are used for construction of facilities
and are advanced by CoBank as construction costs are incurred by Alliance.
Proceeds from the term loans and revolving term credit are used to repay
the construction loan upon completion of a facility, and for working
capital.
The credit facility was also amended to accommodate the construction of two
weaned pig facilities in place of two feeder pig facilities. The unused
revolving term credit expires June 20, 2006. Interest accrues on the
outstanding principle balance of the loan at a rate equal to CoBank's
national variable rate, plus 1.25% (9.75% at February 28, 1998). Alliance
capitalized $38,606 and $8,241 of interest on construction for the six
months ended February 28, 1998 and 1997 respectively.
At February 28, 1998, no additional term loans and $1,497,500 of revolving
term credit were immediately available. Additional amounts of term loans
of $3,350,000 became available during March 1998 for the two facilities
currently under construction.
The new credit facility provides for the monthly payment of principal and
interest. The existing non-revolving term loans will change from ten year
to eight year terms effective August 31, 1998. Each new tranche of non-
revolving term credit will be repaid with monthly interest payments and
with 97 monthly principal payments of $21,800 for feeder pig facilities and
$17,300 for weaned pig facilities to begin 18 months after the initial
advance on each new construction loan commitment. The revolving credit
facility will mature on August 31, 2010 and will decrease in 40 equal
amounts at the end of each of the Company's fiscal quarters based on the
amount of available commitment at August 31, 2001.
Alliance is required to comply with various covenants, including, but not
limited to (i) maintaining at least $3,900,000 of shareholders' equity,
(ii) maintaining modified working capital (calculated as current assets
plus the available revolving term credit minus current liabilities
excluding the current portion of term debt payments) of at least $504,000,
(iii) restrictions on the occurrence of additional indebtedness, (iv)
restrictions on the declaration and payment of the cash portion of
patronage distributions and other distributions or allocations of earnings,
surplus or assets. As of February 28, 1998, Alliance was in compliance
with all covenants. Alliance may be required to make equity investments in
CoBank in an amount not to exceed 1% of the average five-year principal
loan balance until Alliance meets CoBank's target level of equity
investment, which is currently 11.5% of the average five-year principal
loan balance. As of February 28, 1998, substantially all assets of
Alliance were pledged to CoBank.
At February 28, 1998, $499,758 had been borrowed from Farmland pursuant to
a $760,000 loan agreement. The $760,000 loan agreement provides for
interest at CoBank's prime rate and requires repayment in 2005.
Long-term debt as of February 28, 1998 matures during the fiscal years
ending August 31 in the following amounts:
1998........$ 1,262,700
1999........ 1,550,400
2000........ 1,550,400
2001........ 1,550,400
2002........ 1,550,400
Thereafter..8,253,658
$ 15,717,958
6. Alliance Farms is currently operating seven 2,450 sow feeder pig facilities
and has one weaned pig facility under construction in Yuma County, Colorado
and in Wayne County, Illinois. As of February 28, 1998, commitments for
construction of these two facilities totaled $691,175.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN
THIS REPORT ON FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ALLIANCE'S ACTUAL RESULTS, FINANCIAL CONDITION OR BUSINESS COULD
DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION OR BUSINESS,
OR THE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS CONTEMPLATED BY
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ALLIANCE FARMS'
AUGUST 31, 1997 ANNUAL REPORT ON FORM 10-KSB UNDER THE CAPTION "FACTORS THAT MAY
AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS", AS WELL
AS THOSE DISCUSSED ELSEWHERE IN ALLIANCE'S REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1998, Alliance reported a working capital deficit of
$340,821 and total assets of $28,300,038. Alliance issued 17 shares of Class A
common stock in August 1997 for net proceeds of $1,231,584. Alliance used these
funds, in combination with $2,110,000 of borrowings through February 28, 1998
for the repayment of a $1,360,000 loan made by Farmland, and for the
development, population, and start-up of its second feeder pig facility in Wayne
County, Illinois. Alliance issued 36 shares of Class B common stock in November
1997 for net proceeds of $2,104,638. Alliance used these funds to repay the
balance owed Farmland pursuant to another $1,360,000 loan agreement, and for the
development, population, and start-up of one weaned pig facility in Yuma County,
Colorado and one in Wayne County, Illinois.
As of the date of this report, Alliance has 119 shares of Class A Common
Stock issued and outstanding, 36 shares of Class B Common Stock issued and
outstanding, no issued and outstanding shares of Class C Common Stock and is
offering an additional 34 shares of Class A Common Stock, 18 shares of Class B
Common Stock, and 72 shares of Class C Common Stock to qualified prospective
investors. At February 28, 1998, no additional term loans and $1,497,500 of
revolving term credit were immediately available. Additional amounts of term
loans of $3,350,000 became available during March 1998 for the two facilities
currently under construction. 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, 1998, Alliance has borrowed $499,758 from Farmland to
purchase land for future expansion.
During the six month period ended February 28, 1998, Alliance had capital
expenditures of $1,838,741 for construction of its first weaned pig unit in Yuma
County, Colorado and $1,503,248 for its first weaned pig unit in Wayne County,
Illinois. The remaining capital expenditures were for replacement breeding
stock and building construction for the first seven units.
Major uses of cash during the six months ended February 28, 1998 include:
$5,660,497 for capital expenditures on new and existing facilities, $603,300 of
principal payments on long term debt, and $116,666 paid to Farmland pursuant to
a $760,000 loan agreement. Major sources of cash include: $2,104,638 of
proceeds, net of offering costs, from the issuance of common shares, $443,869 of
proceeds from the issuance of long term debt, a $410,631 increase in revolving
term credit and $2,582,884 in cash provided by operating activities.
On March 18, 1998, Alliance entered into a new $34,506,700 secured credit
facility with CoBank to provide financing for the debt portion of the
construction of up to six 2,450-sow weaned and/or feeder pig production
facilities, related support facilities and initial breeding stock associated
with each unit and to restate and modify the terms and conditions of the
existing loan agreements, including the commitments for financing the debt
portion of the two 2,450-sow weaned pig facilities already under construction,
along with these units related support facilities, initial breeding stock and
capitalized start-up costs. This agreement provides for $18,400,000 of
construction loans, $26,846,700 of term loans and $7,660,000 of revolving term
credit. The availability of non-revolving term debt and revolving term credit
under the CoBank credit facility is subject to specified equity investment
levels in the Company being satisfied. There is no assurance that additional
shares of common stock will be sold and the specified equity investment levels
satisfied. Under this new credit facility, proceeds from the construction loan
are used for construction of facilities and are advanced by CoBank as
construction costs are incurred by Alliance. Proceeds from the term loans and
revolving term credit are used to repay the construction loan upon completion of
a facility, and for working capital.
The new credit facility provides for the monthly payment of principal and
interest. The existing non-revolving term loans will change from ten year to
eight year terms effective August 31, 1998. Each new tranche of non-revolving
term credit will be repaid with monthly interest payments and with 97 monthly
principal payments of $21,800 for feeder pig facilities and $17,300 for weaned
pig facilities to begin 18 months after the initial advance on each new
construction loan commitment. The revolving credit facility will mature on
August 31, 2010 and will decrease in 40 equal amounts at the end of each of the
Company's fiscal quarters based on the amount of available commitment at August
31, 2001.
Alliance is required to comply with various covenants, including, but not
limited to (i) maintaining at least $3,900,000 of shareholders' equity, (ii)
maintaining modified working capital (calculated as current assets plus the
available revolving term credit minus current liabilities excluding the current
portion of term debt payments) of at least $504,000, (iii) restrictions on the
occurrence of additional indebtedness, (iv) restrictions on the declaration and
payment of the cash portion of patronage distributions and other distributions
or allocations of earnings, surplus or assets. As of February 28, 1998,
Alliance was in compliance with all covenants. Alliance may be required to make
equity investments in CoBank in an amount not to exceed 1% of the average five-
year principal loan balance until Alliance meets CoBank's target level of equity
investment, which is currently 11.5% of the average five-year principal loan
balance. As of February 28, 1998, substantially all assets of Alliance were
pledged to CoBank.
THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
Shipments of feeder pigs were higher for the three months ended February
28, 1998 than in the prior year's period. Alliance shipped 80,331 feeder pigs
for the quarter ended February 28, 1998 compared to 57,746 feeder pigs shipped
for the quarter ended February 28, 1997 for an increase of 39%. Net sales for
the quarter ended February 28, 1998 increased to $4,808,904 from $3,316,983 for
the prior year period, an increase of $1,873,420, or 45%. The selling price per
pig is determined pursuant to the formula established under Alliance's Feeder
Pig Purchase Agreement with its members. The selling price is based on
Alliance's operating costs (which are based on a twelve month rolling average),
debt service and an additional $4.50 per pig. The above increase in volume and
sales dollars is partially a result of having six units in production for six
weeks and seven units in production for seven weeks of the quarter ended
February 28, 1998 as compared to six units in production for the quarter ended
February 28, 1997, in addition to improved productivity during the quarter ended
February 28, 1998. The per pig sales price was higher during the three months
ended February 28, 1998 compared to the three months ended February 28, 1997
partially because the pigs shipped weighed more and partially because the twelve
months of costs used to compute the per pig prices was slightly higher and the
twelve months of productivity used to compute the per pig prices was lower for
the three months ended February 28, 1998 than the three months ended February
28, 1997. Average net sales price was $59.86 and $57.44 during the quarter
ended February 28, 1998 and 1997, respectively.
Alliance earned gross margins of $1,285,046 and $347,397 for the three
month periods ended February 28, 1998 and 1997, respectively. This improvement
in gross margin is primarily due to the nature of the contractual pricing
arrangements applicable to Alliance's sale of feeder pigs to its members. As
previously described, the selling price is based on, among other things,
Alliance's operating costs on a twelve month historical rolling average. For
the second quarter of fiscal 1998, Alliance's net sales price exceeded then
current production costs by $16.00 per pig sold. For the second quarter of
fiscal 1997, the net sales price exceeded then current production costs by $6.02
per pig sold.
Sales to Farmland for the three month periods ended February 28, 1998 and
1997 were $2,962,334 and $1,956,704, respectively. The average net sales price
per head was $59.86 and $57.44 and the average industry market price per head
was $38.83 and $56.20 during 1998 and 1997, respectively.
Alliance recorded $45,438 of start-up costs relating to the operation of
it's two newest production facilities under construction during the three months
ended February 28, 1998. Start-up 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 feeder pig production facilities.
Administrative expenses were $154,577 for the three months ended February
28, 1998 compared to $122,027 for the prior year period. This increase reflects
the increased operations and includes higher administrative, payroll and
professional fees, related primarily to additional facilities being in
operation.
Gain on sale of breeding stock was $7,562 for the three months ended
February 28, 1998 as compared to a loss of $21,362 for the prior year period.
This change is attributable to the existence of more newly developed facilities
culling animals during the second quarter of fiscal 1997 as compared to more
mature facilities culling animals during the second quarter of fiscal 1998.
Interest expense of $334,566 for the three months ended February 28, 1998
as compared to $357,932 for the prior year period, was incurred in financing the
development of seven existing and two new pig production facilities. This
decrease is due to the capitalization of $33,042 of interest in the second
quarter of fiscal 1998 compared to none in the second quarter of fiscal 1997,
partially offset by an increase in the outstanding loan balance.
Alliance earned net income of $780,785 for the three months ended February
28, 1998 compared to a net loss of $110,670 for the prior year period. 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. The net loss for the second quarter of fiscal 1997 was
attributable to the current costs exceeding the rolling average cost that per
pig sales prices are based on by $1.92 per pig shipped, caused by a decrease in
productivity from the first quarter of fiscal 1997 due to herd health issues,
partially offset by decreasing corn prices. In addition to operating risks and
uncertainties associated with any business, Alliance's ability to generate net
income is limited by any start-up expenses that are incurred with respect to
facilities development and by the selling price formula for feeder pigs that
contains a $4.50 production margin.
SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
Shipments of feeder pigs were higher for the six months ended February 28,
1998 than in the prior year's period. Alliance shipped 149,975 feeder pigs for
the six months ended February 28, 1998 compared to 112,800 feeder pigs shipped
for the six months ended February 28, 1997 for an increase of 33%. Net sales
for the six months ended February 28, 1998 increased to $8,970,810 from
$6,519,998 for the prior year period, an increase of $2,450,812, or 38%. The
selling price per pig is determined pursuant to the formula established under
Alliance's Feeder Pig Purchase Agreement with its members. The selling price is
based on Alliance's operating costs (which are based on a twelve month rolling
average), debt service and an additional $4.50 per pig. The above increase in
volume and sales dollars is partially a result of having six units in production
for nineteen weeks and seven units in production for seven weeks of the first
half of fiscal 1998 as compared to five units in production for nine weeks and
six units in production for seventeen weeks of the first half of fiscal 1997, in
addition to improved productivity for the first half of fiscal 1998 as compared
to the first half of fiscal 1997. The per pig sales price was higher during the
first half of fiscal 1998 compared to the first half of fiscal 1997 partially
because the pigs shipped weighed more and partially because the twelve months of
costs used to compute the per pig prices was slightly higher and the twelve
months of productivity used to compute the per pig prices was lower for the
first half of fiscal 1998 than the first half of fiscal 1997. Average net sales
price was $59.82 and $57.80 during the six months ended February 28, 1998 and
1997, respectively.
Alliance earned a gross margin of $2,738,780 and $970,949 for the first
half of fiscal 1998 and fiscal 1997, respectively. This improvement in gross
margin is primarily due to the nature of the contractual pricing arrangements
applicable to Alliance's sale of feeder pigs to its members. As previously
described, the selling price is based on, among other things, Alliance's
operating costs on a twelve month historical rolling average. For the first half
of fiscal 1998, Alliance's net sales price exceeded then current production
costs by $18.26 per pig sold. For the first half of fiscal 1997, the net sales
price exceeded then current production costs by $8.61 per pig sold.
Sales to Farmland for the first half of fiscal 1998 and 1997 were
$5,715,787 and $3,961,082, respectively. The average net sales price per head
was $59.82 and $57.80 and the average industry market price per head was $40.26
and $53.99 during 1998 and 1997, respectively.
Alliance recorded $449,047 of start-up costs relating to the operation
of it's two newest production facilities under construction during the first
half of fiscal 1998 and $75,668 of start-up costs relating to the two facilities
under construction during the first half of fiscal 1997. Start-up costs for the
first half of fiscal 1998 and 1997 were comprised of utilities, feed, labor and
other general expenses prior to the operation of the new feeder pig production
facilities.
Administrative expenses were $324,315 for the six months ended February 28,
1998 compared to $214,996 for the prior year period. This increase reflects the
increased operations and includes higher administrative, payroll and
professional fees, related primarily to additional facilities being in
operation.
Loss on sale of breeding stock was $55,539 for the six months ended
February 28, 1998 as compared to $81,020 for the prior year period. This
decrease is attributable to the existence of more newly developed facilities
culling animals during the first half of fiscal 1997 as compared to more mature
facilities culling animals during the first half of fiscal 1998.
Interest expense of $716,115 for the six months ended February 28, 1998 as
compared to $680,584 for the prior year period, was incurred in financing the
development of four existing and two new pig production facilities. This
increase is primarily due to the increase in the outstanding loan balance,
partially offset by the capitalization of $38,606 of interest in the first half
of fiscal 1998 compared to $8,241 in the first half of fiscal 1997. As of
February 28, 1998, Alliance had borrowed $15,218,200 from CoBank for
construction and start up costs and $499,758 from Farmland for the purchase of
land which is intended to be used for future expansion.
Alliance earned net income of $1,243,581 for the six months ended February
28, 1998 compared to $4,467 for the prior year period. 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. The small net
income for the first half of fiscal 1997 was attributable to the rolling average
cost that per pig sales prices are based on exceeding then current costs per pig
by $.04 per pig shipped, caused in part by an improvement in productivity at the
beginning of the fiscal year which decreased throughout the first half of fiscal
1997 due to herd health issues, offset by decreasing corn prices.
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 2, 1997. The following matters were submitted to a vote of the
members:
Item 1. Election of Directors
Wayne N. Snyder, Doug Brown, Merl Daniel, Gerald Johnson, Loren Keppy and
Larry Welsh each were elected as directors of Alliance Farms for a term
expiring at the 1998 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 103 0
Mr. Brown 103 0
Mr. Daniel 103 0
Mr. Johnson 103 0
Mr. Keppy 103 0
Mr. Welsh 103 0
Item 2. Selection of Independent Auditors
KPMG Peat Marwick LLP was selected as the Association's independent
auditors for the fiscal year ending August 31, 1998. The vote with respect
to the approval of KPMG Peat Marwick LLP was as follows:
Affirmative Votes 103
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, 1998.
4.1 Master Loan Agreement, dated as of March 18, 1998, between
CoBank, ACB and the Registrant (filed as exhibit 10.1)
10.1 Master Loan Agreement, dated as of March 18, 1998, between
CoBank, ACB and the Registrant
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended February 28,
1998.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ALLIANCE FARMS COOPERATIVE ASSOCIATION
(Registrant)
Wayne Snyder
Chairman of the Board, President
and Director
(Principal Executive Officer and Principal
Financial and Accounting Officer)
Dated: April 13, 1998