UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x |
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For the quarterly period ended May 31, 2008; | |
OR | |
o |
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for the transition period from TO
Golden Oval Eggs, LLC
(Exact name of registrant as specified in its charter)
Delaware | 20-0422519 | |
(State or other jurisdiction of incorporation or |
| (I.R.S. employer identification number) |
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1800 Park Avenue East |
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Renville, MN | 56284 | |
(Address of principal executive offices) |
| (Zip code) |
Telephone: (320) 329-8182
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “accelerated filer” and “large accelerated filer”filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large |
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Non-accelerated filer x | Smaller reporting company o | ||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No x
As of May 31, 2007,2008, there were 4,733,5275,442,543 of the Company’s Class A Units and 697,350 of the Company’s Class B Units issued and outstanding.outstanding
TABLE OF CONTENTS
Golden Oval Eggs, LLC
Form 10-Q
For The Quarter Ended May 31, 20072008
Description |
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1 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 1. CondensedConsolidated Financial Statements
GOLDEN OVAL EGGS, LLC
Consolidated Condensed Balance Sheets
May 31, 20072008 and August 31, 20062007
(In Thousands)
(Unaudited)(unaudited)
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| May 31, |
| August 31, |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 352 |
| $ | 222 |
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Accounts receivable |
| 18,479 |
| 14,854 |
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Inventories |
| 18,189 |
| 16,005 |
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Restricted cash |
| 1,476 |
| 779 |
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Other current assets |
| 511 |
| 1,076 |
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Total current assets |
| 39,007 |
| 32,936 |
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Property, plant and equipment |
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Land and land improvements |
| 11,642 |
| 11,553 |
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Buildings |
| 41,561 |
| 40,669 |
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Leasehold improvements |
| 888 |
| 860 |
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Equipment |
| 72,159 |
| 72,312 |
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Construction in progress |
| 140 |
| 57 |
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| 126,390 |
| 125,451 |
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Accumulated depreciation |
| (54,314 | ) | (45,622 | ) | ||
Total property, plant and equipment, net |
| 72,076 |
| 79,829 |
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Other assets |
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Investments |
| 1,669 |
| 1,576 |
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Intangible assets, net |
| 19,300 |
| 20,724 |
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Goodwill |
| 22,858 |
| 22,858 |
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Note receivable |
| 136 |
| 77 |
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Total other assets |
| 43,963 |
| 45,235 |
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Total assets |
| $ | 155,046 |
| $ | 158,000 |
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| May 31, |
| August 31, |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 706 |
| $ | — |
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Accounts receivable |
| 16,029 |
| 18,502 |
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Inventories |
| 20,421 |
| 18,352 |
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Restricted cash |
| 1,449 |
| 783 |
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Other current assets |
| 1,252 |
| 1,047 |
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Total current assets |
| 39,857 |
| 38,684 |
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Property, plant and equipment |
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Land and land improvements |
| 11,649 |
| 11,649 |
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Buildings |
| 40,222 |
| 40,684 |
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Leasehold improvements |
| 922 |
| 896 |
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Equipment |
| 72,275 |
| 71,906 |
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Construction in progress |
| 44 |
| 173 |
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| 125,112 |
| 125,308 |
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Accumulated depreciation |
| (65,120 | ) | (57,103 | ) | ||
Total property, plant and equipment, net |
| 59,992 |
| 68,205 |
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Other assets |
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Investments |
| 1,720 |
| 1,670 |
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Intangible assets, net |
| 14,336 |
| 18,826 |
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Goodwill |
| 22,858 |
| 22,858 |
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Note receivable |
| 297 |
| 135 |
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Total other assets |
| 39,211 |
| 43,489 |
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Total assets |
| $ | 139,060 |
| $ | 150,378 |
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See accompanying notes to consolidated condensed financial statements
1
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| May 31, |
| August 31, |
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Liabilities and Members’ Equity |
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Current liabilities |
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Revolving line of credit |
| $ | 13,508 |
| $ | 11,884 |
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Accounts payable |
| 7,867 |
| 14,221 |
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Accrued interest |
| 788 |
| 2,988 |
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Accrued compensation |
| 2,606 |
| 1,824 |
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Other current liabilities |
| 3,254 |
| 2,595 |
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Current maturities of long-term debt |
| 9,522 |
| 9,522 |
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Total current liabilities |
| 37,545 |
| 43,034 |
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Long-term debt, less current maturities |
| 66,210 |
| 84,727 |
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Members’ equity |
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Members’ equity |
| 34,129 |
| 21,612 |
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Non-controlling interest in consolidated entities |
| 1,176 |
| 1,005 |
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Total members’ equity |
| 35,305 |
| 22,617 |
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Total liabilities and members’ equity |
| $ | 139,060 |
| $ | 150,378 |
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See accompanying notes to consolidated condensed financial statementsstatements.
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| May 31, |
| August 31, |
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Liabilities and Members’ Equity |
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Current liabilities |
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Revolving line of credit |
| $ | 11,150 |
| $ | 3,869 |
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Accounts payable |
| 11,376 |
| 7,665 |
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Accrued interest |
| 2,790 |
| 812 |
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Accrued compensation |
| 1,241 |
| 1,485 |
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Other current liabilities |
| 2,847 |
| 2,877 |
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Current maturities of long-term debt |
| 9,461 |
| 9,461 |
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Total current liabilities |
| 38,865 |
| 26,169 |
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Long-term debt, less current maturities |
| 87,898 |
| 94,257 |
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Members’ equity |
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Members’ equity |
| 27,302 |
| 36,701 |
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Non-controlling interest in consolidated entities |
| 981 |
| 873 |
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Total members’ equity |
| 28,283 |
| 37,574 |
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Total liabilities and members’ equity |
| $ | 155,046 |
| $ | 158,000 |
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2
GOLDEN OVAL EGGS, LLC
Consolidated Condensed Statements of Operations
For the Periods Ended May 31, 2008 and 2007
(In Thousands, Except Per Unit Data)
(Unaudited)
|
| Three Months Ended |
| Nine Months Ended |
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| May 31, |
| May 31, |
| May 31, |
| May 31, |
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| 2008 |
| 2007 |
| 2008 |
| 2007 |
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Net sales |
| $ | 56,649 |
| $ | 53,035 |
| $ | 165,187 |
| $ | 147,098 |
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Cost of goods sold |
| 47,427 |
| 47,025 |
| 148,494 |
| 134,001 |
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Gross profit |
| 9,222 |
| 6,010 |
| 16,693 |
| 13,097 |
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Operating expenses |
| 4,785 |
| 4,750 |
| 18,104 |
| 15,822 |
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Income (loss) from operations |
| 4,437 |
| 1,260 |
| (1,411 | ) | (2,725 | ) | ||||
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Other income (expense) |
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Interest expense |
| (1,901 | ) | (2,513 | ) | (7,110 | ) | (7,477 | ) | ||||
Non-controlling interest in income (loss) of consolidated entities |
| 1 |
| (22 | ) | (103 | ) | (84 | ) | ||||
Other income |
| 214 |
| 255 |
| 908 |
| 853 |
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Forgiveness of debt |
| — |
| — |
| 17,000 |
| — |
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Total other income (expense) |
| (1,686 | ) | (2,280 | ) | 10,695 |
| (6,708 | ) | ||||
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Net income (loss) |
| $ | 2,751 |
| $ | (1,020 | ) | $ | 9,284 |
| $ | (9,433 | ) |
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Weighted average Members’ units outstanding |
| 5,431 |
| 5,420 |
| 5,431 |
| 5,420 |
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Net income (loss) per Members’ unit, basic |
| $ | 0.51 |
| $ | (0.19 | ) | $ | 1.71 |
| $ | (1.74 | ) |
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Net income per Members’ unit, diluted |
| 0.44 |
| (0.19 | ) | 1.61 |
| $ | (1.74 | ) | |||
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Distributions per unit |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
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See accompanying notes to consolidated condensed financial statementsstatements.
3
GOLDEN OVAL EGGS, LLC
Consolidated Condensed Statements of Operations
For the Periods Ended May 31, 2007 and 2006
(In Thousands, except per unit data)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| May 31, |
| May 31, |
| May 31, |
| May 31, |
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| 2007 |
| 2006 |
| 2007 |
| 2006 |
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Net sales |
| $ | 53,035 |
| $ | 19,217 |
| $ | 147,098 |
| $ | 57,332 |
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Cost of goods sold |
| 47,025 |
| 16,220 |
| 134,001 |
| 47,215 |
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Gross profit |
| 6,010 |
| 2,997 |
| 13,097 |
| 10,117 |
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Operating expenses |
| 4,750 |
| 1,945 |
| 15,822 |
| 6,179 |
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Income (loss) from operations |
| 1,260 |
| 1,052 |
| (2,725 | ) | 3,938 |
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Other income (expense) |
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Interest expense |
| (2,513 | ) | (784 | ) | (7,477 | ) | (2,008 | ) | ||||
Non-controlling interest in income (loss) of consolidated entities |
| (22 | ) | 24 |
| (84 | ) | 3 |
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Other income |
| 255 |
| 240 |
| 853 |
| 727 |
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Total other expense |
| (2,280 | ) | (520 | ) | (6,708 | ) | (1,278 | ) | ||||
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Net income (loss) |
| $ | (1,020 | ) | $ | 532 |
| $ | (9,433 | ) | $ | 2,660 |
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Weighted average Members’ units outstanding |
| 5,420 |
| 4,698 |
| 5,420 |
| 4,692 |
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Net income (loss) per Members’ unit, basic and diluted |
| $ | (0.19 | ) | $ | 0.11 |
| $ | (1.74 | ) | $ | 0.57 |
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Distributions per unit |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
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See accompanying notes to consolidated condensed financial statements
GOLDEN OVAL EGGS, LLC
Consolidated Condensed Statements of Cash Flows
For the Periods Ended May 31, 20072008 and 20062007
(In Thousands)
(Unaudited)
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| Nine Months Ended |
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| May 31, |
| May 31, |
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| 2007 |
| 2006 |
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Cash flows from operating activities |
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Net income (loss) |
| $ | (9,433 | ) | $ | 2,660 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities |
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Depreciation |
| 8,704 |
| 5,541 |
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Amortization |
| 1,424 |
| 164 |
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Gain on sale of property, plant & equipment |
| 2 |
| (9 | ) | ||
Non-controlling interest in income of consolidated entities, net of distributions |
| 108 |
| (70 | ) | ||
Changes in operating assets and liabilities |
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Accounts receivable |
| (3,625 | ) | (1,291 | ) | ||
Inventories |
| (2,184 | ) | (809 | ) | ||
Other current assets |
| 565 |
| (1,843 | ) | ||
Accounts payable |
| 3,711 |
| (200 | ) | ||
Accruals and other current liabilities |
| 1,738 |
| 90 |
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Net cash provided by operating activities |
| 1,010 |
| 4,233 |
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Cash flows from investing activities |
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Purchases of property, plant and equipment |
| (958 | ) | (2,389 | ) | ||
Proceeds from sale of property, plant and equipment |
| 5 |
| 22 |
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Advance of note receivable |
| (59 | ) | (40 | ) | ||
Purchases of investment in other cooperatives |
| (102 | ) | (32 | ) | ||
Retirement of investment in other cooperatives |
| 9 |
| — |
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Net cash used by investing activities |
| (1,105 | ) | (2,439 | ) | ||
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Cash flows from financing activities |
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Proceeds from issuance of long term debt |
| — |
| 3,000 |
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Net increase (decrease) in revolving line of credit |
| 7,281 |
| (1,836 | ) | ||
Payments of long-term debt |
| (6,359 | ) | (2,758 | ) | ||
Decrease (increase) in restricted cash |
| (697 | ) | (665 | ) | ||
Net cash provided (used) by financing activities |
| 225 |
| (2,259 | ) | ||
Net increase (decrease) in cash and cash equivalents |
| 130 |
| (465 | ) | ||
Cash and cash equivalents - beginning of period |
| 222 |
| 690 |
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Cash and cash equivalents - end of period |
| $ | 352 |
| $ | 225 |
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| Nine Months Ended |
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| May 31, |
| May 31, |
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| 2008 |
| 2007 |
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Cash flows from operating activities |
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Net income (loss) |
| $ | 9,284 | �� | $ | (9,433 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
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Depreciation |
| 8,013 |
| 8,704 |
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Amortization |
| 1,327 |
| 1,424 |
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Gain on sale of property, plant & equipment |
| 2 |
| 2 |
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Asset impairment |
| 3,531 |
| — |
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Gain on debt forgiveness |
| (17,000 | ) | — |
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Stock vesting unit compensation for vesting awards |
| (9 | ) | — |
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Changes in operating assets and liabilities |
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Accounts receivable |
| 2,473 |
| (3,625 | ) | |||||||||
Inventories |
| (2,069 | ) | (2,184 | ) | |||||||||
Other current assets |
| (205 | ) | 565 |
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Accounts payable |
| (6,354 | ) | 3,711 |
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Accruals and other current liabilities |
| 2,483 |
| 1,738 |
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Minority interest |
| 171 |
| 108 |
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Net cash provided by operating activities |
| 1,647 |
| 1,010 |
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Cash flows from investing activities |
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Purchases of property, plant and equipment |
| (178 | ) | (958 | ) | |||||||||
Proceeds from sale of property, plant and equipment |
| 8 |
| 5 |
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Advance of note receivable |
| (162 | ) | (59 | ) | |||||||||
Purchases of investment in other cooperatives |
| (50 | ) | (102 | ) | |||||||||
Retirement of investment in other cooperatives |
| — |
| 9 |
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Net cash used by investing activities |
| (382 | ) | (1,105 | ) | |||||||||
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Cash flows from financing activities |
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Net increase (decrease) in revolving line of credit |
| 1,624 |
| 7,281 |
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Payments of long-term debt |
| (1,517 | ) | (6,359 | ) | |||||||||
Decrease (increase) in restricted cash |
| (666 | ) | (697 | ) | |||||||||
Net cash provided (used) by financing activities |
| (559 | ) | 225 |
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Net increase in cash and cash equivalents |
| 706 |
| 130 |
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Cash and cash equivalents - beginning of period |
| — |
| 222 |
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Cash and cash equivalents - end of period |
| $ | 706 |
| $ | 352 |
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Supplementary disclosures of cash flow information |
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Cash paid during the period for: |
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Interest, net of capitalized interest of $129 and $235 during 2007 and 2006, respectively |
| $ | 7,682 |
| $ | 2,799 |
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Interest, net of capitalized interest of $161 and $129 during 2008 and 2007, respectively |
| $ | 6,455 |
| $ | 7,682 |
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Supplementary disclosures of non-cash transactions |
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Members units issued to directors and officers (Note 4) |
| $ | 177 |
| $ | 747 |
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Debt forgiveness |
| $ | 17,000 |
| $ | — |
| |||||||
Warrant issued for 880,492 Class A Convertible Preferred Units. Warrant issued for accrued interest payable. |
| 3,242 |
| — |
| |||||||||
Members units issued to directors and officers (Note 5) |
| 22 |
| 177 |
|
See accompanying notes to consolidated condensed financial statementsstatements.
5
4
GOLDEN OVAL EGGS, LLC
Notes to Consolidated Condensed Financial Statements
May 31, 20072008 and August 31, 20062007
(In Thousands Except Per Unit Data)
(unaudited)
1. Organization Golden Oval Eggs, LLC (the “Company”) was organized as a Delaware limited liability company to effect the reorganization of Midwest Investors of Renville, Inc. (the “Cooperative”) effective August 31, 2004. The Cooperative was incorporated as a cooperative under the laws of the state of Minnesota in March 1994. The Company operates as the Cooperative’s successor and its operations are a continuance of the operations of the Cooperative. The accompanying consolidated condensed financial statements for all periods presented are those of the Company.
2. Basis of Presentation The accompanying consolidated condensed balance sheet as of August 31, 2006,2007, which has been derived from audited consolidated financial statements, and the unaudited interim consolidated condensed financial statements at May 31, 20072008 and for the three-month and nine month periods ended May 31, 20072008 and 20062007 of the Company have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission rules and regulations. Certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods presented. These consolidated condensed financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2006.2007. The results of operations for the periods ended May 31, 20072008 are not necessarily indicative of results to be expected for any other interim period or for the entire year.
3. Inventories Pullet and layer hen inventories are stated at the cost of production, which includes the costs of the chicks, feed, overhead and labor. Layer hen flock costs are capitalized to the point at which the pullet goes into production and are amortized over the productive lives of the flocks, generally 18 to 24 months. Feed, supplies and liquid egg and egg products inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consisted of the following:
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| May 31, |
| August 31, |
| ||
| |||||||
Hens and pullets |
| $ | 10,634 |
| $ | 10,050 |
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Eggs and egg products |
| 4,195 |
| 3,409 |
| ||
Feed, supplies and other |
| 3,360 |
| 2,546 |
| ||
Total inventories |
| $ | 18,189 |
| $ | 16,005 |
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|
| May 31, |
| August 31, |
| ||
|
|
|
|
|
| ||
Hens and pullets |
| $ | 13,182 |
| $ | 10,766 |
|
Eggs and egg products |
| 4,227 |
| 4,046 |
| ||
Feed, supplies and other |
| 3,012 |
| 3,540 |
| ||
Total inventories |
| $ | 20,421 |
| $ | 18,352 |
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4.Financing Agreements Golden Oval Eggs, LLC, Midwest Investors of Iowa and GOECA, LP are parties to a Credit Agreement that was originally entered into on September 13, 2004, and subsequently amended. With the last amendment effective March 11, 2008, the maturity date of $2,500 of a short term revolving note and all other revolving notes was extended from March 1, 2008 to July 31, 2008 and the commencement date of certain financial covenants was also extended to July 31, 2008. We have historically financed our working capital needs through the Credit Agreement and, to the extent of our cash flow, from operations. The Credit Agreement, as amended, requires the Company, among other things, to
5
generate monthly EBITDA of at least $1,000 for the term of the Credit Agreement. Principal payments for Tranche A and Tranche B loans continue to be deferred until July 31, 2008. To the extent that monthly EBITDA exceeds $1,000, up to $200 per month will be transferred into an interest bearing escrow account to provide funds for the upgrade of the Thompson, Iowa wastewater facility. As has been reported in previous filings and disclosed in the Risk Factors discussion of the Company’s report on Form 10-K for the fiscal year ended August 31, 2007, the Company is continuing to seek alternative sources of capital to strengthen its balance sheet. The Company was in compliance with all covenants under the Credit Agreement for each month in the quarter ended May 31, 2008 and as of May 31, 2008.
On February 15, 2008, the Company and Land O’ Lakes executed an agreement whereby the purchase price of the Egg Products Division of MoArk was reduced by $17,000 and an equal amount of the subordinated note used to finance the acquisition was reduced. Additionally, the Company issued a Warrant for the purchase of up to 880,492 newly authorized convertible preferred units in exchange for the forgiveness of accrued interest on the subordinated note. The 697,350 Class B units held by Land O’ Lakes were converted to Class A units per the agreement.
The subordinated note to Land O’Lakes of $17,000 was treated as debt forgiveness and was classified as income in the other income (expense) section of the Statement of Operations. In exchange for the accrued interest of $3,242 on the $17,000 note that was forgiven, the Company issued Land O’Lakes a Warrant valued at $3,242.
5. Stock Based Compensation The Company has bonus and compensation plans in place for management. Under these agreements management may receive up to 50% of certain performance bonuses in the form of Class A Units. The Company accrues for management bonuses during the year based upon the estimated amount that will be earned by year-end.year end. Upon approval by the Board of Managers, the bonuses are paid to management. The number of units to be issued is based upon the higher of the book or market value of the Class A Units at the time the bonus is awarded. For the ninethree months ended May 31, 2007 and 2006, a total of 20,895 and 107,203May 31, 2008, no Class A unitsUnits were issued to management at a per unit value of $7.63 for 20,895 units in 2007, and $6.05 for 107,203 units in 2006, respectively.management.
The Class A unitsUnits are nontransferable and subject to forfeiture ratably over the following three years. The employee must be employed on the anniversary date of issuance to avoid forfeiture. In the event that termination of the employee occurs, the Company will record any forfeiture of units as a reduction to compensation expense in the period in which the forfeiture occurs. ForThere were no forfeitures for the ninethree months ended May 31, 2007 and 2006 there were forfeitures of 2,045 and 0.2008 nor for the quarter ended May 31, 2007.
The members of the Board of Managers are granted 2,000 Class A Units for each year served on the board following each year of service. The Company recognizes compensation expense for these awards based upon the fair value on the date they are granted. Forlast three recorded trade prices prior to the nine months endedissuance of the members’ units. The unit value was calculated at $1.87 per unit and 11,666 units were issued on May 31, 2007 and 200629, 2008 for a total expense of 12,000 units at a unit value of $2.60 and 14,000 units at a unit value of $7.02 were awarded.$21,815.
Below is a summary of stock activity pursuant to these compensation plans for the nine months ended:
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| May 31 |
| May 31 |
| ||||||
|
| 2007 |
| 2006 |
| ||||||
|
| Units |
| $ |
| Units |
| $ |
| ||
Issued to management |
| 20,895 |
| $ | 159 |
| 107,203 |
| $ | 649 |
|
Issued to directors |
| 12,000 |
| 31 |
| 14,000 |
| 98 |
| ||
Forfeitures |
| (2,045 | ) | (13 | ) | — |
| — |
| ||
Total |
| 30,850 |
| $ | 177 |
| 121,203 |
| $ | 747 |
|
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5.6. Earnings per Unit Basic net income (loss) per unit was calculated by dividing net income (loss) by the weighted average number of Class A common units outstanding during the period. Diluted net income (loss) per unit was calculated by dividing net income (loss) by the weighted average number of Class A common units outstanding during the period plus the dilutive effects of the Warrant. Convertible Class A Preferred units representing 340,628 units were included in the calculation of diluted net income per members’ unit.
|
| May 31, |
| May 31, |
| ||
Numerator |
|
|
|
|
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Net income (loss) |
| $ | 9,284 |
| $ | (9,433 | ) |
Denominator |
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|
|
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Weighted average units outstanding |
| 5,431 |
| 5,420 |
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|
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|
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Diluted weighted average units outstanding |
| 5,772 |
| 5,420 |
| ||
|
|
|
|
|
| ||
Basic profit (loss) per unit |
| $ | 1.71 |
| $ | (1.74 | ) |
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|
|
|
|
| ||
Diluted profit (loss) per unit |
| $ | 1.61 |
| $ | (1.74 | ) |
7. Use of Estimates The preparation of consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
6.8. IntangiblesCapital Resources and GoodwillLiquidity On June 30, 2006,The Company is a party to an Amended and Restated Credit Agreement, as amended, with Metropolitan Life Insurance Company as lender and CoBank, ACB as lender and administrative agent (the “Credit Agreement”). The Company has had limited access to capital under the Credit Agreement and the lenders under the Credit Agreement have modified certain financial covenants in order to allow compliance with these covenants by the Company. As part of its efforts to obtain a refinancing of the Credit Agreement, the Company has completed the MoArk Acquisition. The purchase price consisted of $38,000 paid in cash, the issuance by the Company of a $17,000 promissory note, and $5,000 paid by the issuance of 697,350 newly-created Class B Units. The $17,000 promissory note contains a contingent warrant provision which allows the note holder, at the Holder’s option, to exercise that number of units of membership interests equal to ten (10%) of the issued and outstanding units of the Company, if the note has not been paid in full on or before the Maturity Date. Also on June 30, 2006,following steps:
On March 11, 2008, the Company entered into an amendedextension and restated creditamendment agreement as described in Liquiditywith the lenders under the Credit Agreement that extends the termination date of a $2,500 short-term revolving note issued under our Restated and Capital Resources.Amended Credit Agreement from February 29, 2008 to July 31, 2008. The Company has allocated the purchase price in accordance with SFAS 141 “Business Combinations” and recorded $19,000 of intangible assets to be amortized over the relevant lifecommencement of the underlying assets, and $22,800 in goodwill that is not amortized, but will be tested at least annually for impairmenteffective date of financial covenants under SFAS 142, “Goodwill and Other Intangible Assets.” During the quarter ended MayCredit Agreement has also been delayed from March 1, 2008 to July 31, 2007, the Company considered whether an event had occurred or circumstances had changed that more likely than not would reduce the fair value of the Company below its carrying amount. Examples of such events or circumstances include:2008.
a. A significant adverse change in legal factors or in the business climate;
b. An adverse action or assessment by a regulator;
c. Unanticipated competition;
d. A loss of key personnel; or
e. A more-likely-than-not expectation that a significant portion of the Company will be sold or otherwise disposed of.
After such consideration, Management concluded that circumstances and events did not indicate that an interim test of goodwill recoverability was required.
7.9. ContingenciesLegal Proceedings On March 29, 2007 theThe Attorney General of Iowa files ahas filed suit in relation to the Thompson, Iowa Waste Water Facility.wastewater facility. Please refer to Item 1. Legal Proceedings under Part IIII. of this Quarterly Report on Form 10-Qfiling for a fullermore detailed description of this and other legal proceedings involving the Company.
8. Credit Agreement Effective April 30, 2007, Golden Oval Eggs, LLC (the “Company”) and its two subsidiaries, GOECA, LP and Midwest Investors of Iowa, a cooperative (collectively, the “Borrowers”) entered into a First Amendment to Amended and Restated Credit Agreement (the “Amendment”) with Metropolitan Life Insurance Company, as a bank, CoBank, ACB and the other financial institutions or entities that are signatories thereto (the “Lenders”). CoBank, ACB is also the administrative agent for the Lenders.matters
The Lenders and the Borrowers entered into an Amended and Restated Credit Agreement dated as of June 30, 2006 (the “Credit Agreement”). The Amendment amends certain provisions of the Credit Agreement, including covenants relating to net worth, current ratios, working capital, leverage ratios, fixed charge coverage ratios. By the Amendment, the Lenders also waived defaults of these covenants for the period ending February 28, 2007, as well as certain other covenants relating to compliance with laws and environmental matters. Further, the Amendment extended the termination date of the Credit Agreement from April 30, 2007 to March 1, 2008. Please refer to 8K filed May 9, 2007 for details on Credit Agreement. 8K filed May 9, 2007 for details on Credit.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements that are based on current expectations, beliefs, intentions or future strategies of the management of Golden Oval Eggs, LLC (“we”, “us”, “our”, or the “Company”). When used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations or elsewhere in this Quarterly Report on Form 10-Q, the words “believe,” “expect,” “anticipate,” “will,” “estimate” and similar verbs or expressions are intended to identify such forward-looking statements. If our management’s assumptions prove incorrect or should unanticipated circumstances arise, our actual results could differ materially from those anticipated. These differences could be caused by a number of factors or combination of factors including, but not limited to, those factors described in Part I, Item 1A. “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended August 31, 2006,2007, as well as those identified in other filings with the Securities and Exchange Commission. Readers are strongly urged to consider such factors when evaluating any forward-looking statement. The Company undertakes no obligation to update any forward-looking statements to reflect future events or developments.
The following is a discussion and analysis of our financial condition and results of operations as of and for the three month and nine months periods ended May 31, 20072008 and 2006.2007. This section should be read in conjunction with the condensed financial statements and related notes in Item 1 of this Quarterly Report and our Annual Report on Form 10-K for the year ended August 31, 2006.2007.
Summary
Golden Oval Eggs, LLC is a Delaware limited liability company primarily engaged in the business of producing, processing, marketing and distributing egg products. The Company operates seven production and/or distribution facilities in the United States. On June 30, 2006, the Company closedIt maintains its acquisition of certain assets of MoArk, LLCheadquarters in Renville, Minnesota and its subsidiaries relating to the business of manufacturing, marketing, selling and distributing liquid egg products, as more fully describeda sales office in the Company’s Annual Report on Form 10-K for the year ended August 31, 2006. With the completion of the MoArk Acquisition, the Company moved into the further processed egg business.Plymouth, Minnesota.
The Company produces a wide range of egg products, from unpasteurized liquid eggs, further processed egg products for other food manufacturers, and finished goods for sale to retailers and food service customers. Products are sold to other food manufacturers, restaurants, supermarkets and foodservice distributors.
The Company produces less than halfapproximately two-thirds of its annual needs from eggs produced at layer barns at the Company’s Renville, Minnesota and Thompson, Iowa facilities. The remainder is satisfied from purchases of eggs or liquid product in market based transactions.under a variety of pricing arrangements with third parties.
The Company’s operating income or loss is materially affected by wholesale liquid egg prices, and pricing of further processed products each of which can fluctuate widely and are outside of the Company’s control. Liquid eggs are a commodity product and prices fluctuate in response to supply/demand factors. The Company also sells a portion of its products under contracts at non-market prices. Depending upon market circumstances, the prices generated by the Company’s non-market volume tend to be less or more than what the prevailing open market prices would generate.
The Company’s cost of production is materially affected by feed, purchased egg and liquid egg costs, which averaged approximately 54%50% of the Company’s total production costs in the first three quartersthird quarter of fiscal year 2007 as compared to 48% for the first two quarters of fiscal 2007. As a result of the MoArk acquisition on June 30, 2006, feed alone has dropped from 34% of sales for the quarter ended May 31, 2006, to 19% for the quarter ending May 31, 2007, reducing somewhat the Company’s exposure to volatile corn and soybean2008.
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markets. Agricultural commodity prices influence purchased eggs and open market liquid egg prices although not necessarily in the same direction, to the same degree or at the same time.
Results of Operations
Results of Operations — Third Quarter Fiscal Year 20072008 Compared to Third Quarter Fiscal Year 20062007
Net SalesNet sales for the third quarter of fiscal 20072008 were $53.0$56.6 million, an increase of $33.8$3.6 million, or 176%6.8% over the third quarter ofin the prior fiscal year. Business acquired in the MoArk acquisition accounted for $33.3 million, or 98% of the increase. The remainder of the increase or $0.5 million is from the Company’s interest in United Mills, which is consolidated in the financial statements, and is due to an increase in United Mills’ sales because of higher feed costs . Sales of liquid unpasteurized eggs from the facilities in place prior to the MoArk acquisition were unchanged. Sales pounds from those facilities to outside parties declined by 20%, caused by increased utilization of output in company owned facilities, offset by an increase in average selling prices of 25.2%. Pounds sold in the third quarter were 66.5 million, a decrease of fiscal 2007 were 94.1 million, an increase of 39.627.5 million, or 73% over41.4%, less than the same period year ago. The decrease is due to a significant reduction of the Millersburg, Ohio facility egg supply (15.9 million pounds) which resulted in an impairment charge in the prior year. Pounds from the facilities acquired from MoArk accounted for 50.8 millionfiscal year ended August 31, 2007. Additional causes of the increase, offsetting an 11.2 million pound decline include a decrease in pounds soldavailable to outside partiessell from production at the Renville Minnesota and Thompson Iowa facilities as total production declined approximately 9% due to reduced bird numbers, and more production is used internally asa result of reductions in flock sizes associated with an ingredientincrease in the further processed plants. Shipmentsamount of space allotted to company facilities are not accounted foreach bird in compliance with animal care guidelines promulgated by industry groups (2.0 million pounds), and a decrease in pounds available to sell as sales on a consolidated basis.result of us exiting certain low margin businesses (9.6 million pounds). The average selling price per pound for the quartersold increased from $0.353$0.541 to $0.564,$0.779, an increase of $0.211,$0.238, or 59.8% over the prior year same period, with $0.157 due to the inclusion44.0%, as a result of further processed products which command a higher selling price per poundprices executed in the marketplace, as well as overall strengthening inan environment of sharply increased liquid whole egg prices at the Renville and Thompson locations, which accounted for $0.054 of the increase.markets.
Cost of Goods Soldgoods sold.Cost of goods sold for the third quarter of fiscal 20072008 was $47.0$47.4 million, an increase of $30.8$0.4 million, or 190% of cost of goods sold for0.9%, as compared to the third quarter of fiscal 2006.2007. The majority of the increase was associated with the acquired businesses. Gross profit for the period doubled from $3.0 million a year ago to $6.0 million in the current period. Since the Company does not produce all of its liquid egg needs from its own birds, it is a purchaser of eggs and liquid eggs in the market. An increase in egg and liquid egg pricing that increases sales also increases cost of goods, although not proportionately. Costs did grow faster than sales, resulting in a decline in gross margin as a percentage of sales from 15.6% in the third quarter 2006 to 11.3% in the current quarter. Feed prices rose by more than 50% per ton, driven by higher corn and soybean meal costs. This impact of the increase was mitigated somewhat by the fact that asprimarily a result of the MoArk acquisition on June 30, 2006, feed alone has dropped from 34% of sales for the third quarter of 2006 to 19% for the current quarter. The impact of higher feed costs at the Renville and Thompson facilities was $2.4 million unfavorable variance for the quarter. In the acquired businesses, prices for carton eggs rose to very high levels, and with them,increases in the cost of feed, purchased eggs purchased for breaking as eggs were diverted to supermarkets and other users of carton eggs. In contrast to the second quarter, the price ofpurchased liquid eggs did moveexceeding the reduction in relation to the cost of purchased eggs, allowing the acquired facilities to capture the margin to cover the costs of converting the eggs into liquid, significantly improving profitability.pounds needed for production.
Operating Expensesexpenses. Operating expenses for the third quarter of fiscal 20072008 were $4.7$4.8 million, an increase of $2.8$.04 million, or 144%.7%, fromas compared to the third quarter of fiscal 2006. As2007. The slight increase was due to increased discretionary spending.
Total other income(expense). Total other income(expense) for the casethird quarter of fiscal 2008 was $(1.7) million, an improvement of $.6 million from the prior year period. Interest expense decreased $0.6 million primarily as a result of the elimination of interest on the $17.0 million subordinated debt that was forgiven in the second quarter of fiscal 2008.
Income Taxes. As a limited liability company, the Company expects to be treated as a partnership for federal income tax purposes. Therefore, the Company will pay no federal income tax and instead, the Company’s members will include their pro-rata share of the Company’s net income or loss as an item of income for the purposes of their own federal income tax returns.
Net Income(Loss). Operations for the third quarter ended May 31, 2008 resulted in a profit of $2.8 million, or a profit of $.51 per basic members’ unit and $.44 per diluted members’ unit, as compared to a loss of $(1.0) million, or $(0.19) per basic and diluted members’ unit for the quarter ended May 31, 2007.
The Company’s financial performance in the current quarter may not be indicative of future quarters due to seasonal factors and volatility in both selling prices and cost of materials purchased, as well as industry factors in an intensely competitive industry.
Results of Operations — Nine Months ended May 31, 2008 Compared to Nine Months ended May 31, 2007
Net Sales.Net sales for the first twonine months of fiscal 2007 were $165.2 million, an increase of $18.1 million, or 12.3% over the first nine months of the prior fiscal year. The average selling price per pound increased from $0.478 to $0.729, an increase of $0.251, or 52.5% over the prior year same period. Total pounds shipped to customers for the first nine months of fiscal 2008 were 214.8 million, a decrease of 77.8 million pounds or 26.6%. The increase in average selling price was enough to offset the sales pounds decrease caused by the reduction in supply from the Millersburg facility (47.7 million pounds), compliance with animal care guidelines promulgated by industry groups (6 million pounds), and a decrease in pounds
9
available to sell as a result of us exiting certain low margin business lines and the seasonality of the business (24.1 million pounds).
Cost of Goods Sold. Cost of goods sold for the first three quarters of fiscal 2008 was $148.5 million, an increase of $14.5 million or 10.8% of the figure for same period of fiscal 2007 and less than the percentage increase in sales dollars, resulting in an increase of $3.6 million in gross profit. Significant unfavorable cost pressures were experienced in the period. Feed prices have risen substantially, driven by higher corn and soybean meal costs, resulting in $7.6 million of additional feed expense at the Renville and Thompson facilities. The cost of purchased liquid and eggs increased by $11.0 million, or 21.9%, driven by the same pricing environment reflected in the increase in selling prices. Improvements in operations resulted in reductions in direct and indirect operating costs of $4.1 million.
Operating Expenses.Operating expenses for the first three quarters of fiscal 2008 were $18.1 million, an increase of $2.3 million, or 14.4%, from the same period of fiscal 2007. The increase is primarily due to additional sales, management and administrative expenses associated with the MoArk acquisition, as the majorityimpairment of the employees of the acquired facilities became Golden Oval employees. Additionally, marketing expenses, including the Land O’ Lakes licensed products test market costs, are incrementaltrademark of $3.2 million recorded in the current period. Amortization of intangible assets and deferred financing costs associated with the MoArk Acquisition accounted for $0.4 million for the period. Operating expenses decreased as a percent of net sales from 10.1% from third quarter of fiscal 2006 to 9.0% in the third quarter of fiscal 2007.
Income from Operations The cumulative effect of the events described above was to produce positive income from operations of $1.3 million, and increase of $0.2 million, or 20% over same quarter last year. This is also the firstsecond quarter of the current fiscal year with additional impairment expense and reserves relating to report anthe termination of the Land O’ Lakes license and withdrawal from certain unprofitable market segments of $.5 million. Other operating profit.expenses, primarily marketing, were reduced by $1.4 million.
Total Other ExpenseIncome (Expense).Total other expenseincome increased from $0.5$(6.7) million to $2.3$10.7 million, an increase of $1.8$17.4 million for the period. Nearly all of theThe increase is due almost exclusively to the forgiveness of the $17.0 subordinated note. Interest expense decreased $0.4 million, primarily reflecting the elimination of interest expenses on higher debt levels associated with the acquisition.forgiven note for the fiscal third quarter.
Income TaxesTaxes. As a limited liability company, the Company expects to be treated as a partnership for federal income tax purposes. Therefore, the Company will pay no federal income tax and instead, the Company’s members will include their pro-rata share of the Company’s net income as an item of income for the purposes of their own federal income tax returns.
Net Income (loss). Net income for the quarternine months ended May 31, 20072008 resulted in a lossprofit of $(1.0)$9.3 million, or $(0.19)$1.71 per basicweighted average units and diluted members’ unit of $1.61, as compared to a profitloss of $0.5$(9.4) million, or $0.11$(1.74) per members’ unit weighted average and diluted unit for the same period a year ago.
Results of Operations — Nine Months ended May 31, 2007 Compared to Nine Months ended May 31, 2006
Net SalesNet sales for the first nine months of fiscal 2007 were $147.1 million, an increase of $89.8 million, or 157% over the first nine months of the prior fiscal year. Business acquired in the MoArk acquisition accounted for $89.8 million, or 100% of the increase. A $2.8 million increase in sales attributable to the Company’s interest in United Mills, which is consolidated in the financial statements, due to an increase in United Mills’ sales because of higher feed costs , is offset by a $2.8 million decrease in sales of liquid unpasteurized eggs from the facilities in place prior to the acquisition. The decline in sales pounds to outside parties of 14.3%, caused by increased utilization of output in company owned facilities, is partially offset by an increase in average selling prices of 10.5%. Pounds sold in the first nine months of fiscal 2007 were 292.6 million, an increase of 132.9 million, or 83.2% over the same period year ago. Pounds from the facilities acquired from MoArk accounted for 155.7 million of the increase, offsetting a 22.8 million pound decline in pounds sold to outside parties from the Renville, Minnesota and Thompson, Iowa facilities as total production declined approximately 14.3% due to reduced bird numbers, and more production being used internally as an ingredient in the further processed plants. Shipments to company facilities are not accounted for as sales on a consolidated basis. The average selling price per pound for the first nine months of fiscal 2007 increased from $0.359 to $0.503, an increase of $0.144, or 40.1% over the prior year same period, with $0.137 due to the inclusion of further processed products which command a higher selling price per pound in the marketplace, as well as overall strengthening in liquid whole egg prices at the Renville and Thompson locations, which accounted for $0.007 of the increase.
Cost of Goods Sold Cost of goods sold for the first three quarters of fiscal 2007 was $134.0 million, an increase of $86.8 million or 184% of the figure for same of fiscal 2006 and slightly less than the amount that sales increased, resulting in an increase of $3.0 million in gross profit on increased sales. The majority of the increase was associated with the acquired businesses. Significant unfavorable cost pressures were experienced in the period. Feed prices have risen by more than 33% per ton, driven by higher corn and soybean meal costs, resulting in $5.5 million of additional feed expense at the Renville and Thompson facilities. In the acquired businesses, two factors had a negative impact on results. First, prices for carton eggs rose to very high levels, and with them, the cost of eggs purchased for breaking as eggs were diverted to supermarkets and other users of carton eggs. Secondly, in the first half of the year the value of the liquid eggs did not move simultaneously higher, thereby substantially reducing or eliminating the margin to cover the costs of converting the eggs into liquid. The acquired facilities typically captured this margin to break an egg before adding value, and as this margin shrank, results in the acquired facilities were adversely affected. The decline in gross profit as a result of the cost pressures effectively accounted for the loss for the period.
Operating ExpensesOperating expenses for the first three quarters of fiscal 2007 were $15.8 million, an increase of $9.6 million, or 156%, from the same of fiscal 2006. The increase is primarily due
to additional sales, management and administrative expenses associated with the MoArk Acquisition, as the majority of the employees of the acquired facilities became Golden Oval employees. Additionally, marketing expenses, including the Land O’ Lakes licensed products test market costs, are incremental in the current period. Amortization of intangible assets and deferred financing costs associated with the MoArk Acquisition accounted for $1.3 million for the period. Operating expenses were constant as a percent of net sales at 10.8%.
Total Other ExpenseTotal other expense increased from $1.3 million to $6.7 million, an increase of $5.4 million for the period. Interest expenses on higher debt levels associated with the acquisition accounted for the entire $5.4 million.
Income Taxes As a limited liability company, the Company expects to be treated as a partnership for federal income tax purposes. Therefore, the Company will pay no federal income tax and instead, the Company’s members will include their pro-rata share of the Company’s net income as an item of income for the purposes of their own federal income tax returns.
Net Income (loss) Net income for the nine months ended May 31, 2007 resulted in a loss of $(9.4) million, or $(1.74) per basic and diluted members’ unit, as compared to a profit of $2.7 million, or $0.57 per unit for the same period a year ago.
Liquidity and Capital Resources
The Company’s working capital at May 31, 20072008 was $0.1$2.3 million compared to $6.8$(4.3) million at August 31, 2006.2007. The Company’s current ratio was 1.001.06 at May 31, 20072008 compared to 1.260.90 at August 31, 2006.2007. On June 30, 2006,March 11, 2008, the Company entered into an amendedExtension and restated credit agreementAmendment Agreement with CoBank ACBits lenders that extended the termination date of all revolving loans from March 1, 2008 to July 31, 2008. Additionally, the principal payments for the Tranche A and Tranche B term loans were deferred for the Metropolitan Life Insurance Company.months of March, April, May, June and July of 2008 until the maturity date of the applicable loan. The Company is current on all interest and principal payments as required for the quarter ending May 31, 2008 and complied with its minimum monthly EBITDA requirement for all three months of the third quarter of fiscal 2008. The amended and restated credit agreement providedprovides for a $93.0 million$95.5 line of credit, consisting of a $15.0 million revolving note terminatingthat terminates on April 30, 2007March 1, 2008, a short term revolving note of $2.5 million that also terminates on March 1, 2008 and $78.0 million in term notes duewith principal repayment schedules resulting in retirement beginning in 2014. The amendedCertain financial benchmarks and restated credit agreement provided $38.0 million in new debt to finance the MoArk acquisition and amended certain restrictive covenantsratios contained in the prior agreement, as amended. On April 30, 2007, the Company entered into a first amendment to the existing credit agreement which renewed the $15.0 million revolving note through March 1, 2008 and amended certain covenants. For the third quarter of 2007, the Company was current on all interest and principal payments. Further, for the quarter ending May 31, 2007 the Company is required by certain provisions of its credit agreements to maintain a minimum tangible net worth of not less than $28.0 million plus 40% of earnings plus 100% of equity contributed after Augusthave had their effective dates extended until July 31, 2006. The Company met this covenant for2008. In the third quarter of 2007. For the subsequent quarters of the term of the revolving line of credit,interim period, the Company must meet the tangible net worth covenant described above, as well as covenants requiringproduce a minimum current ratioEBITDA of not less than 1.0$1.0 million per month. To the extent that EBITDA exceeds $1.0 million in any month, up to 1.0; working capital of no less than zero; a leverage ratio of less than 5.0$0.2 million is to 1.0; a fixed charge coverage ratio no less than 1.00be placed in an interest bearing escrow account to 1.
Whilebe used for the Thompson wastewater project. The Company has agreed to explore strategic alternatives on terms, conditions and time frames mutually agreed between the Company has collateral in excess of the cap used to determine availability on the revolving loan portion ofand its facility, thelenders.
The Company may require significant additional capital resources in order to proceed with potential future expansions or to otherwise respond to competitive pressures in the industry. In addition, the Company may seek additional capital from an offering of itsour equity securities or by incurring additional
10
indebtedness, or both. No assurance can be given that additional working capital will be obtained in an amount that is sufficient for the Company’s needs, in a timely manner or on terms and conditions acceptable to the Company or its members. The Company’s financing needs are based upon management estimates as to future revenue and expense. The Company’sOur business plan and itsour financing needs are also subject to change based upon, among other factors, market and industry conditions, itsour ability to increase cash flow from operations and itsour ability to control costs and expenses. The Company’sOur efforts to raise additional funds from the sale of equity may be hampered by the fact that the Company’sour securities are illiquid and are subject to restrictions on transfer. The Company’sOur efforts to raise additional funds from incurring additional indebtedness may be hampered by the fact that the Company has significant outstanding indebtedness and all of the Company’s assets are pledged to its lenders to secure existing debt. In addition, the covenants of the Company’s credit agreement restrict the Company’s ability to make distributions, create liens, incur indebtedness and sell assets and properties.
The Company’s long-term debt at May 31, 2007,2008, including current maturities, was $97.3$75.7 million compared to $103.7$94.2 million at August 31, 2006.2007. As of May 31, 2007, $11.12008, $13.5 million has been drawn against the $15.0$17.5 revolving line of credit including the $2.5 million short term revolving note, compared to $3.9$11.9 million as of August 31, 2006.2007. Substantially all trade receivables and inventories collateralize the Company’s line of credit;credit and property, plant and equipment collateralize the Company’s long-term debt under its credit agreement and the note issued to Land O’Lakes, Inc.agreement.
With respect to the improvements that will be required to the Thompson, Iowa wastewater system (see Part II, Item 1 “Legal Proceedings”), the Company is currently estimatingsecuring bids to establish the cost of these improvements. Management does not believe
On February 15, 2008, the cost of these improvements will adversely impactCompany and Land O’ Lakes executed an agreement whereby the liquidity or capital resourcespurchase price of the Company.Egg Products Division of MoArk was reduced by $17.0 million and an equal amount of the subordinated note used to finance the acquisition was reduced. Additionally, the Company issued a Warrant for the purchase of up to 880,492 newly authorized convertible preferred units in exchange for the forgiveness of accrued interest on the subordinated note of $3.2 million. The 697,350 Class B units held by Land O’ Lakes were converted to Class A units per the agreement.
Net cash flow from operations was $ 1.0$1.6 million for the first three quarters of fiscal 20072008 compared to $4.2$1.0 million in the first three quarters of fiscal 2006.2007. Principal payments on long-term debt were $6.4$1.5 million and additions to fixed assets were $1.0$0.2 million. There were no distributions to unit holders during the first threetwo quarters of fiscal 2007.2008. An additional $0.7$0.6 million was added to restricted cash to provide for the principal paymentand interest payments on the 1999 and 2001 bonds due in July 2007. Effective September 1, 2006, we issued 20,895 Class A units to pay $0.2 million in management bonuses. The management bonuses were earned during fiscal year 2006. On May 22, 2007, 12,000 Class A Units were issued to pay $0.03 million in Board of Managers compensation. The Board of Managers’ compensation was earned and accrued during fiscal years 2006 and 2007.2008.
Critical Accounting Policies and Estimates
The above discussion and analysis of our results of operations and financial condition are based upon our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events may change and even the best estimates and judgments may require adjustment. For a complete description of the Company’s significant accounting policies, please see Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended August 31, 2006.2007. There have been no changes to critical accounting policies identified in our Annual Report on Form 10-K for the year ended August 31, 2006.2007.
Tangible Assets
We continually evaluate the carrying value of our tangible assets for events or changes in circumstances that indicate that the carrying value may not be recoverable. As part of this reevaluation, if impairment
11
indicators are present, we estimate the future cash flows expected to result from the use of this asset and its eventual disposal. During the third quarter of fiscal year 2008, no triggering events were identified that would have resulted in the carrying value of any asset to be deemed unrecoverable. As a result, no impairment tested was initiated.
Recorded impairment of tangible assets for the nine months ending May 31, 2008 is $.5 million.
Intangible Assets
As a result of the MoArk Acquisition that was completed June 30, 2006, we acquired intangible assets consisting of licenses to use certain brand names and trademarks, licenses of certain product technology and certain patents and patent applications. We have recorded the excess of consideration paid over assets acquired. Financial Accounting Standard No. 141 “Business Combinations” dictates that values be assigned to certain intangible assets. We have accordingly made estimates of the values to be carried on our books for intangible assets acquired, including registered and unregistered trade names and trademarks, licensing agreements, and patents and patent applications. The values of these assets are determined by forecasting future cash flows and assessing the risk of achieving the forecast. Those intangible assets with finite lives will be amortized over a period matching the life of the underlying intellectual property, for example, the term of the license agreement or the remaining life of the patent. With the termination of the retail test market and the cancelling of Land O’Lakes licensing agreements (Form 8K filed 2/20/2008), impairment was recognized for the intangible Land O’Lakes license agreement of $3.2 million. This was recorded in the operations section of the Statement of Operations. For the third quarter ending May 31, 2008, no triggering events were identified that would have resulted in the carrying value of any intangible asset to be deemed unrecoverable. As a result, no impairment testing was initiated.
Those intangibles with indefinite lives have been recorded as goodwill, and will not be amortized over a fixed time period. Rather, they will be tested for impairment when impairment indicators are deemed present. As of February 29, 2008 we tested for impairment under the provisions of SFAS No. 142. The results of the impairment test indicated that the fair value of the single entity reporting unit exceeded the carrying value of the reporting unit. As a result, no provision for impairment was required for the first two quarters of fiscal 2008. No impairment testing was done in the third quarter ending May 31, 2008 due to no triggering events being present.
Impact of Recently Issued Accounting Pronouncements
Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in our Annual Report form 10-K for the year ended August 31, 20062007 for a discussion of the impact of recently issued accounting pronouncements.pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement. FAS 157 isThe effective for the Company on September 1, 2008 and will be applied prospectively. Management is currently evaluating the impactdate of FAS 157 on its consolidated financial statements.
In December 2004,has been deferred one year which means the FASB issued SFAS Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revisioncompany effective date will be September 1, 2009. The provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock IssuedFAS 157 are not expected to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares to be recognized in the income statement based on their fair values. SFAS No. 123(R) also requires the benefits of tax deductions
in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. In the first quarter of fiscal 2007, we adopted SFAS No. 123(R). SFAS No. 123 (R) requires that entities recognize the services received in a share based payment transaction as services are received. The compensation cost for an award of share- based employee compensation classified as equity shall be recognized over the requisite service period The requisite service period for share based bonuses awarded company management is four (4) years, the year the bonus was earned plus the subsequent three (3) year vesting period. The result of adoption of SFAS No. 123 (R) did not have a material impact on theour consolidated financial statements. No stock options were outstanding at the date of adoption and none are currently outstanding.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 addresses the diversity in practice in quantifying financial statement misstatements and establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on a company’s financial statements and related disclosures. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 has not had a material impact on our financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, Establishing“Establishing the Fair Value Option for Financial Assets and Liabilities,” to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007 with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair“Fair Value Measurements.” An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS No. 159 on its consolidated financial statements.
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In December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS 160”). FAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The effective date of FAS 160 is for fiscal years beginning on or after December 15, 2008. Golden Oval is reviewing FAS 160 to determine what impact it may have to the consolidated financial statements.
In March 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment to FASB Statement No. 133. FAS 161 establishes the disclosure requirements for derivative instruments and hedging activities and expands the disclosure requirements of statement 133. The effective date for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Golden Oval is reviewing FASB 161 but anticipates very little impact to the Company.
The FASB issued two new statements in May 2008, FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles and FASB Statements No. 163, Accounting for Financial Guaranty Insurance Contract, an interpretation of FASB 60. FASB 162 identifies sources of accounting principles and establishes a hierarchy of accounting principles to be used in preparation of financial statements in conformity with GAAP for non governmental entities. FASB 162 is effective 60 days following SEC approval of Public Company Accounting Oversight Board (PCAOB) amendments to AU section 411. The Company does not anticipate any impact with the enactment of FASB 162. FASB 163 clarifies the recognition and measurement of claim liabilities in an insured financial obligation by insurance enterprises. FASB 163 is not applicable to the Company.
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
There have been no material changes in the market risk reported in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006.2007.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, Dana Persson, and Chief Financial Officer, Thomas A. Powell, have reviewed the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon this review, they have concluded that there is a continuing deficiency in the Company’s disclosure controls and procedures are effective.as described in Part II, Item 9A “Controls and Procedures” of the Company’s Annual Report on Form 10-K for the year ended August 31, 2007. During the first quarter, the Company secured additional personnel resources to assist with the consolidation and financial reporting process, which resulted in significant progress toward addressing the deficiency in our disclosure controls and procedures. The Company continues, however, to evaluate other possible remedial actions to improve our disclosure controls and procedures.
Changes in Internal Control Overover Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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As previously disclosed, three notices of violation were issued against us by the Iowa Department of Natural Resources regarding alleged violations at our
Our Thompson, Iowa facility ofhas an industrial wastewater treatment facility designed to treat wastewater from egg breaking. The Thompson facility also has an associated National Pollution Discharge and Elimination System (“NPDES”) permit limits for biochemical oxygen demand, total suspended solids, and ammonia nitrogen. Two additional notices of violation have since been issued on the same matter. On December 5, 2006,from the Iowa Environmental Protection Commission referredDepartment of Natural Resources (“IDNR”) that governs the matterquality of the wastewater influent to and effluent from the Iowa Attorney General.treatment facility.
On March 29, 2007, the Iowa Attorney General’s office filed suit against Golden Oval Eggs, LLCus requesting civil penalties for and injunctive relief from furtheragainst alleged NPDES permit violations. violations for exceeding discharge limits for biochemical oxygen demand, total suspended solids, and ammonia nitrogen.
We have received an extension from the Iowa District Court for Winnebago County until August 31, 2007 to submit our answer, which will allow time for us to negotiate a consent decree with the State of Iowa. We are currentlybeen negotiating the terms of the consent decreea Consent Decree with the Iowa Attorney General’s office, and weoffice. We expect the terms of the Consent Decree to enjoin us from further violations, include an obligation by us to make improvements to the Thompson wastewater treatment system to prevent further permit violations on an agreed-upon timeline, as well as the amountand make payment of a $200,000 civil penalties. penalty.
In addition, management has begunFebruary 2008, we received from IDNR a competitive bidding processpermit for construction of permanent improvements to the Thompson wastewater treatment system, and our Boardwe are in the process of Managers has established a preliminary budgetpreparing for capitalconstruction of the improvements, spending. which we anticipate will be completed no later than April 30, 2009. In addition, operational changes have been made at the wastewater facility that have achieved significant improvement in compliance with the NPDES permit requirements.
At this time, the cost associated with the interim solution, permanent improvement to the wastewater treatment facility complianceis estimated to be approximately $2.5 million. The Company is securing bids to determine final costs for the project.
On March 27, 2008, we received a subpoena from the U.S. Department of Justice, through the U.S. Attorney for the Eastern District of Pennsylvania, requesting documents for the period of January 1, 2002 through March 27, 2008 relating primarily to the pricing, marketing, and sales of our egg products. We intend to fully cooperate with the NPDES permit,Department of Justice request. We cannot predict what, if any, impact this inquiry and the amountany results from this inquiry could have on our current or future operations or results of penalty or fine imposed by the Iowa Attorney General cannot be estimated, however they may be significant, both individually and in the aggregate.operations.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company’s Annual Meeting of Members was held on April 4, 2007. Of the 4,721,527 Class A Units and 697,350 Class B Units outstanding and entitled to vote at the meeting as of February 28, 2007,
2,198,651 Class A Units and no Class B Units were present, either in person or by ballot. The following describes the maters considered by the Company’s members at the Annual Meeting, as well as the results of the votes cast at the Annual Meeting.
Proposal 1: Election of two managers to serve on the Company’s Board of Managers for terms expiring at the Annual Meeting of the Company’s Members to be held in 2010 or until such manager’s successor is elected and shall qualify.None.
Nominees |
| Votes For |
| Votes Withheld |
|
|
|
|
|
|
|
Rodney Hebrink |
| 2,060,139 |
| 138,512 |
|
|
|
|
|
|
|
Paul Wilson |
| 2,025,672 |
| 172,976 |
|
The terms of Messrs. Chris Edgington, Marvin Breitkreutz, Mark Chan, Howard Dahlager and James N. Reith continued after the Annual Meeting although Mr. Reith resigned as a manager effective April 19, 2007.
None.
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Exhibit |
| Description |
|
|
|
31.1 |
| Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|
|
|
31.2 |
| Certification of the Chief Financial Officer pursuant to pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|
|
|
32 |
| Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GOLDEN OVAL EGGS, LLC | |||||
|
| ||||
| |||||
By: | /s/ Dana Persson | ||||
| President and Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
|
| ||||
| By: | /s/ Thomas A. Powell | |||
| Vice President and Chief Financial | ||||
| Officer | ||||
| (Principal Financial and Accounting | ||||
| Officer) | ||||
|
| ||||
|
| ||||
Date: July 1, 2008 |
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