UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| For the fiscal year ended August 31, 2005 |
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| Or |
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o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File No. 000-51096 |
GOLDEN OVAL EGGS, LLC
(Exact name of registrant as specified in its charter)
Delaware |
| 20-0422519 |
(State of incorporation) |
| (IRS Employer Identification No.) |
1800 Park Avenue East, Renville, MN 56284
(Address of principal executive offices including zip code)
(320) 329-8182
(Registrant’s telephone number, including area code)
Securities Registered Pursuant To Section 12(b) Of The Act:
None
Securities Registered Pursuant To Section 12(g) Of The Act:
None
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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act). Yes o No ý
There is no established public market for the Registrant’s limited liability company. As of November 28, 2005, the Registrant had 4,581,762 units issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I.
Forward-Looking Statements
This report contains forward-looking statements based upon assumptions by the management of Golden Oval Eggs, LLC (the “Company”, “Golden Oval” or “we”), a Delaware limited liability company, as of the date of this Annual Report, including assumptions about risks and uncertainties faced by the Company. When used in this report, the words “believe,” “expect,” “anticipate,” “will,” “estimate” and similar verbs or expressions are intended to identify such forward-looking statements. If management’s assumptions prove incorrect or should unanticipated circumstances arise, the Company’s 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 the “Risk Factors” section of this report. 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 in this report to reflect future events or developments.
ITEM 1. BUSINESS
Introduction
The Company is a Delaware limited liability company, that was organized for the specific purpose of consummating the conversion of Midwest Investors of Renville, Inc., d/b/a “Golden Oval Eggs”, a Minnesota cooperative (the “Cooperative”), into a LLC. The conversion of the Cooperative from a cooperative to a LLC was completed effective August 31, 2004, with the Company being the surviving entity in the conversion. The Company operates as the Cooperative’s successor and its operations are a continuance of the operations of the Cooperative.
For more information regarding the Company’s conversion from a Minnesota cooperative to a limited liability company, please refer to the Company’s Registration Statement on Form S-4 (File No. 333-112533) filed with the United States Securities and Exchange Commission.
The Company’s output consists of liquid whole egg, liquid egg white and liquid egg yolk. The egg products produced by the Company are sold on a direct basis to companies who further process the raw liquid egg into various finished egg products such as dried eggs, frozen, hard cooked, extended shelf-life liquid, pre-cooked egg patties, specialty egg products, etc. Institutional, food service, restaurants, and food manufacturers in turn purchase these further processed products.
The Company has seen its production increase from approximately 7 million liquid pounds in 1995 to approximately 180 million in 2005. The second phase of the Thompson facility, currently under construction, is expected to be completed by February, 2006. Upon completion, the Company expects to reach an annual production capacity of approximately 225 million pounds. The egg industry has been consolidating as producers and processors try to meet the needs of their large customers. We believe that these large customers are looking for a reduced number of reliable suppliers that can give them the high quality product that they need.
The Company had revenues of approximately $63.2 during fiscal 2005 (ending August 31, 2005), $83.5 million during fiscal 2004 (ending August 31, 2004) and $53.0 million during fiscal 2003 (ending August 31, 2003).
Sales, Marketing and Customers
Currently, a majority of the Company’s egg products are sold through a variety of contract arrangements in an effort to reduce price and product sales risk. The Company is a party to several multi-year written contracts to supply different customers, based on formula pricing, fixed price and toll milling. Those contracts typically involve the customer’s agreement to purchase a specified quantity of egg products each year during the term of the applicable agreement, and allow either party to terminate the contract upon specified notice to the other party. Currently, egg products that are priced on a “non-market” basis under these long-term contracts account for approximately 60% of total sales volume, although this percentage tends to fluctuate over time depending on the availability of and interest of the Company’s management in entering into these types of sales arrangements. Pricing under these non-market contracts is generally reflective of historical average market prices. The current contracts
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expire at various times over the next five years, subject to termination by either party on from six to 24 months’ notice. In the event that any such contractual arrangements were terminated, the Company would plan to sell the available products into the commodity markets for such products.
In the most recent fiscal year, there were four customers who each represented more than 10% of the cooperative’s total sales. Those customers include Primera Foods, Sunny Fresh Foods, Michael Foods and MOARK. Some of the Company’s sales are made to customers in Canada. In 2003, non-U.S. sales totaled approximately $4,798,000, with sales in 2004 and 2005 increasing to approximately $6,289,000 and $3,858,000, respectively.
Egg Industry and Markets
In 2004, the average number of egg-type laying hens in the U.S. was 283 million. Flock size on January 1, 2005 was 287 million layers; 3.9% larger than one year ago, up 7 million hens. Rate of lay per day on January 1, 2005 averaged 71.3 eggs per 100 layers, up slightly from a year ago.
Market Segmentation
There were 210.3 million cases (30 dozen eggs per case) of shell eggs produced in 2004:
63.9 million cases (30%) were further processed into other commodity products such as fresh liquid, pasteurized liquid, frozen, frozen and salted, frozen and sugared and dried eggs;
127.3 million cases (61%) went to retail;
18.1 million cases (9%) went for foodservice use; and
1.3 million cases (1%) were exported.
The Company participates in the 63.9 million cases that are further processed into various types of egg product. This equates to production of approximately 2,492 million pounds of liquid eggs.
Per Capita Consumption
The following table provides “per capita consumption” data on a national basis. Note that per capita consumption is a measure of total egg production divided by the total population. It does not represent demand.
Year: |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
| 1999 |
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
|
Per Capita Consumption: |
| 233.5 |
| 234.6 |
| 235.7 |
| 240.1 |
| 250.7 |
| 253.0 |
| 254.2 |
| 256.0 |
| 255.6 |
| 257.3 |
|
Source: U.S. Department of Agriculture (USDA has recently adjusted data to reflect 2000 Census figures)
Competition
For 2004, there were approximately 260 egg producing companies nationally with flocks of 75,000 hens or more, representing approximately 95% of all the layers in the U.S. Of these, there are approximately 64 egg producing companies with 1 million plus layers, representing about 90% of all the layers in the U.S. And, of these, there are approximately 14 companies with greater than 5 million layers. Egg Industry Magazine ranked the Company as the 13th largest producer nationally as of December 31, 2004. The top twenty producers represented 74.5% of the national flock.
The industry converted approximately 63.9 million cases into approximately 2,492 million pounds of liquid eggs in 2004. In its most recent fiscal year, the Company sold 180 million pounds of liquid egg supplying
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approximately 7% of the market. Some of the Company’s customers listed above break a number of their own eggs to fulfill their needs while others source all of their liquid egg from outside providers.
Feed Procurement
Feed is a primary cost component in the production of eggs. Although feed ingredients are available from a number of sources, prices for ingredients can fluctuate and can be affected by weather and by various supply and demand factors. The Company purchases the feed needed for its birds in the marketplace, based upon the then-prevailing market price for such feed and the ingredients of such feed supplies.
Governmental Regulation
The Company is subject to federal and state regulations relating to grading, quality control, labeling, sanitary control and waste disposal. The Company’s egg processing facilities are subject to regulation by both the U.S. Department of Agriculture and the U.S. Food and Drug Administration. The Company believes that it is in material compliance with the applicable regulatory requirements. The Company maintains its own inspection program to assure compliance with applicable regulatory requirements, the Company’s standards and customer specifications.
Environmental Matters
The Company is subject to several federal and state environmental regulations. The federal environmental regulations with which it must comply were promulgated by the U.S. Environmental Protection Agency pursuant to the Clean Air Act, Clean Water Act and Resource Conservation and Recovery Act. The Environmental Protection Agency has delegated permitting and most enforcement authority under each of these acts to Minnesota and Iowa, where the Company has facilities. Thus, the Company is primarily required to comply with the provisions of regulations promulgated by the Minnesota Pollution Control Agency, as well as the Iowa Department of Natural Resources, pursuant to these federal acts.
In Minnesota, the Company has obtained the following permits related to environmental regulations:
The Company has a general National Pollutant Discharge Elimination System permit from the Minnesota Pollution Control Agency that addresses the requirements of the Clean Water Act. This permit is in the process of being renewed, effective in 2006. The Company does not anticipate the cost of renewing this permit to be material.
The Company has a permit to discharge wastewater from its Minnesota processing operations into the City of Renville’s sewer system. The Company and the City are currently negotiating new permit rates, to be effective in 2006. The cost of this permit renewal is not expected to be material. In the future, the Company may elect to own and operate the wastewater treatment facilities necessary for the treatment of waste effluent. If it chooses to do this, the permitting costs are not expected to be material.
In Iowa, the Company has obtained or applied for the following permits related to environmental regulations:
The Company has an Animal Feeding Operation construction permit issued in compliance with the Iowa Department of Natural Resources’ Animal Feeding Operation regulations, which were promulgated pursuant to the Clean Water Act. The construction permit does not expire unless significant changes in the size or operation of the facility are anticipated. The Company is not currently planning any such changes.
The Company has a National Pollutant Discharge Elimination System Permit from the Iowa Department of Natural Resources for its wastewater treatment operations at the Iowa facility. An application for renewal of this permit was submitted to the Department in early 2005, and the permit renewal is currently being processed and, when issued, will continue until 2010. The Company expects the permit renewal to be issued in the near future.
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The Company has air quality construction permits from the Iowa Department of Natural Resources for various pieces of equipment that are air emission sources at the Iowa facility, including equipment for the feed mill and related egg shell recovery and grain receiving facilities. These permits have no expiration date, but must be modified if emissions from the equipment are anticipated to change. The Company is not currently planning any such changes.
The Company also manages any solid waste, such as deceased hens and waste egg shells, pursuant to Minnesota Pollution Control Agency and Iowa Department of Natural Resources solid waste regulations
The Company is also subject to the federal Comprehensive Environmental Response Compensation and Liability Act, also known as the federal “Superfund” law. This law establishes liability for releases of hazardous substances to the environment. Under the law, current and former owners and operators of facilities where hazardous substance releases occur are jointly and severally liable for response costs and damages to natural resources caused by the releases. Because both the Minnesota and Iowa facilities were constructed on previously undeveloped agricultural land, and because any hazardous substances utilized by the Company are managed according to regulations promulgated by Minnesota and Iowa pursuant to the Resource Conservation and Recovery Act, and any releases of hazardous substances are within permitted or regulatory limits, the Company does not believe it has any significant potential liability under the Comprehensive Environmental Response Compensation and Liability Act.
Nevertheless, in an effort to ensure that it does not experience any issues related to federal enforcement actions, the Company in July 2005 agreed to participate in a national program established by the Environmental Protection Agency under which the Company enters into a Consent Agreement and Final Order with the Environmental Protection Agency under which the Agency releases the Company from potential federal enforcement actions under the Clean Air Act, the hazardous substance release notification provisions of the Comprehensive Environmental Response, Compensation and Liability Act, and the emergency notification provisions of the Emergency Planning and Community Right-to-Know Act. In return, the Company agrees to be potentially selected as one of several egg production farms that will receive on-site monitoring to determine potential air emissions from poultry barns. Under the Consent Agreement, the Company also agrees to comply with new regulations likely to be promulgated by the Environmental Protection Agency at the end of the air monitoring study period later in this decade. The Company submitted its signed Consent Agreement to the Environmental Protection Agency in July 2005. It is the Company’s understanding that the Environmental Protection Agency is in the process of reviewing thousands of similar agreements received and will be notifying the Company in the near future of its eligibility under the Consent Agreement program. If the Company is selected for air monitoring, the costs for such monitoring would be borne by a national third party nonprofit organization established by Environmental Protection Agency for such purposes. The Company does not expect that its monitoring costs would be material.
As noted above, the Company has permits to discharge wastewater from its Renville processing operations into the City of Renville’s sewer system, and maintain ponds for storm water runoff. In the future, the Company may elect to own and operate the wastewater treatment facilities necessary for the treatment of waste effluent. The Thompson site is a totally self-contained operation, complete with its own water wells and water tower, processing wastewater treatment facilities and electrical generating equipment.
The Company believes that it is currently in compliance with applicable environmental laws and regulations and has all necessary permits for existing operations. As the Company expands its operations, it will need to continue to obtain necessary permits and maintain compliance with regulatory reporting requirements. The Company maintains an on-going program designed to ensure compliance with environmental laws and regulations. The Company cannot predict whether future changes in environmental laws or regulations might increase the cost of operating its facilities and conducting its business. Any such changes could have material financial consequences for the Company and its unitholders.
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Intellectual Property Rights
The Company does not hold any patents and generally uses industry-standard equipment and processing lines in its business. To the extent it develops proprietary uses of such systems, the Company relies on a combination of trade secrets, trademarks, nondisclosure agreements and technical measures to establish and protect its proprietary rights.
Research and Development
As a commodity-based business, the Company does not conduct any research and development activities associated with either the development of new products or the development of new technologies for use in producing those products. Instead, as described above, the Company relies upon industry-standard processing and related equipment.
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Employees
As of August 31, 2005, the Company had approximately 265 full-time employees, none of which are covered by collective bargaining agreements. Management considers its employee relations to be good.
Risk factors
We are subject to numerous risks and uncertainties, including the following:
Market prices of wholesale liquid eggs are volatile and changes in these prices can adversely impact our results of operations.
Our operating results are significantly affected by wholesale liquid egg market prices, which fluctuate widely and are outside of our control. Small increases in production or small decreases in demand can have a large adverse effect on liquid egg prices.
In March 2003 egg prices began to rise dramatically. This increase was due to several factors, including: (1) shutdown of several egg production facilities for economic reasons; (2) reduction in the number of laying hens (layers) due to the implementation of animal welfare standards; (3) reduction in layers due to the outbreak of Exotic Newcastle Disease, a contagious and fatal viral disease in birds, in the Southwest and on the West Coast; and (4) increased demand for eggs and egg products due to the number of Americans switching to some form of high protein/low carbohydrate diets. In April 2004 egg prices began to decline and continued that decline through June of 2005. Prices had moved up as of August 2005 and are currently around 10-year averages.
Changes in consumer demand for liquid eggs can negatively impact our business.
Demand for liquid eggs has increased in recent years as a result of a number of factors. We believe that increased fast food restaurant consumption, favorable reports from the medical community regarding the health benefits of liquid eggs, reduced liquid egg cholesterol levels, current high protein diet trends and industry advertising campaigns have all contributed to the increase in liquid egg demand. However, there can be no assurance that the demand for liquid eggs will not decline in the future. Adverse publicity relating to health concerns and changes in the perception of the nutritional value of liquid eggs, as well as movement away from popular high protein diets, could adversely affect demand for liquid eggs, which would have a material adverse effect on our future results of operations and financial condition.
Feed costs are volatile and changes in these costs can adversely impact our results of operations.
Feed costs represent a significant element of our liquid egg production cost, equating to approximately 40% of total annual cost in each of the last five fiscal years. Although feed ingredients are available from a number of sources, we have little, if any, control over the prices of the ingredients that we purchase, which are affected by various demand and supply factors and have experienced significant fluctuations in the past. Increases in feed costs which are not accompanied by increases in the selling price of liquid eggs will have a material adverse effect on the results of our operations.
Our largest customers have historically accounted for a significant portion of our net sales volume. Accordingly, our business may be adversely affected by the loss of, or reduced purchases by, one or more of our large customers.
As indicated above, in its most recent fiscal year, the Company had several customers who each represented more than 10% of the Company’s business. Any change in the Company’s relationship with one or more of those customers could have a material impact on the Company and the results of its operations.
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Failure to comply with applicable governmental regulations, including environmental regulations, could harm our operating results, financial condition and reputation.
We are subject to federal and state regulations relating to grading, quality control, labeling, sanitary control and waste disposal. As a fully-integrated liquid egg producer, our liquid egg facilities are subject to United States Department of Agriculture, (the “USDA”), and Food and Drug Administration, (the “FDA”), regulation and various state and local health and agricultural agencies. Our liquid egg processing facilities are subject to periodic USDA inspections. Our feed production facilities are subject to FDA regulation and inspections.
Our operations and facilities are also subject to various federal, state and local environmental, health and safety laws and regulations governing, among other things, the generation, storage, handling, use, transportation, disposal and remediation of hazardous materials. Under these laws and regulations, we are also required to obtain permits from governmental authorities, including, but not limited to wastewater discharge permits.
If we fail to comply with any applicable law or regulation or permit, or fail to obtain any necessary permits, we could be subject to significant fines and penalties or other sanctions, our reputation could be harmed and our operating results and financial condition could be materially and adversely affected. In addition, because these laws and regulations are becoming increasingly more stringent, there can be no assurances that we will not be required to incur significant costs for compliance with such laws and regulations in the future.
Our business is highly competitive.
The production and sale of fresh liquid eggs, which have accounted for virtually all of our net sales in recent years, is intensely competitive. We compete with a large number of companies that may prove to be more successful than we are in marketing and selling liquid eggs. We cannot assure you that we will be able to compete successfully with any or all of these companies. In addition, increased competition could result in price reductions, greater cyclicality, reduced margins and loss of market share, which would negatively affect our business, results of operations and financial condition.
Agricultural risks could harm our business.
Our liquid egg production activities are subject to a variety of agricultural risks. Unusual or extreme weather conditions, disease and pests can materially and adversely affect the quality and quantity of liquid eggs we produce and distribute. If a substantial portion of our production facilities are affected by any of these factors in any given quarter or year, our business, financial condition and results of operations could be materially and adversely affected.
H5N1 Avian Influenza (Bird Flu)
Avian influenza HN51, also referred to as the “bird flu”, has recently received significant publicity. The bird flu is extremely deadly to birds that contract the disease, which typically spreads through contact between infected migratory birds and domesticated birds. Efforts to control the spread of the diseases have led to the destruction of flocks of birds, including chickens, in a variety of areas in Asia, Europe and Africa. There is also concerns that it will mutate into a form of influenza that can be easily transmitted among humans, potentially causing a pandemic. To date, however, there has been no human to human transfer of the flue and only a limited number of human deaths have occurred in Asia. All of these cases occurred among individuals who have had close contact with infected birds. The Company does not believe that the bird flu presents a current risk to its flocks or its business. That belief is based on the absence of the bird flu in North America to date, the Company’s biosecurity practices and, in particular, to the confinement of the Company’s flocks in facilities that provide little opportunity for interaction between the Company’s chickens and any infected migratory birds. However, the Company might be adversely impacted if concerns about the bird flu led consumers in the United States to reduce their consumption of eggs and egg products.
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Available Information
The Company’s Internet website address is www.goldenovaleggs.com. We make available, free of charge, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “1934 Act”) as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission.
ITEM 2. PROPERTIES AND PROCESSING FACILITIES
The Company maintains production and processing facilities at both its original 60-acre site in Renville, Minnesota and a second 240-acre site northeast of Thompson, Iowa. The land on which the Thompson facilities are located is leased from Midwest Investors of Iowa, Inc., a cooperative. At each location, the Company maintains a large layer flock for “in-line” production of eggs.
The laying barns are equipped with high-rise turbo ventilation systems which are designed to promote better bird health, improved pest control, uniform temperatures and a purer environment for employees working at the facility. The turbo ventilation system dries poultry litter to approximately 15% moisture, which greatly reduces any odor. The dried poultry litter also results in less tonnage being transported to area farm fields for application. The dried poultry litter is marketed to local farmers for its nutrient value to be applied as a soil amendment to farm fields located in the vicinity of the facility.
After the eggs are produced, they are processed into liquid egg products at one of the Company’s two egg breaking facilities. The in-line processing facility receives the shell eggs via a conveyor belt directly from the layer barns. At the Renville site, supplementary equipment also allows procurement of “off-line” produced shell eggs from third parties for processing. The egg breaking facilities process the eggs by washing, rinsing, sanitizing and candling the eggs prior to removing the shells. The process then extracts any inedible substances and separates the liquid into whites, yolks or whole eggs. The liquid eggs are then filtered, cooled and pumped into liquid storage tanks. The liquid egg products are then shipped via tanker trucks to customers. The resulting egg shells are transferred to an egg shell recovery facility at the Thompson site where egg shells are dried for utilization as a feed ingredient.
Renville, Minnesota
Construction of an in-line production and processing layer complex in Renville, Minnesota, began in June 1994, with construction being completed and all 16 barns housed with approximately 2.0 million birds by October 1996. The Company also brings in offline eggs purchased from third party producers to process at the Renville site. The Renville processing facility presently operates near its current production capacity of approximately 70 million pounds of liquid egg per year.
The Company acquires all of its baby chicks from third-party sources. The Company has an exclusive contract pullet growing arrangement for its needs at the Renville operation with The Pullet Connection. The Pullet Connection receives day-old birds, provides housing, labor, and utilities and delivers the pullets to the layer sight at approximately sixteen weeks of age. The Company owns the birds, provides all feed and supplies, and pays The Pullet Connection a fixed fee per delivered pullet along with performance incentives determined by certain quality standards. The Pullet Connection’s facility has the capacity to house approximately 520,000 pullets.
Feed for the laying hens at the Renville facility and the pullet growing operations is manufactured at a feed mill owned and operated on a cost basis by United Mills. United Mills is a cooperative venture owned one-third each by Coop Country Farmers Elevator of Renville, Minnesota, Christensen Family Farms and the Company. The feed mill is capable of producing 250,000 tons of feed annually. The Company uses approximately 65% of the feed manufactured by United Mills. The Company believes that it is able to leverage United Mills’ volume purchasing power and production capacity to achieve lower feed costs than the Company would face if it manufactured feed at its own facilities. In fiscal year 2004, management determined that United Mills is a variable interest entity, of
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which the Company is the primary beneficiary. Accordingly, United Mills is consolidated beginning in fiscal year 2004 in accordance with FIN 46R which eliminates the effects of intercompany transactions between the Company and Untied Mills in the accompanying consolidated financial statements for fiscal years 2004 and 2005.
Thompson, Iowa
In August 1999, construction of a second in-line production and processing layer complex began on the site located near Thompson, Iowa. The project is divided into two phases. Construction of phase one, the east side of the complex, which houses approximately 2.7 million layers and 650,000 pullets, was completed in December 2001. Phase one consists of eleven high-rise barns, segmented by one brooder barn, one starter barn, nine layer barns, an egg processing facility and an operations office. Phase two is the west side of the complex, designed as a duplicate of the east side brooder, starter and layer barns. Construction of phase two is underway and as of August 31, 2005, six layer barns were completed and housed. The last three barns will be completed and layers housed by February 2006.
As with the Renville operation, the Company acquires all of its baby chicks for production at the Thompson site from third-party sources. However, the Company raises the baby chicks to pullets itself at the Thompson facility.
Additionally, the company constructed a 400,000 ton annual production capacity feed mill and related facilities in 2004. The Company intends to utilize approximately one-half of the capacity of the feed mill for its own purposes and contract out the remainder of the capacity to outside users. When construction is complete, the Thompson facility will operate at its stated capacity of approximately 150 million pounds.
ITEM 3. LEGAL PROCEEDINGS
From time to time and in the ordinary course of its business, the Company is named as a defendant in legal proceedings related to various issues, including worker’s compensation claims, tort claims and contractual disputes. Other than such routine litigation, the Company is not currently involved in any material legal proceedings. In addition, the Company is not aware of other potential claims that could result in the commencement of legal proceedings. The Company carries insurance that provides protection against certain types of claims, up to the policy limits of the Company’s insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our unit holders during the fourth quarter of the fiscal year.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT’S LIMITED LIABILITY COMPANY UNITS AND RELATED UNITHOLDER MATTERS
There is no established public trading market for the Company’s limited liability company units. As of August 31, 2005 there were 692 holders of the Company’s limited liability company units.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Golden Oval Eggs, LLC. The information presented as of and for the fiscal years ended August 31, 2005, 2004, 2003, 2002 and 2001 is derived from the Company’s financial statements, which have been audited by Moore Stephens Frost, independent auditors.
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We encourage you to read the financial data presented below along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the financial statements and related notes included at the end of this document.
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Selected Financial Data of the Company
(in thousands, except share and per share data)
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| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
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Income Statement Data: |
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Revenues |
| $ | 63,196 |
| $ | 83,543 |
| $ | 53,052 |
| $ | 46,169 |
| $ | 35,215 |
|
Cost of goods sold |
| 52,118 |
| 50,693 |
| 43,300 |
| 39,450 |
| 31,053 |
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Gross profit |
| 11,078 |
| 32,850 |
| 9,752 |
| 6,719 |
| 4,162 |
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Operating expenses |
| 7,677 |
| 9,749 |
| 3,208 |
| 3,339 |
| 2,495 |
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Income from operations |
| 3,401 |
| 23,101 |
| 6,544 |
| 3,380 |
| 1,667 |
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Interest expense |
| (6,385 | ) | (2,732 | ) | (3,520 | ) | (3,466 | ) | (2,314 | ) | |||||
Non-controlling interest in income of consolidated entities |
| (103 | ) | (41 | ) | __ |
| 35 |
| __ |
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Other income |
| 750 |
| 513 |
| 509 |
| 385 |
| 650 |
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Income (loss) before income tax expense (benefit) |
| (2,337 | ) | 20,841 |
| 3,533 |
| 299 |
| 3 |
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Income tax expense (benefit) |
| (378 | ) | 2,926 |
| — |
| — |
| — |
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Net income (loss) |
| $ | (1,959 | ) | $ | 17,915 |
| $ | 3,533 |
| $ | 299 |
| $ | 3 |
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Weighted average common shares/ members’ units outstanding |
| 4,581,762 |
| 4,581,762 |
| 4,581,762 |
| 4,388,517 |
| 4,189,832 |
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Net income (loss) per common share/members’ unit |
| $ | (0.43 | ) | $ | 3.91 |
| $ | 0.77 |
| $ | 0.07 |
| $ | — |
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Distributions per common share/members’ unit |
| $ | — |
| $ | 4.22 |
| $ | — |
| $ | — |
| $ | 0.04 |
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| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
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Balance Sheet Data: |
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Current assets |
| $ | 17,992 |
| $ | 25,926 |
| $ | 18,211 |
| $ | 14,420 |
| $ | 15,619 |
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Property, plant and equipment |
| 69,614 |
| 55,143 |
| 38,118 |
| 42,537 |
| 46,346 |
| |||||
Other assets |
| 3,339 |
| 6,396 |
| 8,531 |
| 9,815 |
| 5,618 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
| $ | 90,945 |
| $ | 87,465 |
| $ | 64,860 |
| $ | 66,772 |
| $ | 67,583 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities |
| $ | 13,523 |
| $ | 24,360 |
| $ | 6,025 |
| $ | 8,965 |
| $ | 9,591 |
|
Long-term debt, less current maturities |
| 46,546 |
| 30,335 |
| 32,804 |
| 35,309 |
| 37,624 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total owners’ equities |
| $ | 30,876 |
| $ | 32,770 |
| $ | 26,031 |
| $ | 22,498 |
| $ | 20,368 |
|
Weighted average common shares/members’ units outstanding |
| 4,581,762 |
| 4,581,762 |
| 4,581,762 |
| 4,581,762 |
| 4,189,832 |
| |||||
Book value per common share/member unit |
| $ | 6.73 |
| $ | 7.15 |
| $ | 5.68 |
| $ | 4.91 |
| $ | 4.86 |
|
13
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion contains forward-looking statements. Such statements are based on assumptions by the Company’s management, as of the date of this report, and are subject to risks and uncertainties, including those discussed under “Risk Factors” in this report, that could cause actual results to differ materially from those anticipated. The Company cautions readers not to place undue reliance on such forward-looking statements.
Overview
The Company is engaged in the production, breaking, and sale of non-pasteurized liquid whole eggs, liquid whites, and liquid yolks. The Company’s operations are integrated from the production of eggs, processing of those eggs into liquid eggs, and the transportation of the liquid eggs. The Company operates two in-line egg-breaking facilities, one in Renville, Minnesota and the other in Thompson, Iowa and is currently ranked in the top 15 in the nation for production of shell eggs. The Company also obtains a relatively small portion of its eggs from third parties for processing, which amount has ranged from 7.6% to 9.4% of total eggs processed for each of the last three fiscal years. The Company primarily markets its liquid eggs on a direct basis to companies who further process the raw liquid eggs into various egg products such as dried eggs, frozen, hard cooked, extended shelf-life liquid, pre-cooked egg patties, specialty egg products, etc. Institutional, food service, restaurants, and food manufacturers in turn purchase these further processed products.
The Company’s operating income or loss is significantly affected by wholesale liquid egg prices, 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’s cost of production is materially affected by feed costs, which average approximately 40% of the Company’s total costs. Approximately 60% of these feed costs are incurred in the procurement of corn and soybean meal. The cost of these ingredients is affected by a number of supply and demand factors such as crop production and weather, and other factors, such as the level of grain exports, over which the Company has little or no control.
Following several years of attractive profits (from fiscal 1996 to fiscal 1999), the Company experienced a period of low earnings from fiscal 2000 to fiscal 2002. The primary reason for these results was an industry wide overproduction of eggs in North America ahead of retail and food service demand. This supply/demand imbalance caused egg prices to fall to levels that made most egg producers and processors marginally profitable to unprofitable during this period.
In March 2003, egg prices began to rise dramatically. This increase was due to several factors, including: (1) shutdown of several egg production facilities for economic reasons; (2) reduction in the number of laying hens (layers) due to the implementation of animal welfare standards; (3) reduction in layers due to the outbreak of Exotic Newcastle Disease, a contagious and fatal viral disease in birds, in the Southwest and on the West Coast; and (4) increased demand for eggs and egg products due to the number of Americans switching to some form of high protein/low carbohydrate diets.
In April 2004 egg prices began to decline and at fiscal year end had again dropped below long-term averages. These profit margins for fiscal 2004 far outstripped historical profit margins of the Company. During fiscal 2005 the egg prices continued to drop as demand for eggs weakened, coupled with a slight oversupply of eggs. By the end of fiscal 2005 demand caught up with the supply and egg prices started to rise. Liquid egg prices are currently near 10-year averages.
Construction at the Company’s Thompson facility is underway and as of August 31, 2005, six layer barns were completed and layers housed. Additionally, the Company constructed a 400,000 ton annual production
14
capacity feed mill and related facilities in 2004. The feed mill was in operation and was the complete source of feed at the Thompson facility during fiscal 2005. The last three layer barns at Thompson will be completed and layers housed by February 2006. The Company does not expect the construction of the additional layer barns and operation of the feed mill and related facilities to have a net material effect on its results of operations. In addition, the Company will continue to tightly manage its risk management profile by seeking ways to minimize volatility in its operating margins.
The Company sells 60% of its products under contract at non-market prices. Depending upon market circumstances, the prices generated by the Company’s non-market volume sales tend to be either less or more than what the prevailing open market prices would generate.
Results Of Operations
The following table presents the amounts sold and weighted average sales prices of those sales for the liquid eggs for the periods presented.
|
| 2003 |
| 2004 |
| 2005 |
| |||
Pounds sold (in millions) |
| 145.9 |
| 157.5 |
| 179.6 |
| |||
Average price per pound |
| $ | .364 |
| $ | .516 |
| $ | .334 |
|
15
Fiscal Year Ended August 31, 2005 Compared To Fiscal Year Ended August 31, 2004
Net Sales. Net Sales for the fiscal year ended August 31, 2005 were $63.2 million, a decrease of $20.3 million, or 24.3%, as compared to fiscal year 2004. The decrease in revenues occurred despite an increase in total pounds of egg products sold of 22.1 million lbs, or 14.0%, as compared to fiscal year 2004. Egg product selling prices during fiscal 2005 averaged $.334 per lb, a decrease of $.182 per lb, or 35.3%, as compared with fiscal 2004. The Company’s average selling price is the blended price for liquid whole eggs, liquid egg whites and liquid egg yolks. Four new layer barns were brought on line at the Thompson facility during fiscal 2005. These new barns, along with the two barns added in the fourth quarter of fiscal 2004, accounted for the increased production during fiscal 2005. Domestic demand for eggs weakened during fiscal 2005 as the popularity of the high protein diets started to fade. This coupled with an increase in the supply of eggs caused the lower egg prices during fiscal 2005.
Cost of goods sold. Cost of goods sold for fiscal 2005 was $52.1 million, an increase of $1.4 million, or 2.8%, as compared to fiscal 2004. While there was an increase in production of 14.0%, cost of goods sold was held to a 2.8% increase because of a drop in feed prices and a drop in the price paid for shell eggs used for our off-line breaking in Renville. Feed costs decreased $.6 million, despite consuming 28,865 more tons of feed with the additional barns. Feed costs per ton during fiscal 2005 dropped $19.58, or 16.2%, as compared to fiscal 2004. The decrease in feed cost was the result of a drop in corn and soy bean meal prices. Shell eggs purchased for the off-line production decreased in cost by $3.3 million, or 48.1%, despite having only a 7.5% reduction in quantity purchased. These cost reductions netted out the increase in cost of goods associated with the new layer barns at the Thompson site.
Operating expenses. Operating expenses for fiscal 2005 were $7.7 million, a decrease of $2.1 million, or 21.3%, as compared to fiscal 2004. Bonus compensation was high in 2004 due to the record profitability and dropped $2.9 million in fiscal 2005. Professional services relating primarily to the Company’s public reporting requirements increased $.2 million as compared to fiscal 2004. The rest of the operating expenses increased a net of $.7 million in fiscal 2005, as compared to fiscal 2004. This increase was the result of the growth the Company experienced in fiscal 2005.
Total other expense. Total other expense for fiscal 2005 was $5.7 million, an increase of $3.5 million, or 153.9%, as compared to fiscal 2004. In September 2004, the Company entered into a new financing agreement and retired the 2000 bonds. (See liquidity and capital resources) The increase in total other expense is the result of the 2000 bond payment. The Company wrote off the $.8 million book value of capitalized bond issuance costs recorded relating to the 2000 bonds. The 2000 bonds also had an embedded interest rate swap agreement derivative instrument which had been considered clearly and closely related. With the retirement of the 2000 bonds, the Company recorded the carrying value of this instrument at fair market value, with the offset to interest expense in the amount of $2.3 million. $.3 million of the increase relates to increased interest costs relating to the increased debt balances associated with the Thompson expansion.
Income Taxes. As of August 31, 2004, the Company accrued for the estimated liability related to the final tax return as a cooperative. The liability paid in 2005 related to this final return was $.4 less than the accrued liability at August 31, 2004. This amount was recorded as an income tax benefit in fiscal 2005. The Company expects to be treated as a partnership for federal income tax purposes and therefore will pay no federal income tax and its members will pay tax on their share of the LLC’s net income.
Fiscal Year Ended August 31, 2004 Compared To Fiscal Year Ended August 31, 2003
Net Sales. Net Sales for the fiscal year ended August 31, 2004 were $83.5 million, an increase of $30.4 million, or 57.3%, as compared to fiscal year 2003. The increase in revenues was due primarily to the increase in total pounds of egg products sold and egg product selling prices during fiscal 2004 as compared with fiscal 2003. Pounds sold for fiscal 2004 were 157.5 million, an increase of 11.6 million, or 8%, as compared to fiscal 2003. Two new layer barns were brought on line during the 4th quarter of 2004. These new barns accounted for $4 million of the increased sales, while the rest of the increase in pounds sold resulted from changes in the amount and composition of feed used. $2.3 million of the increased sales came from the implementation of FASB Interpretation 46R which consolidated variable interest entities in the current year with the Company’s historical
16
operations. Domestic demand for eggs were strong, which resulted in higher selling prices during fiscal 2004. The Company’s average selling price per pound for fiscal 2004 was $.515, compared to $.364 for fiscal 2003, an increase of 41.5%. The Company’s average selling price is the blended price for liquid whole eggs, liquid egg whites and liquid egg yolks. The factors relating to the increase in sales prices are discussed in the overview above.
Cost of goods sold. Cost of goods sold for fiscal 2004 was $50.7 million, an increase of $7.4 million, or 17.1%, as compared to fiscal 2003. The increase is due to an increase in the cost of eggs purchased from third parties for the Company’s off-line production, an increase in the cost of feed and the cost of goods associated with the additional 2 layer barns added during the 4th quarter of 2004. The Company buys a significant number of shell eggs from third parties for processing at its Renville egg breaking facility. The cost of these eggs during fiscal 2004 increased $2.8 million, or 70%, as compared to fiscal 2003. This increase is due primarily to the overall rise in prices in the egg industry. Over this same period, feed costs increased by $3 million, or 16%. Approximately $1.9 million of the increase in feed costs is due to increased feed prices due primarily to increases in the price of soy meal and corn, and approximately $1.1 million is due to an increase in the amount of feed used. Approximately $.3 million of the increase is the result of the implementation of FASB Interpretation 46R which consolidated variable interest entities in the current year with the Company’s historical operations. The rest of the increase is the result of the additional barns added during the 4th quarter of 2004.
Operating expenses. Operating expenses for fiscal 2004 were $9.7 million, an increase of $6.5 million, or 203%, as compared to fiscal 2003. Increased bonus compensation due primarily to record profitability accounts for approximately $2.8 million of the increase. Professional services relating primarily to the limited liability company conversion account for approximately $1.1 million of the increase. $1.9 million of the increase was the result of the operating expenses of the variable interest entities consolidated as a result of the FASB Interpretation 46R implementation.
Total other expense. Total other expense for fiscal 2004 was $2.3 million, a decrease of $.7 million, or 23.3%, as compared to fiscal 2003. This reduction was the result of lower interest expense due to decreased outstanding principal balances.
Income Taxes. As a cooperative, the Company was subject to federal income tax only on certain nondeductible expenses and any amount of net proceeds not returned in the form of cash, qualified written notices of allocation or qualified per unit retainage certificates issued within eight and one-half months after the fiscal year end. Income tax expense for fiscal 2004 was $2.9 million. The Company expects to be treated as a partnership for federal income tax purposes and therefore will pay no federal income tax and its members will pay tax on their share of the LLC’s net income.
Fiscal Year Ended August 31, 2003 Compared To Fiscal Year Ended August 31, 2002
Net Sales. For the fiscal year ended August 31, 2003, net sales were $53.1 million, an increase of $6.9 million, or 14.9%, as compared to the fiscal year ended August 31, 2002. While liquid pounds sold by the Company remained virtually unchanged between the two years, the average selling price for the eggs was $.3635 per pound for fiscal 2003, an increase of $.0473 per pound, or 15%, compared to an average price of $.3162 in fiscal 2002. The increase in net sales was due to the increased market price for liquid whole eggs, liquid egg whites and liquid egg yolks sold by the Company.
Cost of goods sold. Cost of goods sold for fiscal 2003 was $43.3 million, an increase of $3.9 million, or 9.8%, as compared to fiscal 2002. Feed costs accounted for most of the change with a $3.0 million, or 19.1%, increase from fiscal 2002 to fiscal 2003. Approximately $.7 million of the increase in feed costs was due to an increase in the amount of feed used, and approximately $2.3 million due to increased feed prices. The remaining increase in cost of goods sold came from a variety of other factors, with no one factor accounting for a meaningful component of the remaining increase.
Operating expenses. Operating expenses for fiscal 2003 were $3.2 million, a decrease of $.1 million, or 3.0%, as compared to fiscal 2002. No one factor accounted for a meaningful amount of the decrease.
17
Total other expense. Total other expense for fiscal 2003 was $3.0 million, a decrease of $70,000, or 2.3%, as compared to fiscal 2002. An increase of $120,000 from litter and inedible egg sales was partially offset by an increase of $50,000 in interest expense.
Liquidity and Capital Resources
The Company’s working capital at August 31, 2005 was $4.5 million compared to $1.6 million at August 31, 2004. The Company’s current ratio was 1.3 at August 31, 2005 compared to 1.1 at August 31, 2004. On September 13, 2004, the Company entered into a new financing agreement with CoBank. The new agreement gives the Company a $55 million line of credit of which $10 million is a revolving line of credit and the remaining $45 million will be term debt. The $10 million revolving line of credit replaces the $5.5 million working capital line of credit with US Bank and is collateralized by accounts receivable and inventories. This revolving credit line, which protects the company from seasonal cash fluctuations, terminates on November 30, 2005. The $45 million term piece will be used to pay off the 2000 bonds and to fund the current construction at the Thompson site. $42 million of the $45 million has been drawn as of August 31, 2005 and the final $3 million will be drawn in January 2006. The Company expects that cash flow from operations and proceeds from its existing credit lines will be sufficient to fund operations, to provide adequate capital expenditures for the current expansion, and to make distributions to its members for at least the next 12 months. 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.
The production and processing plants were built over the course of the last ten years with completion of the Renville production and processing facility in 1996 and the phase one production and processing completed at Thompson in 2001. Capital expenditures totaled $19.4 million in 2004 and $.3 million in 2003. Capital expenditures for 2005 totaled $20.6 million, primarily for the construction at the Thompson facility. As of August 31, 2005, the Company has three layer barns yet to complete in the current Thompson expansion. As of August 31, 2005 the Company has spent $6.0 million towards these three layer barns. The Company will spend an additional $1.5 million in fiscal 2006 to complete the expansion project. In addition, the Company’s expansion will necessitate increases in inventory of approximately $1 million, which would be financed by trade credit and amounts available for borrowing under the Company’s credit lines.
The Company’s long-term debt at August 31, 2005, including current maturities, was $51.2 million compared to $33.0 million at August 31, 2004. Substantially all trade receivables and inventories collateralize the Company’s line of credit and property, plant and equipment collateralize the Company’s long-term debt under its loan agreements. The Company is required by certain provisions of its loan agreements to maintain (1) a minimum tangible net worth of not less than $28.8 million plus 40% of earnings; (2) working capital of no less than $2.0 million; (3) a current ratio of not less than 1.25:1; (4) a leveraged ratio of no more than 4.25:1; and (5) a fixed charge coverage ratio no less than 1.15:1. The Company was in compliance with all but (1) and (4) as of August 31, 2005. The Company’s lenders waived the covenant violations as of August 31, 2005 and have amended the covenants in the debt agreement.
The Company has an interest rate collar agreement that was originally embedded in the Corporate Bonds, Series 2000, which limited the variability of the interest rate on the bonds to a range of 8.46% to 7.31%, and was determined to be clearly and closely related. During the current year, the Company entered into a new financing agreement. A portion of the proceeds from the new financing was used to retire the Corporate Bonds, Series 2000. At the time the Corporate Bonds, Series 2000 were retired; the interest rate collar agreement became a separate stand-alone agreement. As of August 31, 2005, the interest rate collar agreement, which terminates on July 10, 2010, has a notional amount of $19,655. The interest rate collar agreement requires that the Company maintain a collateral account. The fair value of the interest rate collar agreement is recorded as a reduction of the value of the collateral account in the Company’s consolidated balance sheet. As of August 31, 2005, the net value of the collateral account was $.7 million.
Net cash flow from operations was $2.0 million in fiscal 2005. $20.6 million was the cash paid for the purchase of property, plant and equipment. $2.5 million was returned from the Company’s restricted cash account. $2.7 million was received from the revolving line of credit and $42.6 million was received from the issuance of long-term debt and was used to pay off $24.3 million of long-term debt, $10.3 in distributions to our members and
18
$1.5 million was used to pay deferred debt costs. The net effect of this activity was a reduction in cash of $6.9 million since August 31, 2004.
Net cash flow from operations was $28.7 million for fiscal 2004. This increased level of cash flow was primarily the result of improved profit margins resulting from the record high sales prices. The Company believes that these profit margins are not sustainable over the long term. See “Overview” above. Despite the increased levels of sales revenue, outstanding accounts receivable remained unchanged. Increase in corn and soybean prices, along with the addition of two more laying flocks, increased inventory $1.9 million. Overall the changes in net non-cash working capital were not material. This cash flow has allowed the Company to (1) pay $19.4 million towards the Thompson expansion, (2) make a $1.8 million distribution to its shareholders, (3) set aside $1.1 million to restricted cash account to be used to pay the 2001 bond debt, (4) payoff $2.5 million of long-term debt and (5) increase its cash on hand to $7.6 million.
Management believes that non-cash working capital levels are appropriate in the current business environment and does not expect a significant increase or reduction of non-cash working capital in the next twelve months.
Contractual Obligations
The following table presents various known contractual obligations of the Company as of August 31, 2005, in thousands:
|
| Payments due by period |
| ||||||||
Contractual Obligations |
| Total |
| Less than |
| 1-3 years |
| 3-5 years |
| More than |
|
Long-Term Debt |
| 51,214 |
| 4,668 |
| 10,796 |
| 11,061 |
| 24,689 |
|
Operating Leases |
| 1,102 |
| 291 |
| 456 |
| 260 |
| 95 |
|
Construction Obligations |
| 1,502 |
| 1,502 |
| — |
| — |
| — |
|
Total |
| 53,818 |
| 6,481 |
| 11,252 |
| 11,321 |
| 24,784 |
|
The data presented in the preceding table does not include any expected interest payments. The Company had no material purchase obligations as of August 31, 2005.
Critical Accounting Estimates
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. The Company’s significant accounting policies are discussed in detail in Note 1 to the consolidated financial statements included at the end of this document. Certain of these accounting policies as discussed below require management to make estimates and assumptions about future events that could materially affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of the Company’s consolidated financial statements because they inherently involve significant judgments and uncertainties. Although the Company has not experienced any material changes in its financial position or results of operations in connection with these matters in the past, based on management’s experience there is a reasonable likelihood that such changes may occur from time to time in the future. For all of these estimates, we caution that future events rarely develop exactly as forecast, and estimates routinely require adjustment.
Allowance for Doubtful Accounts. In the normal course of business, the Company extends credit to its customers on a short-term basis. Although credit risks associated with its customers are considered minimal, the Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations to the Company (e.g. bankruptcy filings), a specific reserve is recorded to reduce the receivable to the amount expected
19
to be collected. For all other customers, the Company recognizes reserves for bad debts based on management’s experience and the length of time the receivables are past due, generally the entire balance for amounts more than 90 days past due. As of August 31, 2005, the Company had never written off any accounts receivable and had no bad debt reserves.
Inventories. Inventories of eggs, feed and supplies are valued principally at the lower of cost (first-in, first-out method) or market. If market prices for eggs and feed grains move substantially lower, the Company would record adjustments to write-down the carrying values of eggs and feed inventories to fair market value.
The cost associated with flock inventories, consisting principally of chick costs, feed, labor, and overhead costs, are accumulated during the growing period of approximately 18 weeks. Layer 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. High mortality from disease or extreme temperatures would result in abnormal adjustments to write-down flock inventories. As of August 31, 2005, the Company had only one abnormal adjustment due to high mortality. The results of this adjustment were not material to the consolidated financial statements. Management continually monitors each flock and attempts to take appropriate actions to minimize the risk of mortality loss.
Long-Lived Assets. Depreciable long-lived assets are primarily comprised of buildings and improvements and machinery and equipment. Depreciation is provided by the straight-line method over the estimated useful lives based on management’s experience, which is 7 to 39 years for buildings and improvements and 3 to 15 years for machinery and equipment. An increase or decrease in the estimated useful lives would result in changes to depreciation expense. As of August 31, 2005, the Company had never experienced any write-offs as a result of changes to asset useful lives.
The Company continually reevaluates the carrying value of its long-lived assets, for events or changes in circumstances, which indicate that the carrying value may not be recoverable. As part of this reevaluation, if impairment indicators are present, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposal. As of August 31, 2005, the Company had never determined impairment indicators to be present in its reevaluation processes.
Financial Instruments. The Company’s financial instruments consist primarily of cash equivalents, accounts receivable, long-term receivable, accounts payable, debt, and an interest rate collar agreement. The carrying amounts of cash equivalents, accounts receivable, and accounts payable approximate their fair values because of the short-term maturity of such instruments. The stated value of the Company’s long-term receivables approximates their fair value based on current market rates for financial instruments of the same remaining maturities and risk characteristics. The carrying values of long-term debt instruments approximate their fair value because interest rates on such debt are periodically adjusted and approximate current market rates. The interest rate collar agreement manages the Company’s exposure to fluctuations in interest rates. The Company has accounted for this agreement in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities, “as amended by SFAS Nos. 138 and 149. Interest rate swap contracts are reported at fair value with the gain or loss on market value recorded as an increase or reduction of interest expense. At August 31, 2005, no interest rate swap agreements are designated as hedges. An increase or decrease in the fair value of these financial instruments would result in changes of the recorded value of these financial instruments in the Company’s consolidated financial statements. As of August 31, 2005, the Company had only one abnormal and material adjustment due to fluctuations in the fair values of financial instruments. This adjustment recognized a $2.3 million decrease in the recorded value of the collateral on the interest rate collar agreement at the time this agreement was determined to no longer be clearly and closely related to the Corporate Bonds, Series 2000.
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46R, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51.” (“FIN 46R”). This interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of
20
ownership, contractual or other financial interests in the entity. A variable interest entity results from interests in an entity through ownership, contractual relationships, or other pecuniary interest. Under current accounting guidance, entities are generally consolidated by an enterprise only when it has a controlling financial interest through ownership of a majority voting interest in the entity. The Company has interests in various affiliates established for the purpose of finished feed production, technology services and rental of real estate. The creditors of the entities do not have recourse to the Company. As a result of the implementation of Interpretation No. 46R, the Company determined that United Mills and Midwest Investors of Iowa, Inc. are variable interest entities under Interpretation No. 46R. Additionally, the company has concluded that it is the primary beneficiary of these variable interest entities, and as a result, the Company has consolidated these entities effective as of the beginning of the fiscal year ending August 31, 2004, in accordance with FIN 46R. Management has determined that there have been no redetermination events and accordingly, these entities continue to be consolidated for fiscal year 2005.
The FASB issued SFAS No. 123R “Share-Based Payment”, as amended, which revised SFAS No. 123, “Accounting for Stock-Based Compensation” and superceded APB Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement is effective for public entities as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company currently does not believe that the adoption of SFAS No. 123R will have a material impact on the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 151, “Inventory Costs” which amended the guidance in ARB No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal”. In addition, this statement requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The Company currently does not believe that the adoption of SFAS No. 151 will have a material impact on the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, commodity prices, exchange rates, equity prices and other market changes. Market risk is attributed to all market-risk sensitive financial instruments, including long-term debt.
The Company does not believe it is subject to any material market risk exposure with respect to interest rates, commodity prices, exchange rates, equity prices, or other market changes that would require disclosure.
21
ITEM 8. FINANCIAL STATEMENTS
GOLDEN OVAL EGGS, LLC
August 31, 2005, 2004 and 2003
Consolidated Financial Statements
With
Independent Auditor’s Report
22
Report of Independent Registered Public Accounting Firm
Members and Board of Managers
Golden Oval Eggs, LLC
Renville, Minnesota
We have audited the accompanying consolidated balance sheets of Golden Oval Eggs, LLC as of August 31, 2005 and 2004, and the related consolidated statements of operations, owners’ equity and cash flows for each of the three years in the period ended August 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golden Oval Eggs, LLC as of August 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
| Moore Stephens Frost |
| Certified Public Accountants |
|
|
|
|
Little Rock, Arkansas |
|
October 31, 2005, |
|
except for Note 6, as to which |
|
the date is November 21, 2005 |
|
23
GOLDEN OVAL EGGS, LLC
Consolidated Balance Sheets
August 31, 2005 and 2004
(In Thousands)
|
| 2005 |
| 2004 |
| ||
Assets |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 690 |
| $ | 7,642 |
|
Accounts receivable |
| 4,809 |
| 5,920 |
| ||
Inventories |
| 11,189 |
| 9,171 |
| ||
Restricted cash |
| 917 |
| 2,272 |
| ||
Other current assets |
| 387 |
| 921 |
| ||
Total current assets |
| 17,992 |
| 25,926 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment |
|
|
|
|
| ||
Land and land improvements |
| 11,163 |
| 7,936 |
| ||
Buildings |
| 34,782 |
| 25,406 |
| ||
Equipment |
| 54,819 |
| 39,115 |
| ||
Construction in progress |
| 6,502 |
| 14,181 |
| ||
|
| 107,266 |
| 86,638 |
| ||
Accumulated depreciation |
| (37,652 | ) | (31,495 | ) | ||
Total property, plant and equipment, net |
| 69,614 |
| 55,143 |
| ||
|
|
|
|
|
| ||
Other assets |
|
|
|
|
| ||
Restricted cash |
| — |
| 3,481 |
| ||
Investments |
| 1,529 |
| 1,512 |
| ||
Deferred financing costs, net |
| 1,773 |
| 1,380 |
| ||
Note receivable |
| 37 |
| 23 |
| ||
Total other assets |
| 3,339 |
| 6,396 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 90,945 |
| $ | 87,465 |
|
24
|
| 2005 |
| 2004 |
| ||
Liabilities and Owners’ Equity |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Revolving line of credit |
| $ | 2,724 |
| $ | 27 |
|
Accounts payable |
| 2,830 |
| 3,562 |
| ||
Accrued interest |
| 333 |
| 363 |
| ||
Accrued compensation |
| 1,449 |
| 3,539 |
| ||
Income taxes payable |
| — |
| 2,685 |
| ||
Patronage dividends payable |
| — |
| 10,250 |
| ||
Other current liabilities |
| 1,519 |
| 1,317 |
| ||
Current maturities of long-term debt |
| 4,668 |
| 2,617 |
| ||
Total current liabilities |
| 13,523 |
| 24,360 |
| ||
|
|
|
|
|
| ||
Long-term debt, less current maturities |
| 46,546 |
| 30,335 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies - See Notes 6 and 11 |
|
|
|
|
| ||
|
|
|
|
|
| ||
Patrons’ equity |
|
|
|
|
| ||
Common stock, $.01 par value; 50,000 shares outstanding |
| — |
| 46 |
| ||
Additional paid-in capital |
| — |
| 19,923 |
| ||
Qualified written notices of allocation |
| — |
| 7,250 |
| ||
Unallocated capital reserve |
| — |
| 4,644 |
| ||
Non-controlling interest in consolidated entities |
| — |
| 907 |
| ||
Total patrons’ equity |
| — |
| 32,770 |
| ||
|
|
|
|
|
| ||
Members’ equity |
|
|
|
|
| ||
Members’ equity |
| 29,891 |
| — |
| ||
Non-controlling interest in consolidated entities |
| 985 |
| — |
| ||
Total members’ equity |
| 30,876 |
| 32,770 |
| ||
|
|
|
|
|
| ||
Total owners’ equity |
| 30,876 |
| 32,770 |
| ||
|
|
|
|
|
| ||
Total liabilities and owners’ equity |
| $ | 90,945 |
| $ | 87,465 |
|
The accompanying notes are an integral part of these consolidated financial statements.
25
GOLDEN OVAL EGGS, LLC
Consolidated Statements of Operations
For the Years Ended August 31, 2005, 2004 and 2003
(In Thousands, except per share/members’ unit data)
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 63,196 |
| $ | 83,543 |
| $ | 53,052 |
|
|
|
|
|
|
|
|
| |||
Cost of goods sold |
| 52,118 |
| 50,693 |
| 43,300 |
| |||
|
|
|
|
|
|
|
| |||
Gross profit |
| 11,078 |
| 32,850 |
| 9,752 |
| |||
|
|
|
|
|
|
|
| |||
Operating expenses |
| 7,677 |
| 9,749 |
| 3,208 |
| |||
|
|
|
|
|
|
|
| |||
Income from operations |
| 3,401 |
| 23,101 |
| 6,544 |
| |||
|
|
|
|
|
|
|
| |||
Other income (expense) |
|
|
|
|
|
|
| |||
Interest expense |
| (6,385 | ) | (2,732 | ) | (3,520 | ) | |||
Non-controlling interest in income of consolidated entities |
| (103 | ) | (41 | ) | — |
| |||
Other income |
| 750 |
| 513 |
| 509 |
| |||
Total other expense |
| (5,738 | ) | (2,260 | ) | (3,011 | ) | |||
|
|
|
|
|
|
|
| |||
Income (loss) before income taxes |
| (2,337 | ) | 20,841 |
| 3,533 |
| |||
|
|
|
|
|
|
|
| |||
Income tax expense (benefit) |
| (378 | ) | 2,926 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | (1,959 | ) | $ | 17,915 |
| $ | 3,533 |
|
|
|
|
|
|
|
|
| |||
Basic and diluted earnings per common share/members’ unit |
| $ | (0.43 | ) | $ | 3.91 |
| $ | 0.77 |
|
|
|
|
|
|
|
|
| |||
Distributions per common share/members’ unit |
| $ | — |
| $ | 4.22 |
| $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
26
GOLDEN OVAL EGGS, LLC
Consolidated Statements of Changes in Owners’ Equity
For the Years Ended August 31, 2005, 2004 and 2003
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-Controlling |
|
|
| |||||||
|
| Common |
| Common |
| Additional |
| Qualified |
| Unallocated |
|
|
| Interest in |
| Total |
| |||||||
|
| Stock/Members’ |
| Stock |
| Paid-in |
| Written Notices |
| Capital |
| Members’ |
| Consolidated |
| Owners’ |
| |||||||
|
| Units |
| Amount |
| Capital |
| of Allocation |
| Reserve |
| Equity |
| Entities |
| Equity |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance - August 31, 2002 |
| 4,582 |
| $ | 46 |
| $ | 19,923 |
| $ | — |
| $ | 2,529 |
| $ | — |
| $ | — |
| $ | 22,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
| — |
| — |
| — |
| — |
| 3,533 |
| — |
| — |
| 3,533 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance - August 31, 2003 |
| 4,582 |
| 46 |
| 19,923 |
| — |
| 6,062 |
| — |
| — |
| 26,031 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Cumulative effect of adoption of FIN-46R |
| — |
| — |
| — |
| — |
| — |
| — |
| 866 |
| 866 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Distributions paid |
| — |
| — |
| — |
| — |
| (1,833 | ) | — |
| — |
| (1,833 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Distributions declared |
| — |
| — |
| — |
| 7,250 |
| (17,500 | ) | — |
| — |
| (10,250 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
| — |
| — |
| — |
| — |
| 17,915 |
| — |
| — |
| 17,915 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Non-controlling interest in income of consolidated entities, net of distributions |
| — |
| — |
| — |
| — |
| — |
| — |
| 41 |
| 41 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance - August 31, 2004 |
| 4,582 |
| 46 |
| 19,923 |
| 7,250 |
| 4,644 |
| — |
| 907 |
| 32,770 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Conversion to LLC |
| — |
| (46 | ) | (19,923 | ) | (7,250 | ) | (4,644 | ) | 31,863 |
| — |
| — |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Distributions paid |
| — |
| — |
| — |
| — |
| — |
| (13 | ) | — |
| (13 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (1,959 | ) | — |
| (1,959 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Non-controlling interest in income of consolidated entities, net of distributions |
| — |
| — |
| — |
| — |
| — |
| — |
| 78 |
| 78 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance - August 31, 2005 |
| 4,582 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 29,891 |
| $ | 985 |
| $ | 30,876 |
|
The accompanying notes are an integral part of these consolidated financial statements.
27
GOLDEN OVAL EGGS, LLC
Consolidated Statements of Cash Flows
For the Years Ended August 31, 2005, 2004 and 2003
(In Thousands)
|
| 2005 |
| 2004 |
| 2003 |
| |||
Cash flows from operating activities |
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | (1,959 | ) | $ | 17,915 |
| $ | 3,533 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
|
|
|
|
|
|
| |||
Depreciation |
| 6,167 |
| 4,412 |
| 4,695 |
| |||
Amortization |
| 228 |
| 261 |
| 230 |
| |||
(Gain) loss on disposals of property, plant and equipment |
| (1 | ) | 61 |
| — |
| |||
Loss on retirement of bonds |
| 848 |
| — |
| — |
| |||
Non-controlling interest in income of consolidated entities, net of distributions |
| 78 |
| 41 |
| — |
| |||
Unrealized loss on hedging activities |
| 2,302 |
| — |
| — |
| |||
Changes in operating assets and liabilities, net of effects of adoption of FIN-46R |
|
|
|
|
|
|
| |||
Accounts receivable |
| 1,111 |
| 368 |
| (1,878 | ) | |||
Inventories |
| (2,018 | ) | (1,465 | ) | (122 | ) | |||
Other current assets |
| 534 |
| (228 | ) | (29 | ) | |||
Accounts payable |
| (732 | ) | 1,146 |
| (701 | ) | |||
Income taxes payable |
| (2,685 | ) | 2,685 |
| — |
| |||
Accruals and other current liabilities |
| (1,918 | ) | 3,250 |
| 575 |
| |||
Deferred income taxes |
| — |
| 236 |
| — |
| |||
Net cash provided by operating activities |
| 1,955 |
| 28,682 |
| 6,303 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities, net of effects of adoption of FIN-46R |
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment |
| (20,641 | ) | (19,397 | ) | (276 | ) | |||
Proceeds from sales of property, plant and equipment |
| 4 |
| 4 |
| — |
| |||
Advance of note receivable |
| (14 | ) | — |
| — |
| |||
Retirement of investment in United Mills |
| — |
| — |
| 217 |
| |||
Purchase of investment in United Mills |
| — |
| (38 | ) | (245 | ) | |||
Purchases of investments in other cooperatives |
| (58 | ) | (254 | ) | — |
| |||
Retirement of investment in other cooperatives |
| 41 |
| 292 |
| 230 |
| |||
Net cash used by investing activities |
| (20,668 | ) | (19,393 | ) | (74 | ) | |||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Cash flows from financing activities, net of effects of adoption of FIN-46R |
|
|
|
|
|
|
| |||
Net increase (decrease) in revolving line of credit |
| $ | 2,697 |
| $ | 7 |
| $ | (2,969 | ) |
Proceeds from issuance of long-term debt |
| 42,550 |
| — |
| — |
| |||
Payments of long-term debt |
| (24,288 | ) | (2,503 | ) | (2,350 | ) | |||
Payment of deferred financing costs |
| (1,469 | ) | — |
| — |
| |||
Restricted cash |
| 2,534 |
| (603 | ) | 1,023 |
| |||
Cash distributions |
| — |
| (1,833 | ) | — |
| |||
Patronage dividend |
| (10,263 | ) | — |
| (10 | ) | |||
Net cash provided (used) by financing activities |
| 11,761 |
| (4,932 | ) | (4,306 | ) | |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash |
| (6,952 | ) | 4,357 |
| 1,923 |
| |||
|
|
|
|
|
|
|
| |||
Cumulative cash effect of adoption of FIN-46R |
| — |
| 856 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents - beginning of year |
| 7,642 |
| 2,429 |
| 506 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents - end of year |
| $ | 690 |
| $ | 7,642 |
| $ | 2,429 |
|
|
|
|
|
|
|
|
| |||
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
| |||
Cash paid during the period for |
|
|
|
|
|
|
| |||
Interest, net of capitalized interest of $702 and $284 during 2005 and 2004, respectively |
| $ | 3,276 |
| $ | 3,158 |
| $ | 3,593 |
|
Income taxes |
| 2,307 |
| — |
| — |
| |||
|
|
|
|
|
|
|
| |||
Supplemental disclosures of non-cash transactions |
|
|
|
|
|
|
| |||
Patronage dividends declared |
| $ | — |
| $ | 10,250 |
| $ | — |
|
Qualified written notices of allocation declared |
| — |
| 7,250 |
| — |
| |||
and issued |
| — |
| (7,250 | ) | — |
| |||
The accompanying notes are an integral part of these consolidated financial statements.
28
GOLDEN OVAL EGGS, LLC
Notes to Consolidated Financial Statements
August 31, 2005, 2004 and 2003
(In Thousands, except per share/members’ unit data)
1. Summary of Significant Accounting Policies
a. Organization – Effective September 1, 2004, Golden Oval Eggs, LLC (the “Company”) was organized as a Delaware limited liability company as a result of a reorganization of Midwest Investors of Renville, Inc. (“MIR”). MIR was incorporated as a cooperative under the laws of the state of Minnesota in March 1994. Upon conversion, MIR patrons’ equity, including common stock, additional paid-in capital, qualified written notices of allocation, and unallocated capital reserve have been converted into members’ equity of the Company. At the time of conversion, MIR patrons’ obligations to deliver one bushel of corn per share of common stock pursuant to marketing agreements with MIR were terminated.
b. Principles of consolidation – The consolidated financial statements include the accounts of the Company, its majority-owned partnership, AEI, LLC and variable interest entities in which the Company is the primary beneficiary. Investments in 20 percent to 50 percent owned entities that are not variable interest entities in which the Company is the primary beneficiary are accounted for using the equity method. Investments in less than 20 percent owned entities that are not variable interest entities in which the Company is the primary beneficiary and in which the Company does not exercise significant influence over operating and financial policies are accounted for under the cost method. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
c. Business operations and environment – The Company is an integrated poultry operation that produces and sells liquid egg products, principally in the Midwest, California and Canada.
The Company operates in an environment wherein the commodity nature of both its products for sale and its primary raw materials causes sales prices and purchase costs to fluctuate, often on a short-term basis, due to the worldwide supply and demand situation for those commodities. The supply and demand factors for its products for sale and the supply and demand factors for its primary raw materials correlate to a degree, but are not the same, thereby causing margins between sales price and production costs to increase, decrease, or invert, often on a short-term basis.
d. Cash equivalents – The Company considers all highly liquid cash investments purchased with an original maturity of three months or less to be cash and cash equivalents.
29
e. Accounts receivable – Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews its customer accounts on a periodic basis and records a reserve for specific amounts that the Company feels may not be collected. The Company’s management deems accounts receivable to be past due based on contractual terms. Amounts will be written off at the point when collection attempts on the accounts have been exhausted. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance and anticipated customer performance. While management believes the Company’s processes effectively address its exposure to doubtful accounts, changes in the economic, industry or specific customer conditions may require adjustment to any allowance recorded by the Company. At August 31, 2005 and 2004, no allowance for doubtful accounts was considered necessary by the Company’s management.
f. 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 inventories are stated at the lower of cost (first-in, first-out) or market.
g. Investments – Trading Securities – The Company holds certain commodity futures contracts in the regular course of business to manage its exposure against commodity price fluctuations on anticipated purchases of raw materials. The contracts are generally for short durations of less than one year. Although these instruments are economic hedges, the Company does not designate these contracts as hedges for accounting purposes pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. As a result, the Company records these contracts as investments and are they classified as trading securities under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities,” as amended by SFAS No. 130, “Reporting Comprehensive Income.” Accordingly, these investments are recorded at fair value based on quoted market prices. Unrealized gains and losses are included in earnings in the periods in which they arise. At August 31, 2005, there were no such contracts outstanding. At August 31, 2004, these contracts had a fair value of $489 recorded as other current assets on the consolidated balance sheet.
h. Property, plant and equipment – Property, plant and equipment are stated at cost. Depreciation is provided primarily by the straight-line method over the following lives:
Land improvements |
| 7 to 15 years |
Buildings |
| 7 to 39 years |
Equipment |
| 3 to 15 years |
30
Costs of maintenance and repairs that do not improve or extend asset lives are expensed as incurred. Major additions and improvements of existing facilities are capitalized. For retirements or sales of property, the Company removes the original cost and the related accumulated depreciation from the accounts and the resulting gain or loss is reflected in other income in the accompanying consolidated statement of operations. Depreciation and repairs and maintenance expenses are allocated to either cost of goods sold or operating expenses in the accompanying consolidated statements of operations based on the nature and use of the related asset.
i. Long-lived assets – During 2003, the Company adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” which superceded and amended SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” This statement requires that long-lived assets be reviewed for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the excess of the carrying amount over the fair value of the assets. Based on management’s assessment, no impairment indicators are present, and therefore, no impairment testing was necessary at August 31, 2005 or 2004. The factors considered by management in performing this assessment include operating results, trends, and prospects as well as the effects of obsolescence, demand, competition, and other economic factors.
j. Investments (not in thousands) – Investments include the Company’s investments in St. Paul Bank for Cooperatives and four additional cooperatives involved in activities which are similar or complementary to the Company. Additionally, fiscal years 2005 and 2004 include United Mills’ investment in Land O’Lakes, Inc. and five additional cooperatives involved in activities which are similar or complementary to United Mills.
k. Restricted cash – Restricted cash consists of cash that is restricted as to future use by contractual agreements associated with the outstanding bonds and an interest rate collar agreement at August 31, 2005 and 2004. See Note 6 for further discussion of the interest rate collar agreement.
l. Deferred financing costs – Costs incurred in connection with the acquisition of financing are capitalized and amortized over the life of the related financing instrument. Deferred financing costs are shown net of accumulated amortization on the accompanying consolidated balance sheets.
m. Derivative financial instruments – The Company entered into an interest rate collar agreement to manage its exposure to fluctuations in interest rates. The Company has accounted for this agreement in accordance with SFAS No. 133 (as amended by SFAS Nos. 138 and 149). Interest rate swap contracts are reported at fair value with the gain or loss on market value recorded as an increase or reduction of interest expense. At August 31, 2005, no interest rate swap agreements are designated as hedges.
31
n. Income taxes – Golden Oval Eggs, LLC and AEI, LLC are limited liability companies and as such, are treated as partnerships for income tax purposes. Accordingly, the taxable income or loss of these entities is reported on the individual income tax returns of their members. No provisions for income taxes or deferred income tax liability related to these entities is included in the accompanying consolidated financial statements.
United Mills, Midwest Investors of Iowa, Inc. and Midwest Investors of Renville, Inc., prior to conversion to a LLC, are subject to Federal and certain other income taxes and operate as cooperatives that qualify for tax treatment under Subchapter T of the Internal Revenue Code. Accordingly, under specific conditions, these entities can exclude from taxable income amounts distributed as qualified patronage refunds to their members. Provisions for income taxes are recorded only on those earnings not distributed or not expected to be distributed as patronage refunds.
o. Fair value – The Company’s financial instruments consist primarily of cash equivalents, accounts receivable, long-term receivable, accounts payable, and debt. The carrying amounts of cash equivalents, accounts receivable, and accounts payable approximate their fair values because of the short-term maturity of such instruments. The stated value of the Company’s long-term receivables approximates their fair value based on current market rates for financial instruments of the same remaining maturities and risk characteristics. The carrying values of long-term debt instruments approximate their fair value because interest rates on such debt are periodically adjusted and approximate current market rates.
p. Revenue recognition – Revenue is recognized by the Company when the following criteria are met: persuasive evidence of an agreement exists; delivery has occurred (FOB shipping point or destination, depending on the customer) or services have been rendered; the Company’s price to the buyer is fixed and determinable; and collectibility is reasonably assured. All of the Company’s product is shipped in tanker trailers and delivered directly to its customers. Physical delivery is the point in time at which revenue is considered earned since the risks and rewards of ownership generally rest when title passes to the customer. Free-on-Board, or FOB terms generally designate at which point title passes to the customer. These terms are contractual between the parties involved. Products shipped FOB shipping point are recognized as revenue when the product leaves the Company’s premises. Products shipped FOB destination are recognized as revenue when the product reaches the customer.
q. Estimates – The preparation of consolidated 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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
r. Shipping and handling costs – All shipping and handling costs incurred during the year are included in cost of goods sold in the accompanying consolidated statement of operations.
32
s. Reclassifications – Certain reclassifications have been made to the 2004 and 2003 balances in order to conform to the 2005 presentation.
t. Recently issued accounting standards – The Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R “Share-Based Payment”, as amended, which revised SFAS No. 123, “Accounting for Stock-Based Compensation” and superceded APB Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement is effective for public entities as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company currently does not believe that the adoption of SFAS No. 123R will have a material impact on the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 151, “Inventory Costs” which amended the guidance in ARB No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal”. In addition, this statement requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The Company currently does not believe that the adoption of SFAS No. 151 will have a material impact on the consolidated financial statements.
2. Variable Interest Entities
FASB Interpretation No. 46R (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN-46R”), requires that if an enterprise is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity should be included in the consolidated financial statements of the enterprise. The Company held various investments or variable interests, that for purposes of FIN-46R, were evaluated and the Company determined that it was the primary beneficiary. As such, the financial statements of these entities were consolidated in the accompanying consolidated financial statements. Creditors of the variable interest entities lack recourse to the general assets of the Company as the primary beneficiary.
The Company leases land from Midwest Investors of Iowa, Inc. The Company has determined that it is the primary beneficiary and the lessor is a variable interest entity. Under FIN-46R, the lessor is required to be consolidated in the Company’s consolidated financial statements as of September 1, 2003. The land, which totals $1,002 and is collateral for the related obligation, has been recorded as an asset in the Company’s consolidated balance sheet and the outstanding debt has been recorded as a liability. The Company had recorded a note receivable of $950 from Midwest Investors of Iowa, which was secured by this land. The note due in October 2014, bears interest at eight percent and is payable in monthly installments, including interest. As a result of the FIN-46R
33
implementation, and the consolidation of Midwest Investors of Iowa, the note receivable was eliminated.
Additionally, the Company owns a 33 1/3% interest in United Mills, a Minnesota cooperative, from whom it also purchases feed. The Company has evaluated its equity investment in United Mills and has determined that United Mills is a variable interest entity under FIN-46R. The Company has concluded that it is the primary beneficiary as defined by FIN-46R and as a result, the Company is required to consolidate United Mills on September 1, 2003. FIN-46R requires that the Company account for United Mills as if it had been consolidated since the initial investment in 1995. A total of $1,647 and $1,675 of assets of United Mills recorded in the consolidated balance sheet as of August 31, 2005 and 2004, respectively, serve as collateral for the obligations of the variable interest entity.
The Company’s investment in United Mills was accounted for using the equity method for the year ended August 31, 2003. Since United Mills is a cooperative, the income and capital reserves are allocated to the member-patrons on the basis of patronage the Company has with the cooperative, which was 50.0% for the year ended August 31, 2003. United Mills maintains a revolving capital account, funded by its patrons. The principal source of this capital account is the contribution, on a monthly basis, of $3.00 per ton of feed purchased. Revolving capital credits may be retired at any time at the discretion of the Board of Directors of United Mills. United Mills has historically followed a policy of retiring capital credits on a monthly basis at the rate of $3.00 per ton of feed purchased during the corresponding month two years prior. These payments to and from United Mills are reflected as purchase of and retirement of investment in United Mills, respectively, in the accompanying consolidated statements of cash flows.
United Mills reported the following financial results for fiscal year 2003:
Sales |
| $ | 8,119 |
|
Gross profit |
| 626 |
| |
Net income |
| 37 |
| |
34
FIN-46R encouraged but did not require restatement, accordingly, the Company has accounted for this change with a cumulative effect adjustment as of the beginning of 2004. The non-cash effects of adoption of FIN-46R for purposes of the statement of cash flow for the year ended August 31, 2004 are as follows:
Accounts receivable |
| $ | 211 |
|
Inventories |
| (472 | ) | |
Other current assets |
| 144 |
| |
Property, plant and equipment |
| (2,105 | ) | |
Investments |
| 217 |
| |
Bond issue costs |
| (4 | ) | |
Notes receivable |
| 927 |
| |
Accounts payable |
| 1,035 |
| |
Other current liabilities |
| (153 | ) | |
Long-term debt |
| 149 |
| |
Minority interest |
| 907 |
| |
|
|
|
| |
Cumulative cash effect of FIN-46R adoption |
| $ | 856 |
|
3. Inventories
Inventories consist of:
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Hens and pullets |
| $ | 9,826 |
| $ | 8,280 |
|
Eggs and egg products |
| 191 |
| 179 |
| ||
Feed, supplies and other |
| 1,172 |
| 712 |
| ||
|
|
|
|
|
| ||
Total inventories |
| $ | 11,189 |
| $ | 9,171 |
|
35
4. Deferred Financing Costs
Deferred financing costs consist of the following at August 31:
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Deferred financing costs |
| $ | 2,365 |
| $ | 2,080 |
|
Less: accumulated amortization |
| (592 | ) | (700 | ) | ||
|
|
|
|
|
| ||
Net deferred financing costs |
| $ | 1,773 |
| $ | 1,380 |
|
The amortization periods for these deferred financing costs range from seven to fifteen years. The amortization expense is as follows:
2006 |
| $ | 220 |
|
2007 |
| 220 |
| |
2008 |
| 215 |
| |
2009 |
| 188 |
| |
2010 |
| 188 |
| |
Thereafter |
| 742 |
| |
|
|
|
| |
|
| $ | 1,773 |
|
As discussed in Note 6, the Company obtained new financing with a financial institution during the current year. In conjunction with this refinancing, the Company capitalized financing costs incurred in the amount of $1,469, which has a ten-year life.
5. Revolving Line of Credit
The Company has established a revolving short-term line of credit with a maximum indebtedness of the lesser of $10,000 or the limit established by the borrowing base computation with a variable interest rate (5.75% at August 31, 2005). The balance at August 31, 2005 and 2004 was $2,724 and $27, respectively. The weighted average interest rates for these borrowings were 4.54% and 3.85% for the years ending August 31, 2005 and 2004, respectively, based on average amount outstanding. The average amount outstanding on the line of credit was $1,481 and $14 with a maximum outstanding month end balance of $5,630 and $27 for the years ending August 31, 2005 and 2004, respectively. There is a quarterly non-use fee at the rate of one quarter of one percent on the daily average unused amount on the line of credit. The line of credit may be withdrawn immediately upon matured default as defined in the note agreement. The date of maturity on the line is through November 30, 2005.
36
6. Long-Term Debt and Derivative Instruments
Long-term debt consists of:
|
| 2005 |
| 2004 |
| ||
Note payable to a bank; bearing interest at 6.1%; interest paid monthly, principal paid in equal monthly payments of $183 through September 2014; secured By substantially all land, buildings and equipment of the Thompson, IA facility, with a net book value of $52,763. |
| $ | 19,983 |
| $ | — |
|
|
|
|
|
|
| ||
Note payable to a bank; bearing interest at 6.1%; interest paid monthly, principal paid in equal monthly payments of $83 starting in January 2006 through December 2015; secured by substantially all land, buildings and equipment of the Thompson, IA facility, with a net book value of $52,763. |
| 10,000 |
| — |
| ||
|
|
|
|
|
| ||
Note payable to a bank; variable interest rate, currently at 6.1% as of August 31, 2005, paid monthly, principal paid in equal monthly payments of $83 starting in January 2006 through December 2015; secured by substantially all land, buildings and equipment of the Thompson, IA facility, with a net book value of $52,763. |
| 10,000 |
| — |
| ||
|
|
|
|
|
| ||
Corporate bonds, series 2000, bearing variable interest (7.31% at August 31, 2004); Bonds were paid off on September 13, 2004. |
| — |
| 21,100 |
| ||
|
|
|
|
|
| ||
Corporate bonds, series 1999, bearing interest at 8.44%; interest payable semiannually, principal payments due in annual installments from 2001 to July 2014 in amounts ranging from $432 to $1,240; secured by substantially all land, buildings and equipment of the Renville, Minnesota facility amounting to a net book value of $7,346. |
| 8,248 |
| 8,846 |
| ||
37
|
| 2005 |
| 2004 |
| ||
Corporate bonds, series 2001, bearing interest at 8.75%; interest payable semiannually, principal payments in equal annual installments of $300 from 2002 to January 2011; secured by substantially all land, buildings and equipment of the Renville, Minnesota facility amounting to a net book value of $7,346. |
| $ | 1,800 |
| $ | 2,100 |
|
|
|
|
|
|
| ||
Private development bonds, variable interest rate from 5.9% and 6.2%; interest payable semiannually, principal payable annually; unsecured; maturing at various times through December 2004. |
| — |
| 130 |
| ||
|
|
|
|
|
| ||
Note payable to a company; non-interest bearing; secured by certain equipment with a net book value of $327; payable in monthly installments of $5 beginning June 2003 through May 2011. |
| 324 |
| 377 |
| ||
|
|
|
|
|
| ||
Note payable to a company; variable interest rate on two-thirds of note balance (4% at August 31, 2005); with remaining one-third of note balance being non- interest bearing; unsecured; payable in annual installments of $30, plus interest, through January 2010. |
| 150 |
| 180 |
| ||
|
|
|
|
|
| ||
Note payable to a company; non-interest bearing; secured by certain equipment with a net book value of $19; payable in monthly installments of $3, maturing July 2006. |
| 27 |
| 66 |
| ||
|
|
|
|
|
| ||
Note payable to a financing company; non-interest bearing; secured by certain equipment with a net book value of $28; payable in monthly installments of $1, maturing January 2005. |
| — |
| 4 |
| ||
38
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Note Payable to a bank; variable interest rate; secured by assets of United Mills with lack of resource to the Company; payable in monthly installments of $2; maturing November 2011. |
| $ | 132 |
| $ | 149 |
|
|
|
|
|
|
| ||
Note payable to a company; bearing interest at 2%, unsecured: payable in annual installments of $10, plus interest, through November 2014. |
| 100 |
| — |
| ||
|
|
|
|
|
| ||
Note payable to a company; non-interest bearing; secured by certain equipment with a net book value of $632; payable in monthly installments of $4 beginning November 2005 through October 2014. |
| 450 |
| — |
| ||
|
| 51,214 |
| 32,952 |
| ||
|
|
|
|
|
| ||
Less current maturities |
| 4,668 |
| 2,617 |
| ||
|
|
|
|
|
| ||
Long-term debt, less current maturities |
| $ | 46,546 |
| $ | 30,335 |
|
Aggregate maturities of long-term debt are as follows:
2006 |
| $ | 4,668 |
|
2007 |
| 5,368 |
| |
2008 |
| 5,428 |
| |
2009 |
| 5,495 |
| |
2010 |
| 5,566 |
| |
Thereafter |
| 24,689 |
| |
|
|
|
| |
Total |
| $ | 51,214 |
|
During 2005, the Company secured new financing through a new term loan and a revolving line of credit (see Note 5) through a financial institution. The proceeds obtained through this financing were used to retire the Corporate Bonds, Series 2000 and to fund construction in progress. As such, the Company has entered into new debt agreements that contain certain restrictive covenants. These covenants along with covenants already in place require that the Company maintain (1) a minimum tangible net worth of not less than $28,800; (2) working capital of no less than $2,000;
39
(3) a current ratio of not less than 1.25 to 1.00; (4) a leverage ratio of no more than 4.25 to 1.00; and (5) a fixed charge coverage ratio no less than 1.15 to 1.00. The Company was in compliance with all but (1) and (4) as of August 31, 2005. The Company’s lenders waived these covenant violations as of August 31, 2005 and have amended the covenants in the debt agreement.
The Company is exposed to interest rate risk on its debt and enters into interest rate collar agreements to manage this risk. The Company has not elected to treat its interest rate collar derivatives as hedges and thus recognizes the changes in fair value of its derivative instruments currently in earnings in interest expense. It is the Company’s policy and practice to use derivative financial instruments only to the extent necessary to manage its exposure and the Company does not hold or issue derivative financial instruments for trading or speculative purposes.
The interest rate collar agreement was originally embedded in the Corporate Bonds, Series 2000, which limited the variability of the interest rate on the bonds to a range of 8.46% to 7.31%, and was determined to be clearly and closely related. During the current year, the Company entered into a new financing agreement. A portion of the proceeds from the new financing were used to pay off the Corporate Bonds, Series 2000. At the time the Corporate Bonds, Series 2000 were retired, the interest rate collar agreement became a separate stand alone agreement. As of August 31, 2005, the interest rate collar agreement, which terminates on July 10, 2010, has a notional amount of $19,655. The interest rate collar agreement requires that the Company maintain a collateral account. The fair value of the interest rate collar agreement is recorded as a reduction of the value of the collateral account in the accompanying consolidated balance sheet.
For the fiscal year ended August 31, 2005, the Company recognized non-cash charges before income taxes of $2,302 from the change in fair value of this derivative financial instrument.
7. Income Taxes
Income taxes consist of:
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Current tax (benefit) expense |
| $ | (378 | ) | $ | 2,690 |
| $ | — |
|
Deferred tax expense |
| — |
| 236 |
| — |
| |||
|
|
|
|
|
|
|
| |||
|
| $ | (378 | ) | $ | 2,926 |
| $ | — |
|
40
A reconciliation between income taxes at the federal statutory rate and the Company’s income taxes is as follows:
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Federal income taxes at statutory rate |
| $ | — |
| $ | 7,087 |
| $ | 1,201 |
|
State income taxes, net of federal taxes and state NOL carryforwards |
| — |
| 1,361 |
| 346 |
| |||
Effect of (utilization) generation of NOL carryforwards |
| — |
| (3,220 | ) | (639 | ) | |||
Deduction for retirement of non-qualified per-unit retains |
| — |
| (386 | ) | — |
| |||
Effect of patronage distributions |
| — |
| (7,082 | ) | — |
| |||
Gain on conversation to limited liability company |
| (380 | ) | 7,064 |
| — |
| |||
Tax basis adjustment for inventory |
| — |
| (673 | ) | (341 | ) | |||
Accrued vacation |
| — |
| 15 |
| (4 | ) | |||
263a adjustment |
| — |
| (1 | ) | 30 |
| |||
Tax basis adjustment for depreciation |
| — |
| (1,239 | ) | (593 | ) | |||
Tax expense of consolidated variable interest entities |
| 2 |
| — |
| — |
| |||
|
| $ | (378 | ) | $ | 2,926 |
| $ | — |
|
During the years ended August 31, 2004 and 2003, the Company was subject to federal income tax only on certain nondeductible expenses and any amount of net proceeds not returned to patrons in the form of cash, qualified written notices of allocation or qualified per unit retainage certificates issued within eight and one-half months after the fiscal year end.
Temporary differences giving rise to deferred tax assets relate to alternative minimum income tax credit carryforwards. These carryforwards were generated during fiscal 1998 and 1997. These carryforwards were utilized to offset the 2004 regular income tax liability of the Company.
In 2005, MIR filed its final tax return as a cooperative, for the year ended August 31, 2004. As of August 31, 2004, the Company accrued for the estimated liability related to this final tax return. The actual liability paid in 2005 related to this final return was $380 less than the accrued liability at August 31, 2004. This amount was recorded as an income tax benefit in the accompanying 2005 consolidated statement of operations.
41
8. Owners’ Equity
a. Description of members’ equity – Upon conversion to a limited liability company, MIR’s patrons’ equity, including common stock, additional paid-in capital, qualified written notices of allocation, and unallocated capital reserve have been converted into Class A units of the Company. As of August 31, 2005, Class A units outstanding are 4,582. No other classes of units have been established as of August 31, 2005. Each unit holder holding a Class A unit has the right to a pro rata share of the Company’s profits and losses, subject to any preferential rights of any other class of units the Company may issue in the future; receive distributions when declared by the Board of Managers ratable in proportion to units held, subject to any preferential rights of any other class of units the Company may issue in the future and to any applicable lender restrictions; and to vote on matters submitted to a vote of the Company’s members, if the unit holder is also a member. Membership in the Company is available to any individual, corporation or other entity which acquires a minimum of 2 Class A units and is approved for membership by the Board of Managers. Each member has one vote for each Class A unit held on matters submitted to the members for approval. A member may not transfer units without approval by the Board of Managers or without compliance with or waiver of certain conditions and procedures.
Basic earnings per member unit is computed by dividing income available to members by the weighted average number of member units outstanding for the period. Diluted earnings per member unit is computed based on net income divided by the weighted average number of member units and potential member units. Member unit equivalents include those related to share-based compensation, convertible notes, and warrants, however, the Company had no such member unit equivalents during the year ended August 31, 2005. The weighted-average number of member units outstanding for computing basic and diluted earnings per unit was 4,582 during the year ended August 31, 2005.
b. Description of patrons’ equity – Authorized capital as of August 31, 2004 and 2003 consisted of 50,000 shares of common stock, par value of one cent and 10,000 shares of revolving preferred stock, par value of one cent. As of August 31, 2004 and 2003, common shares issued and outstanding are 4,582. Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed based on net income divided by the weighted average number of common and potential common shares. Common share equivalents include those related to stock options, convertible notes, and warrants, however, the Company had no such common share equivalents during the years ended August 31, 2004 and 2003. The weighted average number of common shares outstanding for computing basic and diluted earnings per share was 4,582 during the years ended August 31, 2004 and 2003. No preferred stock was issued or outstanding as of August 31, 2004 and 2003.
c. Per unit retains – The Company may require investment in its capital in addition to the capital raised through the sale of common and preferred stock. This investment shall be direct capital investments from a retainage on a per unit basis of the products, principally grain, purchased from its members. In addition, such retained amounts shall be made on all products delivered, in the same amount per unit and shall at no time become a part of net annual savings available for patronage.
42
d. Unallocated capital reserve – The Company’s net operating margin, less any amount distributed or allocated to patrons as written notices of allocations, is included in the unallocated capital reserve. In accordance with its bylaws, the Company allocates patronage margins to its patrons as determined for income tax purposes. These allocations may be made in cash, stock or in the form of written notices of allocations in proportions determined by its Board of Directors.
e. Distributions – The Company’s bylaws provide that, each year, annual savings be distributed to members and patrons on the basis of their patronage with the Company. The distribution can be made in cash, stock or written notices of allocation or any combination thereof. The distributions must be made within 8 1/2 months after the end of the fiscal year. Distributions declared for the year ended August 31, 2004 were $17,500, $10,250 of which will be paid in cash and $7,250 of which will be made in written notices of allocation.
f. Non-controlling interest - - Non-controlling interest represents the non-controlling members’ proportionate share of the equity of AEI, LLC, the minority stockholders’ proportionate share of the equity of United Mills, and the patrons’ equity in Midwest Investors of Iowa, Inc. At August 31, 2005 and 2004, the Company owned 60% of AEI, LLC’s equity and voting control, which requires that AEI, LLC’s operations be included in the consolidated financial statements of the Company. At August 31, 2005 and 2004, the Company owned 33 1/3% of United Mills’ equity. United Mills is accounted for as a variable interest entity in which the Company has been determined to be the primary beneficiary, which requires that United Mills’ operations be included in the consolidated financial statements of the Company. At August 31, 2005 and 2004, the Company did not own any interest in Midwest Investors of Iowa, Inc. Midwest Investors of Iowa, Inc. is accounted for as a variable interest entity in which the Company has been determined to be the primary beneficiary, which requires that Midwest Investors of Iowa, Inc.’s operations be included in the consolidated financial statements of the Company. The 40% equity interest of AEI, LLC, the 66 2/3% interest of United Mills and the 100% interest of Midwest Investors of Iowa, Inc. not owned by the Company are shown as non-controlling interest in the accompanying 2005 and 2004 consolidated financial statements.
9. Related Party Transactions
The Company has entered into a grain handler agreement with a cooperative which has an ownership interest in the Company. For the years ended August 31, 2005, 2004 and 2003, the Company has purchased services totaling $33, $104 and $95, respectively, from this cooperative, with accounts payable for these services of $7 and $3 as of August 31, 2005 and 2004, respectively.
For the year ended August 31, 2003, the Company has purchased feed totaling $5,030 from United Mills. These transactions were eliminated through consolidation of the financial statements as of and for the years ended August 31, 2005 and 2004, as a result of the implementation of FIN-46R (see Note 2).
43
The Company leases land from a commonly managed cooperative and the Company holds a note receivable of $950 and mortgage for that land from the cooperative. Rent expense for the year ended August 31, 2003 totaled $78. Interest income for the year ended August 31, 2003 totaled $76. These transactions were eliminated through consolidation of the financial statements as of and for the years ended August 31, 2005 and 2004 as a result of the implementation of FIN-46R (see Note 2).
The Company had approximately $190 included in accounts receivable at August 31, 2004, for litter sales to related parties with total sales of approximately $42, $234 and $142 for the years ending August 31, 2005, 2004 and 2003, respectively, which are included in other income in the accompanying consolidated statements of operations. There were no such amounts owed to the Company for such sales at August 31, 2005.
10. Pension Plan
The Company has a defined contribution plan with a 401(k) feature which covers all full-time employees that have six months of eligible service. Employees are permitted to contribute up to their individual permissible legal limits. The Company may make, but is not required to make, a matching contribution to the plan of an amount and type determined each year. The Company may also make, but is not required to make, a discretionary contribution to the plan for a plan year. Contributions made by the Company to the plan totaled approximately $318, $262 and $208 for the years ended August 31, 2005, 2004 and 2003, respectively.
11. Commitments and Contingencies
a. The Company has entered into an agreement with an independent contractor who will care for and raise a portion of the Company’s pullet flocks until they are old enough to be transferred into a layer facility and begin production. This agreement relates to all pullets associated with the Company’s Renville, Minnesota, pullet flocks. This agreement had an initial term of five years and expires in 2008. The independent contractor is paid per acceptable pullet delivered to the layer facility.
b. The Company leases certain equipment and land under various lease agreements that are classified as operating leases. Rent expense for all operating leases amounted to approximately $302, $231 and $315 for the years ended August 31, 2005, 2004 and 2003, respectively, with $78 paid to a related party for the year ended August 31, 2003. At August 31, 2005, future minimum rental commitments under noncancellable operating leases are as follows:
2006 |
| $ | 291 |
|
2007 |
| 248 |
| |
2008 |
| 208 |
| |
2009 |
| 167 |
| |
2010 |
| 93 |
| |
Thereafter |
| 95 |
| |
|
|
|
| |
|
| $ | 1,102 |
|
44
c. The Company has entered into negotiations for contracts for the construction of three layer houses and an office addition at the Renville site. At August 31, 2005, the Company had committed to contracts for the layer houses and office addition totaling approximately $7,729 with approximately $1,502 remaining on the projects.
d. The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
e. During the year ended August 31, 2004, the Board of Directors of the Company approved a bonus for its president and chief executive officer to be paid in the combined form of cash and approximately $575,000 in restricted units of the LLC. Any remaining terms and conditions of the grant related to these units other than amount are to be determined by the Board and the president of the Company subsequent to yearend. The liability for this bonus has been included in accrued compensation in the accompanying financial statements at August 31, 2005 and 2004.
12. Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable with customers, cash investments and other short-term investments deposited with financial institutions. The Company generally does not require collateral from its customers. Such credit risk is considered by management to be limited due to its customers’ financial resources and past payment history.
At August 31, 2005, 2004 and 2003, the Company maintained cash balances with financial institutions in excess of the federal deposit insurance limit.
13. Major Customers
At August 31, 2005, the Company has supply agreements for liquid egg products with four of its major customers, which expire at various times over the next five years. Sales to these four customers are presented as follows as a percentage of total sales: 31%, 20%, 10% and 33% for the year ending August 31, 2005, 24%, 24%, 14% and 30% for the year ending August 31, 2004, and 34%, 26%, 11% and 11% for the year ending August 31, 2003. The Company had balances due from these customers of $933, $989, $572 and $1,424 at August 31, 2005, and $876, $1,363, $845 and $1,614 at August 31, 2004.
The fourth customer discussed above has operations in Canada. Sales to the non-U.S. subsidiary of this customer represented 6%, 8%, and 9% of total sales for the years ending August 31, 2005, 2004 and 2003, respectively. The Company had balances due from these non-U.S. sales of $181 and $529 at August 31, 2005 and 2004, respectively.
45
14. Quarterly Financial Data
Quarterly financial data is as follows:
|
|
|
|
|
|
|
| Earnings |
|
|
| ||||
|
|
|
|
|
|
|
| Per Share |
|
|
| ||||
|
|
|
| Operating |
| Net |
| or Unit |
|
|
| ||||
|
| Net |
| Income |
| Income |
| (Basic and |
| Outstanding |
| ||||
|
| Sales |
| (Loss) |
| (Loss) |
| Diluted) |
| Shares/Units |
| ||||
Fiscal year 2005 quarter ended: |
|
|
|
|
|
|
|
|
|
|
| ||||
November 30, 2004 |
| $ | 17,295 |
| $ | 2,720 |
| $ | 1,350 |
| $ | 0.29 |
| 4,582 |
|
February 28, 2005 |
| 15,042 |
| 1,499 |
| 684 |
| 0.15 |
| 4,582 |
| ||||
May 31, 2005 |
| 15,678 |
| (202 | ) | (678 | ) | (0.15 | ) | 4,582 |
| ||||
August 31, 2005 |
| 15,181 |
| (616 | ) | (3,315 | ) | (0.72 | ) | 4,582 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 63,196 |
| $ | 3,401 |
| $ | (1,959 | ) | $ | (0.43 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fiscal year 2004 quarter ended: |
|
|
|
|
|
|
|
|
|
|
| ||||
November 30, 2003 |
| $ | 20,471 |
| $ | 7,708 |
| $ | 7,049 |
| $ | 1.54 |
| 4,582 |
|
February 29, 2004 |
| 20,425 |
| 7,549 |
| 6,921 |
| 1.51 |
| 4,582 |
| ||||
May 31, 2004 |
| 21,344 |
| 6,209 |
| 5,539 |
| 1.21 |
| 4,582 |
| ||||
August 31, 2004 |
| 21,303 |
| 1,635 |
| (1,531 | ) | (0.35 | ) | 4,582 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 83,543 |
| $ | 23,101 |
| $ | 17,978 |
| $ | 3.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fiscal year 2003 quarter ended: |
|
|
|
|
|
|
|
|
|
|
| ||||
November 30, 2002 |
| $ | 12,152 |
| $ | (31 | ) | $ | (771 | ) | $ | (0.17 | ) | 4,582 |
|
February 28, 2003 |
| 11,798 |
| 737 |
| (47 | ) | (0.01 | ) | 4,582 |
| ||||
May 31, 2003 |
| 13,015 |
| 1,831 |
| 1,066 |
| 0.23 |
| 4,582 |
| ||||
August 31, 2003 |
| 16,087 |
| 4,007 |
| 3,285 |
| 0.72 |
| 4,582 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 53,052 |
| $ | 6,544 |
| $ | 3,533 |
| $ | 0.77 |
|
|
|
46
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, Dana Persson, and Chief Financial Officer, Doug Leifermann, have reviewed the Company’s disclosure controls and procedures within 90 days prior to the filing of this report. Based upon this review, these officers believe that the Company’s disclosure controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.
47
Changes in Internal Controls
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls during the fiscal year covered by this report or from the end of the period to the date of this Form 10-K.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Managers of the Company
The Company is managed by a Board of Managers, all of whom will be elected on an at-large basis. Under the Limited Liability Company Agreement, the number of managers is to be set by the Board of Managers, but may not be less than five. The Board of Managers will be divided into three classes for election purposes. One class of managers will be elected at each annual meeting of members to serve for a three-year term.
The names, addresses, ages and terms of the initial managers of the Company are as follows:
Name and Address |
| Age |
| Position |
| Term |
|
|
|
|
|
|
|
|
|
Chris Edgington |
| 43 |
| Manager, Chairman |
| 2008 |
|
|
|
|
|
|
|
|
|
Marvin Breitkreutz |
| 62 |
| Manager, Vice Chairman |
| 2008 |
|
|
|
|
|
|
|
|
|
Mark Chan |
| 46 |
| Manager, Secretary/Treasurer |
| 2008 |
|
|
|
|
|
|
|
|
|
Rodney Hebrink |
| 48 |
| Manager |
| 2007 |
|
|
|
|
|
|
|
|
|
Paul Wilson |
| 50 |
| Manager |
| 2007 |
|
|
|
|
|
|
|
|
|
Randy Tauer |
| 43 |
| Manager |
| 2006 |
|
|
|
|
|
|
|
|
|
Brad Petersburg |
| 49 |
| Manager |
|
|
|
Chris Edgington. Mr. Edgington previously served as a director of the cooperative from February 2000 through the date of the conversion. He is now serving as a Manager and has been the Company’s Vice Chairman since April 2002. He currently serves on the board for Ag Ventures Alliance, and has served on the Iowa Extension
48
Council. He is a member of the Iowa Pork Producers and served on the producer leadership committee. He has been farming since 1984. He is the owner and manager of a farrow to finish hog operation with his brother and they raise corn, soybeans, millet and alfalfa.
Marvin Breitkreutz. Mr. Breitkreutz previously served as a director of the cooperative from its formation in 1994 through the date of the conversion. He is now serving as Manager and has served as Chairman since April 2002. He has served on the board for Southern Minnesota Sugar Beet Cooperative, is Chairman of the Red River Valley Farmers Insurance Pool, and is a past township supervisor and chairman of the Renville County Farm Bureau. He has owned and operated his farm since 1962. He raises sugar beets, corn and soybeans.
Mark Chan. Mr. Chan previously served as a director of the cooperative from its formation in 1994 through the date of the conversion. He is now serving as a Manager and has served as Secretary/Treasurer since April 2002. He is a past director of Co-op Country Farmers Elevator and ValAdCo. He has been farming since 1982. He is an owner and manager of a family farm corporation, raising corn, soybeans, sugar beets and green peas.
Rodney Hebrink. Mr. Hebrink was elected to the board for the first time and is a Senior Vice President of AgStar Financial Services, ACA, a position he has held since 1995. He served as Vice President and Chief Financial Officer of AgStar Financial Services, ACA from 1986 through 1995. Previously, he was Assistant Vice President in the Agribusiness Division of Norwest Bank and at St. Paul Bank of Cooperatives. Mr. Hebrink has broad managerial skills in leadership and executing business plans.
Paul Wilson. Mr. Wilson was elected to the board for the first time and is Vice President/Loan Officer of the F & M State Bank in Clarkfield, Minnesota. A fifth generation farmer, he has ownership in a turkey operation. He serves on the boards of the Economic Development Association, the Upper Minnesota Valley business Development association, is President of the Lions Club, the Lutheran Church and is a member of the development board for the Clarkfield Charter School.
Randy Tauer. Mr. Tauer previously served as a director of the cooperative from March 2003 through the date of the conversion. He now serves as a Manager. He is currently serving as a board member of the Prairie Farmers Coop and a member of the Corn and Soybean Producers and Pork Producers. He has been farming since 1980. He owns and manages a farrow to finish hog operation and raises corn, soybeans, sweet corn and peas.
Brad Petersburg. Mr. Petersburg previously served as a director of the cooperative from February 2000 through the date of the Cooperative’s conversion. He is serves as a Manager. He has been active in many farmer-owned organizations and is a member and past county board director for the Iowa Farm Bureau, director of Ag Ventures Alliance, director and past president of Exol ethanol cooperative, director of Midwest Grain Processors Cooperative and chairman of U.S. Ag Producers Alliance. He has owned and managed his farm since 1979, raising corn and soybeans.
Committees of the Board of Managers of the Company
The Board of Managers of the Company has appointed a compensation committee, an audit committee, a nomination committee and a strategic alternatives committee.
The compensation committee makes recommendations to the Board of Managers of the Company regarding compensation plans, approving transactions of certain officers and granting units or options for the purchase of units. Messrs. Breitkreutz, Hebrink and Petersburg serve as members of the compensation committee.
The audit committee makes recommendations to the Board of Managers of the LLC regarding the selection of independent auditors, reviews the scope of audit and other services by the independent auditors, reviews the accounting principles and auditing practices and procedures to be used for the LLC’s financial statements and reviews the results of those audits. Messrs. Wilson, Chan and Tauer serve as the members of the audit committee.
The nomination committee recommends nominees for election to the Board of Managers of the Company. Messrs. Wilson, Tauer and Chan serve as the members of the nomination committee.
49
The strategic alternatives committee reviews potential strategic alternatives for the Company to pursue with regard to significant business transactions such as potential outside equity investments, and makes recommendations to the Board of Managers of the Company regarding strategic alternatives. Messrs. Breitkreutz, Hebrink and Petersburg serve as the members of the strategic alternatives committee.
Compensation of Managers
The Company provides its managers with a monthly payment of $1,000 and a per diem payment of $350 for any day on which a manager undertakes activities on the Company’s behalf, including board meetings and other functions of the Company. In addition, the various officers of the Board of Managers receive additional cash compensation in the amount of $500 per month for the Chair, $200 per month for the Vice Chair, $300 per month for the Secretary/Treasurer and $200 per month for each committee chair. The Company all provides cash compensation for its managers in the amount of $50 per hour for any travel time expended by the managers in connection with the Company’s activities. Each member of the Board of Managers is also to receive an annual grant of 2,000 units in the Company; those units may not be transferred by the recipient before the third anniversary of the grant. The Company will also reimburse its managers for out-of-pocket expenses incurred on behalf of the Company.
Executive Officers
The table below sets forth information concerning the executive officers of the Company during the fiscal year ended August 31, 2005. Subsequent to the end of that fiscal year, both Mr. Heying and Ms. Staley retired. The Company has not yet appointed any executives to serve as Vice President/Chief Operations Officer or Vice President/Chief Administrative Officer, respectively.
Name |
| Age |
| Position |
|
Dana Persson |
| 48 |
| President/Chief Executive Officer |
|
Terrance Heying |
| 64 |
| Vice President/Chief Operations Officer |
|
Doug Leifermann |
| 50 |
| Vice President/Chief Financial Officer |
|
Marie Staley |
| 49 |
| Vice President/Chief Administrative Officer |
|
Dana Persson. Mr. Persson served as President and Chief Executive Officer of the company from its formation in 1994 through the present. He has served on a committee for United Egg Producers since 2001, and has been a member of the Board of Directors for United Mills since 1994, serving as its Chairman of the Board since 2001. Prior to 1994, he served as President/CEO of Co-op Country Farmers Elevator of Renville, Minnesota, and general manager of a number of grain marketing and farm supply cooperatives in Minnesota.
Terrance Heying. Mr. Heying served as Vice President and Chief Operations Manager of the company from its formation in 1994 through the present. He is responsible for the day-to-day operation of the egg production complex, and also develops and implements egg production programs, plans, objectives and policies consistent with goals and objectives established in the annual business plan. Prior to joining the company, he owned and managed pullet rearing operations, egg production, shell egg processing, egg breaking, and further processed products. As an entrepreneur in value-added egg products, he developed a technique to freeze cooked egg products. He has designed and built special equipment required to process value-added products in addition to designing and constructing all supporting equipment and facilities.
Doug Leifermann. Mr. Leifermann served as Vice President and Chief Financial Officer for the company from October 2000 through the present. He is responsible for the design and implementation of financial controls, along with providing timely information that accurately portrays the financial status of the Company. He also provides managerial leadership for the accounting, financial, data processing and budgeting functions of the Company. From 1997 to October 2000, he was employed as the Chief Financial Officer for Phenix Biocomposites, a
50
company incorporated to develop and commercialize new biocomposite technology for the construction, furniture, cabinet and design industries.
Marie Staley. Ms. Staley served as Vice President and Chief Administrative Officer for the company from its formation in 1994 through the present. In addition to coordinating the functions of management and the Board of Directors, she is responsible for member relations, communications, shareholder relations, and provides management leadership for the human resources department. She also administers the unit transfer process. She has served as a board member for the Broiler & Egg Association of Minnesota since 2002. Prior to joining the company, she was employed by the St. Paul Bank for Cooperatives.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by the cooperative in the years indicated to its President and Chief Executive Officer and the three other individuals who were serving as executive officers of the Company at the end of its fiscal year 2005.
Summary Compensation Table
|
|
|
| Annual Compensation |
|
|
| ||||||||
Name and Principal Position |
| Fiscal |
| Salary |
| Bonus(1) |
| Other Annual |
| All Other |
| ||||
Dana Persson, |
| 2005 |
| $ | 260,125 |
| $ | 65,000 |
| $ | 17,257 |
| $ | 11,520 |
|
President/Chief Executive |
| 2004 |
| 192,807 |
| 960,506 | (4) | 15,570 |
| 11,568 |
| ||||
Officer |
| 2003 |
| 191,474 |
| 106,032 |
| 15,570 |
| 11,488 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Terrance Heying, |
| 2005 |
| 166,831 |
| 40,000 |
| 16,200 |
| 8,880 |
| ||||
Vice President/Chief |
| 2004 |
| 142,888 |
| 529,669 |
| 14,604 |
| 8,573 |
| ||||
Operations Officer |
| 2003 |
| 136,894 |
| 66,686 |
| 14,604 |
| 7,800 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Doug Leifermann, |
| 2005 |
| 160,000 |
| 40,000 |
| 9,279 |
| 7,200 |
| ||||
Vice President/Chief |
| 2004 |
| 103,077 |
| 529,669 |
| 7,778 |
| 6185 |
| ||||
Financial Officer |
| 2003 |
| 100,000 |
| 66,686 |
| 7,778 |
| 6,000 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Marie Staley, |
| 2005 |
| 117,835 |
| 40,000 |
| 345 |
| 6,282 |
| ||||
Vice President of |
| 2004 |
| 80,200 |
| 527,231 |
| 115 |
| 4,812 |
| ||||
Shareholder Relations |
| 2003 |
| 80,400 |
| 64,506 |
| 115 |
| 4,800 |
| ||||
(1) 2005 bonuses are to be issued as 50% cash and 50% units in the Company.
(2) Includes medical insurance contributions for: Mr. Persson, Mr. Heying and Mr. Leifermann. Also includes the following personal vehicle usage: for Mr. Persson, $7,770 annually; and for Mr. Heying, $6,840 annually.
(3) Consists of matching contributions made by the cooperative to its 401(k) plan.
(4) Of the bonus amount granted to Mr. Persson with respect to the fiscal year ended August 31, 2004, a total of $ 385,614 was paid to Mr. Persson in cash. The remaining portion of this bonus amount will be paid to Mr. Persson through the grant of restricted units in the Company. The Board of Directors is
51
taking steps to establish the precise terms and conditions of that grant of restricted units and are expected to make the grant effective in the near future.
Employment Agreements
The Company is party to “employment, non-competition and severance agreements with its President/Chief Executive Officer, Dana Persson, and its Vice President/Chief Financial Officer, Doug Leifermann. The agreements’ provide for employment of the two executives for an initial period ending August 31, 2007. Each agreement will continue to renew automatically for successive one-year periods unless notice is given by either party not less than 60 days before the end of the then current employment term.
Under the agreements, the Company is to pay Mr. Persson an annual base salary of $260,000 and Mr. Leifermann an annual base salary of $160,000. Mr. Persson and Mr. Leifermann are each to receive an annual bonus based on the Company’s return on equity for each fiscal year, capped at two times the executive’s annual base salary, but subject to the discretion of the Company’s Board to “lift” such cap in its discretion. Each executive is also eligible for a “discretionary individual performance bonus”, based on annual goals. Any bonuses based on the Company’s return on equity or individual performance will be paid 50% in cash and 50% through the grant of units in the Company, based on a unit value equal to the higher of the Company’s per unit book value or market value. Any units in the Company granted as part of such bonuses are subject to forfeiture by the executive in the event of termination for cause or termination of employment at the election of the executive. However, 1/3 of the units contained in each such bonus will cease to be subject to forfeiture on each of the first three anniversaries of the date of the grant of such units as part of a bonus. Each executive is also eligible for an “equity capital markets transaction bonus”. Such a bonus would accrue to the executives if the Company completes one or more transactions in which equity interests in the Company or a subsidiary are offered through the equity capital markets to investors. Mr. Persson would receive a bonus equal to 1.5% of the “Members Gain on Equity” arising from any such equity capital markets transaction and Mr. Leifermann would receive a bonus equal to 0.5% of the “Member’s Gain on Equity”. For purposes of the contracts, “Member’s Gain on Equity” would be calculated by comparing the new equity value of the Company following any such transaction to the book value of the Company prior to any such transaction. Similarly, if more than 20% of the fixed or operating assets of the Company are sold which would represent a proportional capital gain on members’ equity allocated to those assets on a pro rata basis, or if a change in control occurs resulting in a capital gain on members’ equity, then the Company shall pay Mr. Persson and Mr. Leifermann a “liquidation” bonus of 1.5% and 0.5% of the “Member’s Gain on Equity”. Any such equity capital markets transaction bonus or liquidation bonus would be paid to Mr. Persson and Mr. Leifermann, respectively, in the same form or forms of payment as are received by other unitholders of the Company in the transaction or liquidation giving rise to payment of the bonuses. In addition, Mr. Persson and Mr. Leifermann are entitled to receive matching 401(k) plan contributions of up to 6% of each executive’s base salary, the use of a vehicle and other fringe benefits under the Company’s group benefit plans.
The agreements may be terminated prior to the end of the initial term or any renewal term due to death or disability, a change in control of the business, mutual agreement of the parties or otherwise upon the election of either party. If Mr. Persson’s employment is terminated by the Company for any reason other than death of permanent disability, Mr. Persson is entitled to receive payments in an amount equal to his base salary at normal salary payment intervals for a period of 24 months following termination (or for so long as the non-competition provision described below remains in effect) and group benefits for the applicable period. Mr. Leifermann’s agreement contains similar provisions, except that the severance benefits provided to Mr. Leifermann shall extend for a period of 12 months, rather than 24 months.
The agreements provide that, for a period of 24 months after termination of Mr. Persson’s employment and 12 months after termination of Mr. Leifermann’s employment, Mr. Persson and Mr. Leifermann, respectively, may not participate through management or control or be employed by any business or enterprise which is engaged in any business activity similar to that of the Company that competes with the Company for the Company’s egg product markets or sources of egg supplies.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table furnishes information, as of November 28, 2005, regarding beneficial ownership of the Company’s Class A units by each person known by us to beneficially own more than 5% of the Company’s issued and outstanding units, each of the Company’s directors and executive officers, and all of the Company’s directors and executive officers as a group.
|
| Beneficial Ownership of Class |
| ||
Name |
| Number |
| Percentage |
|
|
|
|
|
|
|
Coop Country Farmers Elevator |
| 556,993 |
| 12.2 | % |
Marvin Breitkreutz(1) |
| 25,168 |
| 0.5 |
|
Mark Chan(2) |
| 15,278 |
| 0.3 |
|
Chris Edgington |
| 11,832 |
| 0.3 |
|
Rodney Hebrink |
| 7,432 |
| 0.2 |
|
Brad Petersburg |
| 77,296 |
| 1.7 |
|
Randy Tauer |
| 27,788 |
| 0.6 |
|
Paul Wilson |
| 2,288 |
| — |
|
Dana Persson |
| 15,296 |
| 0.3 |
|
Terrance Heying |
| — |
| — |
|
Doug Leifermann |
| 8,788 |
| 0.2 |
|
Marie Staley |
| 2,000 |
| — |
|
All directors/managers and executive officers as a group |
| 193,616 |
| 4.2 |
|
(1) | Includes Class A units held by Mr. Breitkreutz’s wife. Also includes 18,304 Class A units held jointly by Mr. Breitkreutz and his spouse. |
|
|
(2) | Includes 13,728 Class A units held by MC&S Inc., a corporation owned by Mr. Chan and his family. |
53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Coop Country Farmers Elevator
Coop Country Farmers Elevator, a member holding a significant amount of the Company’s units, provides various services and litter removal to the Company. Service expense for the year ended August 31, 2005 totaled approximately $14,000. The Company also leases office space from Coop Country, under a lease terminable by either party upon 90 days notice. Rent expense for the year ended August 31, 2005 totaled approximately $18,800.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table represents aggregate fees billed (in thousands) to the Company for fiscal years ended August 31, 2005 and 2004 by Moore Stephens Frost, the Company’s principal accounting firm.
|
| Fiscal Year Ended |
| |||||
|
| 2005 |
| 2004 |
| |||
|
|
|
|
|
| |||
Audit Fees |
| $ | 68 |
| $ | 48 |
| |
Audit-Related Fees (a) |
| 5 |
| 8 |
| |||
Tax Fees (b) |
| 32 |
| 37 |
| |||
All Other Fees |
| 52 |
| 80 |
| |||
Total Fees (c) |
| $ | 157 |
| $ | 173 |
| |
(a) Primarily travel, telephone and administrative expenses.
(b) Primarily tax advisory and preparation services.
(c) The Audit Committee and/or Board of Managers have approved all fees.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following are filed as part of this report:
1. Financial Statements
Independent Auditor’s Report
Consolidated Balance Sheets as of August 31, 2005 and 2004
Consolidated Statements of Operations for the years ended August 31, 2005, 2004 and 2003
Consolidated Statements of Changes in Owners’ Equity for the years ended August 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
54
3. Exhibits
Number |
| Description |
2.1 |
| Amended and Restated Agreement and Plan of Merger between Midwest Investors of Renville, Inc. and Golden Oval Eggs, LLC * |
|
|
|
3.1 |
| Certificate of Formation of Golden Oval Eggs, LLC* |
|
|
|
3.2 |
| Amended and Restated Limited Liability Company Agreement of Golden Oval Eggs, LLC* |
|
|
|
10.1 |
| Management Compensation Agreement: Employment, Non-Competition and Severance Agreement between Dana Persson and Golden Oval Eggs, LLC. |
|
|
|
10.2 |
| Litter Handling Agreement between Farmers Cooperative Company and Golden Oval Eggs, LLC, successor to Midwest Investors of Renville, Inc.* |
|
|
|
10.3 |
| Litter Handling Agreement between Co-op Country Farmers Elevator and Golden Oval Eggs, LLC, successor to Midwest Investors of Renville, Inc.* |
|
|
|
10.4 |
| Independent Contractor Agreement for Pullet Production among Pullet Connection, Inc., Barbara Frank and Golden Oval Eggs, LLC, successor to Midwest Investors of Renville, Inc.* |
|
|
|
10.5 |
| Joint Venture Agreement between Midwest Investors of Iowa, Cooperative and Golden Oval Eggs, LLC, successor to Midwest Investors of Renville, Inc.* |
|
|
|
10.6 |
| Land Lease Agreement Between Midwest Investors of Iowa, Cooperative and Golden Oval Eggs, LLC, successor to Midwest Investors of Renville, Inc.* |
|
|
|
10.7 |
| Management Compensation Agreement: Employment, Non-Competition and Severance Agreement between Doug Leifermann and Golden Oval Eggs, LLC. |
|
|
|
23.1 |
| Consent of Moore Stephens Frost |
|
|
|
31.1 |
| Certification of Chief Executive Officer required by Securities and Exchange Commission Rule13a-14(a) or 15d-14(a). |
|
|
|
31.2 |
| Certification of Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a). |
|
|
|
32.1 |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|
|
|
32.2 |
| Certification of Chief Reporting and Compliance Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
*Incorporated by reference from Company’s Form S-4 dated August 11, 2004.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||
|
| ||
|
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| By: | /s/ Dana Persson |
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| Dana Persson, |
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| PRINCIPAL EXECUTIVE OFFICER |
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| Dated: November 28, 2005 | ||
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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/s/ Dana Persson |
| President/Chief Executive Officer |
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Dana Persson |
| (Principal Executive Officer) |
| November 28, 2005 |
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/s/Doug Leifermann |
| Vice President/Chief Financial Officer |
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Doug Leifermann |
| (Principal Financial and Accounting Officer) |
| November 28, 2005 |
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/s/Marvin Breitkreutz |
| Manager, Chairman |
| November 28, 2005 |
Marvin Mreitkreutz |
| Man |
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/s/Mark Chan |
| Manager, Secretary/Treasurer |
| November 28, 2005 |
Mark Chan |
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/s/Chris Edgington |
| Manager, Vice Chairman |
| November 28, 2005 |
Chris Edgington |
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/s/Thomas Jacobs |
| Manager |
| November 28, 2005 |
Thomas Jacobs |
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/s/Brad Petersburg |
| Manager |
| November 28, 2005 |
Brad Petersburg |
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/s/Randy Tauer |
| Manager |
| November 28, 2005 |
Randy Tauer |
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/s/Jeff Woodley |
| Manager |
| November 28, 2005 |
Jeff Woodley |
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