Cagle's-Keystone Foods LLC
Financial Statements
for the 52-Week Period Ended December 27, 2003
Unaudited
CAGLE'S-KEYSTONE FOODS LLC | ||
BALANCE SHEETS - Unaudited | ||
(Dollars in thousands) | ||
December 27, 2003 | ||
ASSETS | ||
CURRENT ASSETS: | ||
Cash | $ 3,397 | |
Accounts receivable | 8,423 | |
Receivables-related party | 4,677 | |
Inventory | 17,956 | |
Prepaid and other current assets | 212 | |
----------------- | ||
Total current assets | 34,665 | |
INVESTMENTS IN AND ADVANCES | ||
TO AFFILIATED ENTITIES | 464 | |
PROPERTY, PLANT, AND EQUIPMENT: | ||
Land | 2,199 | |
Buildings and improvements | 57,397 | |
Machinery and equipment | 27,211 | |
Furniture and fixtures | 1,005 | |
Construction in progress | 289 | |
----------------- | ||
88,101 | ||
Less accumulated depreciation | -28,375 | |
----------------- | ||
Property, plant, and equipment net | 59,726 | |
OTHER ASSETS | 3,107 | |
----------------- | ||
TOTAL | $ 97,962 | |
LIABILITIES AND MEMBERS' EQUITY | ||
CURRENT LIABILITIES: | ||
Current portion of long term debt | $ 7,500 | |
Debt-related party | 16,976 | |
Accounts payable | 7,881 | |
Accounts payable-related party | 244 | |
Accrued expenses | 4,726 | |
----------------- | ||
Total current liabilities | 37,327 | |
LONG-TERM DEBT | 47,063 | |
OTHER LONG-TERM LIABILITIES | 2,549 | |
----------------- | ||
Total liabilities | 86,939 | |
MEMBERS' EQUITY | 11,023 | |
----------------- | ||
TOTAL | $ 97,962 | |
See notes to financial statements. |
STATEMENTS OF OPERATIONS- Unaudited | ||
(Dollars in thousands) | ||
52-Week Period Ended | ||
December 27, 2003 | ||
NET SALES | $ 218,038 | |
TOTAL COST OF PRODUCT SOLD | 189,124 | |
SELLING, GENERAL, AND ADMINISTRATIVE | 7,338 | |
DEPRECIATION AND AMORTIZATION | 9,154 | |
------------ | ||
OPERATING INCOME | 12,422 | |
OTHER INCOME (EXPENSES): | ||
Interest-net of interest income | (2,198) | |
Interest-related party | (377) | |
Other-net | (61) | |
Equity in income of affiliates | 269 | |
------------ | ||
NET INCOME | $ 10,055 | |
See notes to financial statements. |
CAGLE'S-KEYSTONE FOODS LLC | ||||||
STATEMENTS OF MEMBERS' EQUITY | ||||||
(Dollars in thousands) - Unaudited | ||||||
Executive | Cagle's, | |||||
Holdings L.P. | Inc. | Total | ||||
BALANCE-December 28, 2002 | $ 4,636 | $ 1,986 | $ 6,622 | |||
Net income | 7,039 | 3,016 | 10,055 | |||
Other comprehensive income: | ||||||
Net change in fair value of: | ||||||
Interest rate hedge of company- | ||||||
GA/KY Fundco LLC | 5 | 3 | 8 | |||
Interest rate hedge of Cagle Foods | ||||||
Credit, L.L.C.- equity method | ||||||
investment | 41 | 18 | 59 | |||
Total comprehensive income | 7,085 | 3,037 | 10,122 | |||
Distributions to members | (4,005) | (1,716) | (5,721) | |||
BALANCE-December 27, 2003 | 7,716 | 3,307 | 11,023 | |||
See notes to financial statements. |
CAGLE'S-KEYSTONE FOODS LLC | ||
STATEMENTS OF CASH FLOWS - Unaudited | ||
(Dollars in thousands) | ||
52-Week Period Ended | ||
December 27, 2003 | ||
OPERATING ACTIVITIES: | ||
Net income | $ 10,055 | |
Adjustments to reconcile net income to net cash | ||
provided by operating activities: | ||
Depreciation and amortization | 9,154 | |
Loss on sale of equipment | 39 | |
Equity in income of affiliates | (269) | |
Dividends received from affiliates | 118 | |
Changes in operating assets and liabilities: | ||
Accounts receivable-net | 6,173 | |
Inventories | (5,985) | |
Accounts payable and accrued liabilities | (2,289) | |
Other | 2,585 | |
Net cash provided by operating activities | 19,581 | |
INVESTING ACTIVITIES: | ||
Investments in and advances to affiliates | 523 | |
Purchases of property, plant, and equipment | (2,464) | |
Proceeds from sale of property, plant, and equipment | 83 | |
Other assets and liabilities | (4) | |
Net cash used in investing activities | (1,862) | |
FINANCING ACTIVITIES: | ||
Net payments under revolving lines of credit | (12,000) | |
Principal payments on long-term debt | (8,817) | |
Loan fees | (245) | |
Debt-related party | 11,510 | |
Distributions to members | (5,721) | |
Net cash used in financing activities | (15,273) | |
NET INCREASE (DECREASE) IN CASH | 2,446 | |
CASH-Beginning of period | 951 | |
CASH-End of period | $ 3,397 | |
See notes to financial statements. |
CAGLE'S-KEYSTONE FOODS LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE 52-WEEK PERIOD ENDED DECEMBER 27, 2003
(Dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business-Cagle's-Keystone Foods LLC (the "Company") was
established as a limited liability company on October 31, 1997 and is a joint
venture between Cagle's, Inc. (30%) and Executive Holdings L.P. (70%). The
Company's operations are located in Albany and Franklin, Kentucky. The latest
date at which the limited liability company is to dissolve is December 31,
2022. The Company is engaged in the production and sale of processed chicken.
A significant portion of all of the Company's sales are made to the joint
venture partners (see Note 3).
Revenue Recognition-The Company recognizes revenue when the product is
shipped to customers, an exchange has taken place, and the applicable
provisions of Statement of Financial Accounting Standards ("SFAS") No. 48,
Revenue Recognition When Right of Return Exists, have been made.
Inventories-Live field inventories are stated at the lower of cost or
market and breeders are stated at cost, less accumulated amortization.
Breeder costs are accumulated up to the production stage. Such costs are
amortized into hatching egg costs over the estimated production lives
based on monthly egg production. Finished products, feed, medication, and
supplies are stated at the lower of cost or market determined by the
first-in, first-out method.
Inventories at December 27, 2003 consist of the following:
2003
Finished products $ 3,954
Field inventory, breeders, and eggs 10,145
Feed, ingredients, and medication 1,529
Supply inventory 2,328
--------
$ 17,956
Property, Plant, and Equipment-Property, plant, and equipment are stated at
cost. Depreciation is computed principally by the straight-line method for
financial reporting purposes over the following periods:
Buildings and improvements 3-30 years
Machinery, furniture, and equipment 3-17 years
Land improvements 7 years
The Company evaluates the estimated useful lives and the carrying value of
assets on a periodic basis to determine whether events or circumstances
warrant revised estimated useful lives or whether any impairment exists.
Management believes that no impairment existed at December 27, 2003.
Investment in Unconsolidated Affiliates-The equity method of accounting
is used to account for the Company's investment in unconsolidated
affiliates because of the Company's ability to exercise significant
influence.
Fair Value of Financial Instruments-The carrying amounts of cash,
accounts receivable, and accounts payable reflected in the financial
statements approximate fair values because of the short-term nature of
these instruments. Based on the borrowing rates currently available to
the Company for bank loans with similar terms and maturities, the Company
estimates that the carrying value of its long-term debt approximates fair
value. The fair value of the interest rate swaps (see Note 2) is the
amount the Company would receive or pay to terminate the swap agreements.
Use of Estimates-The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reporting Period-The Company's tax reporting year ends on the Saturday
closest to December 31, which for the current year was January 3, 2004.
For purposes of these financial statements, the Company has elected to
use the 52-week period ended December 27, 2003.
Income Taxes-The Company is a limited liability company and has received
a ruling from the Internal Revenue Service, which allows the Company to be
treated as a partnership for income tax purposes. As a partnership, it is
not subject to income taxes and the partners report their proportionate
share of the income on their tax returns.
Accumulated Other Comprehensive Loss-Included in members' equity is
accumulated other comprehensive loss related to interest rate swaps
(see Note 2) of $149 as of December 27, 2003.
Derivative Instruments and Hedging Activities-On December 31, 2000, the
Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which amended SFAS No. 133.
These standards require companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting.
Interest Rate Swap Agreements-These agreements involve the receipt of a
floating rate of interest on long-term debt in exchange for a fixed-rate
of interest over the life of the agreements without an exchange of the
underlying debt principal amount. These swap agreements have been
designated as cash flow hedges and their fair values are recognized as
an asset or liability in the financial statements with a corresponding
gain or lose recognized, in accumulated other comprehensive (loss) income
in members' equity.
Interest Rate Collar Agreements-These agreements involve the receipt of
a floating rate of interest above a certain cap or below a certain floor
on long-term debt in exchange for the cap or the floor over the life of
the agreements without an exchange of the underlying debt principal amount.
These agreements did not qualify as hedges under SFAS No. 133. The fair
values of the collars are recognized as an asset or liability in the
financial statements with a corresponding gain or loss recognized as
income or expense.
New Accounting Pronouncements-
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities-an Interpretation of Accounting Research Bulletin No.
51. FIN 46 addresses consolidation by business enterprises where equity
investors do not bear the residual economic risks and rewards. The
underlying principle behind FIN 46 is that if a business enterprise has
the majority financial interest in an entity, which is defined in FIN 46
as a variable interest entity, the assets, liabilities and results of the
activities of the variable interest entity should be included in
consolidated financial statements with those of the business enterprise.
In December 2003, the FASB issued Revised FIN 46 ("FIN 46R") to clarify
certain aspects of FIN 46 including the determination of who is the
primary beneficiary of a variable interest entity. FIN 46R postponed the
effective date as to when companies are required to apply the provisions
of FIN 46 prospectively for all variable interest entities in existence
prior to January 31, 2003 until the first financial reporting period that
ends after March 15, 2004. However, for entities that are considered to
be special purpose entities, the effective date of FIN 46 is financial
reporting periods after December 15, 2003. The Company is evaluating the
impact of FIN 46 to determine the effect, if any, the pronouncement will
have on its financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. In particular, this statement clarifies
under what circumstances a contract with an initial net investment meets
the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. This statement is effective for contracts entered into or
modified after June 30, 2003. Adoption of the pronouncement did not have
a significant impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and
Equity. SFAS No. 150 establishes how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. As a result
of concerns over implementation and measurement issues, the FASB
unanimously decided on October 29, 2003 to defer the application of SFAS
No. 150 to certain noncontrolling interests of limited-life entities that
are consolidated in the financial statements. Adoption of the
pronouncement did not have a significant impact on the Company's
financial statements.
On January 12, 2004, the FASB issued FASB Staff Position No. FAS 106-1,
Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 ("FSP 106-1").
FSP 106-1 permits employers that sponsor postretirement benefit plans that
provide prescription drug benefits to retirees to make a one-time election
to defer accounting impact, if any, of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the "Act"), which was enacted
into law on December 8, 2003. The Company has elected to defer recognition
of the provisions of the Act as permitted by FSP 106-1 due to uncertainties
regarding some of the new Medicare provisions and a lack of authoritative
accounting guidance regarding certain matters. Changes to previously
reported information may be required depending on the transition guidance
issued in future authoritative guidance.
2. LONG-TERM DEBT
Long-term debt at December 27, 2003 consists of the following:
Notes payable to GA/KY Fundco LLC under a term loan
agreement, variable interest rate (2.92% at December
27, 2003) commencing April 30, 2002, maturing on
April 19, 2007.
$ 54,563
Note payable to Equity Group-Georgia Division LLC, a
related party, variable interest rate (2.89% at
December 27, 2003), due on demand. 15,500
Note payable to Cagle Foods Credit, L.L.C., a
related party, 6.5% fixed interest rate, due
on demand. 875
Note payable to Cagle Foods Credit, L.L.C., a
related party, 9.25 % fixed interest rate, due
on demand. 601
--------
Total 71,539
Current portion of long-term debt 7,500
Related party debt-due on demand 16,976
--------
Total long-term debt $ 47,063
Fundco was established in 1997 as a 50%-owned subsidiary of both the Company
and Equity GA. Fundco is a special purpose entity set up for borrowing of
funds from a group of banks to fund the capital needs of the Company and
Equity GA. All borrowing terms entered into by Fundco are the same borrowing
terms passed down to the Company and Equity GA. Fundco has no other
operations. At December 27, 2003, Equity GA had $22.9 million outstanding
for the term loan facility and none for the revolving loan facility. The
debt is secured by substantially all of the Company's' assets.
Aggregate maturities of long-term debt during the years subsequent to
December 27, 2003 are as follows:
For the fiscal year
2004 $ 24,476
2005 8,000
2006 8,000
2007 31,063
--------
$ 71,539
The Company incurred approximately $2,207 in loan origination costs
related to the term loan and revolver, which is being amortized on a
straight-line basis over the term of the loan, five years. Amortization
expense related to the loan origination costs was $462 in 2003.
In 2003 the Company paid approximately $2,750 in interest expense.
On January 15, 2003, Fundco entered two new interest rate collars on
behalf of the Company and Equity GA. The collars allow Fundco to incur a
floating rate of interest on the outstanding notional amount between a
specified range. The collar swaps floating three-month LIBOR for fixed
rates whenever the floating rate exceeds the cap rate (4%) or falls below
the floor rate (1.5%). Each contract originated with a notional amount of
$28,350. The notional amounts amortize over a three-year term in
proportion to the underlying Fundco term loan. The collars differ in that
one has a conventional cap which may trigger payments on a period-by-period
basis, while the other has a cumulative cap which will only trigger payments
when the sum of all floating rate payments exceed interest at the cap rate
over the life of the contract. As of the date of this report it is highly
probable that the underlying loan for which these derivative contracts were
entered will be terminated in the near term. For this reason, the collars
are not given hedge accounting and changes in their market values are
reflected in other income and expenses of the Company in the amount of $97.
At December 27, 2003 Fundco had an unused standby letter of credit
available to the Company amounting to $4,760.
3. RELATED PARTY TRANSACTIONS
Sales to the Company's owners (Executive Holdings L.P. through its common
ownership affiliate Keystone Foods LLC and Cagle's, Inc.) represented 80%
of net sales during 2003. The Company currently sells deboned chicken at
cost plus $.03 per eviscerated pound.
Executive Holdings L.P. and Cagle's Inc. both charge the Company
administrative fees based on the Company's volume of production. These
fees totaled $2,430 in 2003.
Sales, expenses, and balances with related parties for 2003 summarized as follows:
Executive | ||||||||||
Holdings | Franklin | Cagle's, | ||||||||
L.P. | Equipment | Equity GA | Credit | Inc. | ||||||
2003 | ||||||||||
Net sales | $ 172,580 | $ - | $ 561 | $ - | $ 21 | |||||
Purchases | 5,973 | |||||||||
Interest income (expense) | 14 | (300) | (91) | |||||||
Balance at year-end: | ||||||||||
Net A/R, (A/P) | 4,547 | (58) | (56) | |||||||
Notes receivable | ||||||||||
Notes payable | 15,500 | 1,476 |
In 2003, Cagle Foods Credit, L.L.C. ("Credit"), a related party,
transferred two foreclosed consumer loans and the related real estate that
collateralized the loans to the Company. The Company acquired this real
estate from Credit for the book value and issued notes payable as
consideration for this acquisition. The real estate collateral is recorded
in other assets at the loan values which approximate fair market value and
are held for resale. The balance of the notes payable at December 27, 2003
were $875 (6.5% fixed rate interest) and $601 (9.25% fixed rate interest).
4. COMMITMENTS
In 2003, the Company entered into a five year industrial power agreement
with South Kentucky Rural Electric Cooperative Corporation (the "Co-op").
Under the terms of this agreement, the Co-op has agreed to provide the
substation and other facilities costing approximately $518 to supply the
Company with its power requirements. The cost of these facilities will be
recovered through rates over the life of the contract.
Additionally in 2003, the Company entered into a five year emergency backup
service agreement with the Co-op. Under the terms of this agreement, the
Co-op has agreed to provide the backup generators and associated equipment
and facilities costing approximately $608 to provide backup electric to the
Company in the event of a power interruption. The Company has agreed to pay
an annual facilities charge of $114 for the availability of this service.
The Company leases machinery and equipment under operating leases. Rent
expense was $2,649 in 2003.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consisted of the following at December 27, 2003:
For the fiscal year
2004 $ 2,855
2005 2,855
2006 2,733
2007 1,720
2008 843
Thereafter 318
--------
$ 11,324
5. INVESTMENT IN UNCONSOLIDATED AFFILIATE
Effective December 1995, Cagle's, Inc., Executive Holdings L.P., and Equity
GA formed Credit. Each Company made capital contributions of $3. Effective
July 1, 1998, the Company became a member of Credit, at which time the
Company made a capital contribution of $14. Currently, the Company owns 25%
of Credit along with Equity GA (25%) and Executive Holdings L.P. (50%).
Credit was formed for the purpose of financing the facilities of the
Company's and Equity GA's contract growers. The investment is being
accounted for under the equity method. The undistributed income from this
affiliate allocated to the Company was $269 in 2003. The Company received distributions of $118 in 2003.
On April 30, 2002, Credit executed a loan agreement for a $25.3 million
revolving loan facility at variable interest rates. The Company and Equity
GA have guaranteed the borrowings under the loan agreement. Credit has
received advances of approximately $21.7 million on the revolving loan
facilities as of December 27, 2003. The revolving loan facility is due
in monthly installments. Credit is required to make a final balloon
payment in April 2007.
Credit has consumer loans receivable of approximately $20.8 million at December 27, 2003. Credit has total assets of approximately $24.4 million and total liabilities of approximately $22.6 million as of December 27, 2003 and net income of approximately $1,076 for 2003.
6. BENEFIT PLANS
The Company contributes to a 401(k) retirement plan for employees who meet
the eligibility requirements. Under the plan, the Company contributes up
to 2% of participating employees' salaries. Amounts contributed by the
Company to the 401(k) plan totaled $95 in 2003. During 2003, the Company introduced a defined contribution plan for certain employees not covered by collective bargaining agreements. Contributions are made on the basis of a percentage of each employee's salary and pension expense for 2003 was $227.
The Companies' accumulated postretirement benefit obligation, which is
unfunded, is $328 at December 27, 2003. The accrued postretirement benefit
cost recognized in the accompanying balance sheets is $113 at December 27,
2003. No retiree benefit payments were paid in 2003.
Actuarial assumptions used to determine the liability for postretirement
plans other than pensions included a discount rate of 6.25% at December
27, 2003.
For measurement purposes, an average 5.5% annual increase in the per capita
cost of covered health care benefits was assumed for 2003.
The net periodic postretirement benefit costs were $93 for 2003.
7. CONTINGENCIES
The Company is a party to various lawsuits in the ordinary course of doing
business. The Company intends to defend these matters vigorously. The
outcome of such lawsuits cannot presently be determined, but in the opinion
of management, the aggregate liability, if any, arising from such
litigation will not have a material adverse effect on the accompanying
financial statements.
8. SUBSEQUENT EVENT
As described in Note 1, the Company is owned 70% by Executive Holdings
L.P., which is affiliated with Keystone Foods LLC and various other
entities through common ownership. On April 2, 2004, the Company became
subject to an agreement under which the Company and various other entities
affiliated by common ownership with Keystone Food LLC would be merged into
one entity and an unrelated third party would obtain a controlling equity
interest in that entity. The agreement is subject to regulatory approval
and satisfaction of the conditions agreed to by the parties. Following
that merger, it is likely that borrowing agreements outstanding at December
27, 2003 would be replaced by new agreements entered into by the postmerger
entity. The accompanying financial statements do not reflect any adjustments
that might result from the merger or repayment of debt.
