FINANCIAL STATEMENTS
CAGLE FOODS JV, L.L.C.
For the Year ended December 27, 1997 and December 28, 1996
with Report of Independent Auditors
INDEPENDENT AUDITORS' REPORT
Steering Committee of Cagle Foods JV, L.L.C.
We have audited the accompanying balance sheet of Cagle Foods JV, L.L.C. as
of December 27, 1997 and the related statements of income, members' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The Company's
financial statements as of and for the year ended December 28, 1996 were
audited by other auditors whose report dated March 14, 1997 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 27,
1997 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/S/ Deloitte & Touche LLP
Atlanta, Ga.
February 20, 1998
CAGLE FOODS JV, L.L.C.
BALANCE SHEETS
(In Thousands) December 27, 1997 December 28, 1996
Assets
Current assets:
Cash $ 202 $ 217
Accounts receivable:
Related parties 10,622 6,355
Other 2,600 1,642
--------------- ---------------
13,222 7,997
Inventories 14,059 18,712
Prepaid expenses 604 366
---------------- ---------------
Total current assets 27,087 27,292
Investment in affiliated companies 1,752 1,351
Property, plant, and equipment:
Land 923 963
Land improvements 2,235 2,155
Buildings and building equipment 40,849 23,619
Machinery and equipment 22,078 21,423
Furniture and fixtures 440 387
Construction-in-process 77 733
---------------- -------------
66,602 49,280
Accumulated depreciation 13,793 9,146
---------------- --------------
52,809 40,134
Other assets 801 560
---------------- -------------
$83,449 $69,337
. ================ =============
Liabilities and members' equity
Current liabilities:
Accounts payable $ 6,816 $ 6,066
Accrued expenses 4,315 3,129
Current portion of long-term debt 6,500 -
-------------- -------------
Total current liabilities 17,631 9,195
Long-term debt 35,950 35,676
Members' Equity 32,868 24,466
-------------- -----------
. $83,449 $69,337
. ================ =============
See notes to financial statements.
CAGLE FOODS JV, L.L.C.
STATEMENTS OF INCOME
(In Thousands) Year ended Year ended
Dec.27,1997 Dec.28,1996
-------------- --------------
Net sales:
Related parties $184,979 $147,218
Other 13,361 11,672
. -------------- --------------
Total Net Sales 198,340 158,890
Cost of products sold 177,874 141,623
Selling and administrative expenses 1,763 8,077
. -------------- --------------
179,637 149,700
. -------------- --------------
Operating income 18,703 9,190
Other income (expense):
Other income 439 345
Interest expense (2,451) (2,781)
Other expense (2,493) (1,891)
. --------------- --------------
Net income $ 14,198 $ 4,863
. =============== ==============
See notes to financial statements.
CAGLE FOODS JV, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
(In Thousands)
Executive Cagle's,
Holdings Ltd. Inc. Total
------------- --------- --------
Balance - December 30, 1995 $8,423 $8,424 $16,847
Capital Contribution 3,152 3,152 6,304
Net Income 2,432 2,431 4,863
Distribution of income (1,774) (1,774) (3,548)
--------------------------------
Balance - December 28, 1996 12,233 12,233 24,466
Net Income 7,099 7,099 14,198
Distribution of income (2,898) (2,898) (5,796)
--------------------------------
Balance - December 27, 1997 $16,434 $16,434 $32,868
See notes to financial statements.
CAGLE FOODS JV, L.L.C.
STATEMENTS OF CASH FLOWS
(In Thousands)
Year ended Year ended
December 27,1997 December 28,1996
------------ ------------
Operating activities:
Net income $ 4,198 $ 4,863
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,375 4,385
Undistributed income of affiliates (401) (327)
Gain on sales of property, plant and equipment (39) (17)
Changes in operating assets and liabilities:
Accounts receivable (5,225) (923)
Inventories 4,653 (9,339)
Prepaid expenses (238) (37)
Other assets (439) (20)
Accounts payable 750 1,754
Accrued expenses 1,186 578
------------- -------------
Net cash provided by operating activities 18,820 917
Investing activities:
Proceeds from the sale of property,
plant, and equipment 129 44
Purchases of property, plant, and equipment (16,942) (1,718)
Investment in affiliated company (3)
------------- -------------
Net cash used in investing activities (16,813) (1,677)
Financing activities:
Long-term borrowings 8,625 285
Repayments of long-term debt (4,851) (3,675)
Distribution of income (5,796) (3,548)
Capital contributions 6,304
------------- -------------
Net cash used in financing activities (2,022) (634)
------------- -------------
Net decrease in cash and cash equivalents (15) (1,394)
Cash and cash equivalents:
Beginning of period 217 1,611
------------- -------------
End of period $ 202 $ 217
============= =============
Supplemental disclosures of cash flow
Information- Cash paid during the year
for interest (net of capitalized
interest of $280 in 1997) $ 2,741 $ 2,546
. ============= =============
See notes to financial statements.
Cagle Foods JV, L.L.C.
NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
DECEMBER 27, 1997 AND DECEMBER 28, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Cagle Foods JV, L.L.C. (the "Company") was established as a Limited Liability
Company on March 27, 1993 and is a joint venture between Cagle's, Inc. and
Executive Holdings Ltd. The latest date at which the Limited Liability
Company is to dissolve is 2022. The Company is engaged in the production
and sale of processed chicken. Primarily all of the Company's sales are made
to Executive Holdings Ltd. (see Note 3)
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, 1997 and December 28, 1996 consist of the following
(in thousands): 1997 1996
-------- --------
Finished products $ 2,703 $ 5,666
Field inventory, breeders, and eggs 10,237 12,111
Feed, ingredients, and medication 826 654
Supply Inventory 293 281
---------------- ------------------
$ 14,059 $ 18,712
. ================ ==================
Property, Plant, and Equipment
Property, plant, and equipment is 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
Vehicles 1-8 years
Other Assets
Other assets consist primarily of organizational costs and loan origination
fees which are amortized on a straight-line basis over seven years.
Accumulated amortization related to organization costs and loan origination
fees was $729,000 and $512,000 at December 27, 1997 and December 28, 1996,
respectively.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivables, 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Fiscal Year-End
The Company follows a fiscal year which ends on the Saturday nearest to the
end of the month of December.
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.
Interest Rate Swap Agreements
These agreements involve the receipt of a floating-rate of interest on long-term
debt in exchange for fixed-rate of interest over the life of the
agreements without an exchange of the underlying debt principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The
fair values of the swap agreements are not recognized in the financial
statements.
Reclassifications
Certain reclassifications have been made in 1996 to conform with the 1997
financial statement presentation.
2. LONG-TERM DEBT
Long-term debt at December 27, 1997 and December 28, 1996, respectively,
consists of the following (in thousands):
1997 1996
----------- ------------
Note Payable to Cagle's, Inc., variable
interest rate (7.97% at December 27, 1997
and 7.6% at December 28, 1996),
maturing on March 27, 2000 $1,400 $1,400
Notes payable to GA/KY Fundco LLC under a
term loan agreement, variable interest rate
(6.78% at December 27,1997) due in installments
commencing March 31, 1998 32,950
Notes payable to GA/KY Fundco LLC under a
revolving credit agreement, variable
interest rate (6.78% at December 27, 1997
maturing on September 30, 2002 5,100
Notes payable to financial institutions under
a revolving credit agreement, variable interest
rate (ranging from 6.50% to 6.59%
at December 28, 1996) maturing on
December 31, 1999 9,951
Notes payable to financial institutions under
a term loan agreement, variable interest rate
(6.53% at December 28, 1996), due in installments
commencing March 31, 1998 24,325
---------- -----------
39,450 35,676
Less amounts currently due 6500 -
---------- -----------
Total long-term debt $32,950 $35,676
On November 7, 1997, the Company executed a loan agreement for a $33 million
loan facility and $15 million revolving loan facility at variable interest
rates. The proceeds were used to repay the existing term and revolving loans
as described below. This agreement was entered into by GA/KY Fundco L.L.C.
("Fundco")(a 50% owned subsidiary) on the behalf of Cagle's-Keystone Foods
L.L.C. ("Kentucky")(a related party) and the Company. This loan is guaranteed
by the Company and Kentucky.
Fundco was established in 1997 as a 50% owned subsidiary of both the Company
And Kentucky. 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
Kentucky. Fundco has no other operations.
On December 20, 1993, the Company executed a loan agreement for a $28 million
term loan facility and a $5 million revolving loan facility at variable
interest rates. On August 16, 1995, the loan agreement was amended to
increase the revolving loan commitment to $12 million, extend the revolving
loan maturity date to December 31, 1998, and reduce the annual fee for the
unused portion of the revolving loan commitment to 0.25%. On December 31,
1996, this debt was refinanced and the Company entered into an agreement for
a $38 million term loan facility and a $12 million revolving loan facility.
Aggregate maturities of long-term debt during the years subsequent to December
27, 1997 under the term and revolving loan of Fundco related to the portion
borrowed by the Company the note payable to Cagle's, Inc. are as follows
(in thousands): For the year ended:
January 2, 1999 6,500
January 1, 2000 7,000
December 30, 2000 8,400
December 29, 2001 7,500
December 28, 2002 10,050
---------
$39,450
The Company has incurred approximately $1,277,000 in loan origination costs
related to the term loan and revolver which is being amortized on a straight
line basis over seven years (the term of the loan). Amortization expense
related to the loan origination costs amounted to approximately $165,000 in
1997 and $152,000 in 1996.
The Company has entered into interest rate swap agreements to reduce the impact
of changes in interest rates on its term and revolving note agreement which
expire June 30, 2000. At December 27, 1997 and December 28, 1996, the Company
had two outstanding interest rate swap agreements, having a notional amount
of $18.2 million and $23.1 million, respectively. The notional amount declines
over the term of the swap agreement. Approximately $8,847 and $69,336 in
unrealized gains exist on these agreements at December 27, 1997 and December
28, 1996, respectively. These agreements effectively fix the average interest
rate on the Company's term and revolving loan agreements at 5.845% plus a
spread based on the Company's Debt to Cash flow ratio through 2000. Under the
terms of the agreements, the Company makes payments at fixed rates and
receives payments at variable rates based on LIBOR adjusted quarterly.
The Company does not intend to terminate these agreements prior to the maturity
date. The Company is exposed to credit loss in the event of nonperformance by
the other party to the interest swap agreement. However, the Company does not
anticipate nonperformance by the counterparties.
At December 27, 1997 the Company has an unused letter of credit amounting
to $500,000.
3. RELATED PARTY TRANSACTIONS
Sales to the Company's owners (Executive Holdings Ltd./Keystone Foods
Corporation and Cagle's, Inc.) represented 93.3% and 92.7% of net sales
during the year ended December 27, 1997 and the year ended December 28,
1996, respectively. The Company sells deboned chicken at cost plus $.03
per eviscerated pound to Executive Holdings Ltd. The Company also sells
other chicken components at market price to Cagle's, Inc.
During 1996, Executive Holdings Ltd. and Cagle's, Inc. charged the
Company a management fee based on the Company's volume of production.
In 1997, the management was terminated. Executive Holdings Ltd. and
Cagle's, Inc. both charge the Company administrative service fees based
on the Company's volume of production. The Company pays Cagle's, Inc.
for computer processing services for which it charges a fee based on the
Company's volume of production.
Sales, expenses and balances with related parties for 1997 and 1996 are
summarized as follows:
(In Thousands)
Cagle's-
Executive Cagle's Keystone
Holdings Ltd. Inc. LLC
1997
Sales $160,972 $24,007 $
Administrative service and other fees 1,247 1,579
Balances at year end:
Accounts receivable 7,182 2,253 1,187
Note payable 1,400
1996
Sales $132,344 $14,874
Management fee 3,152 3,152
Administrative service and other fees 946 1,304
Balances at year end:
Accounts receivable 5,223 1,132
Note payable 1,400
4. COMMITMENTS AND CONTINGENCIES
The Company leases machinery and equipment under operating leases. The leases
for the machinery and equipment require payments of contingent rentals based
on usage in excess of a specified minimum, and future rental payments may be
adjusted for increases in maintenance and insurance above specified amounts.
Rent expense for the years ended December 27, 1997 and December 28, 1996 was
approximately $471,000 and $477,000, respectively.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more made on behalf of Keystone by the Company, consisted
of the following at December 27, 1997: (In Thousands)
January 2, 1999 $ 3,904
January 1, 2000 3,765
December 30, 2000 3,720
December 29, 2001 3,632
December 28, 2002 3,895
Thereafter 10,640
--------
$29,556
The schedule above includes leases for certain vehicles which may require
the Company to make additional payments if the sales price of the vehicle
at the end of the lease term is below the guaranteed residual value.
During 1994, the Company entered into an agreement with the City of Camilla,
Georgia whereby the City agreed to construct a water tower and waste water
treatment system primarily for the Company. The Company has agreed to
service the debt incurred by the City to construct these facilities under
the condition that the City provide adequate water and waste water treatment
services. If the City is unable to provide water and waste water treatment
services, the Company is not obligated to repay the debt. The cost and
related debt associated with these facilities was approximately $10.1 million.
The Company has agreed to make annual debt service payments of approximately
$746,000 through May, 2016.
During 1995, the Company entered into an agreement with the City of Camilla,
Georgia whereby the City agreed to construct a power substation primarily
for the Company. The Company has agreed to service the debt incurred by the
City to construct these facilities under the condition that the city provide
an adequate power supply to the processing plant. If the City is unable to
provide an adequate power supply, the Company is not obligated to repay this
debt. The total cost and debt associated with these facilities was
approximately $205,000. The Company has agreed to make annual debt service
payments of approximately $41,000 through June 2005.
The Company has entered into an agreement with the City of Camilla, Georgia
to construct an additional waste water treatment facility to service the
processing plant including the planned expansion. Under the terms of the
agreement, the Company is responsible for the estimated total cost of the
facility of approximately $2.1 million less any grant money received by the
City of Camilla to fund this project. During 1996, the Company has incurred
approximately $619,000 in costs which are to be reimbursed by the City.
During 1997, the Company has received reimbursements totaling approximately
$482,000. The remaining unreimbursed amounts are expected to be received
during 1998. The Company will be required to reimburse the City over a
twenty-year period for costs incurred in excess of grants received.
Additionally, the Company will be required to pay for the maintenance and
operations of the facility.
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
At the date the Company was formed (March 27, 1993), Cagle's, Inc.
transferred their investment of approximately $894,000 (50% of the
outstanding stock) in a grain elevator corporation to the Company. The
investment is being accounted for under the equity method. The
unaudited undistributed income for the years ended December 27, 1997 and
December 28, 1996 from this affiliate allocated to the Company was
approximately $416,000 and $351,000, respectively. The Company
purchased, at prices approximating market, $70.2 million and $62.3 million
in feed ingredients from this affiliate during 1997 and 1996, respectively.
Effective December 1995, Cagle's, Inc., Executive Holdings, L.P., and the
Company formed Cagle Foods Credit, L.L.C. (the "Credit Company"). Each
Company has made capital contributions of $3,000. The Credit Company
was formed for the purpose of financing the facilities of the Company's
contract growers. The investment is being accounted for under the equity
method. The undistributed loss from this affiliate allocated to the
Company was approximately $15,000 in 1997 and $21,000 in 1996.
The Credit Company executed a loan agreement for a $15 million revolving
loan facility at variable interest rates. The Company has guaranteed
the borrowings under the loan agreement. The Credit Company has received
advances of approximately $13.1 million on the revolving loan facility as
of December 27, 1997. The Credit Company has consumer loans receivable of
approximately $12.8 million at December 27, 1997.
6. BENEFIT PLANS
Substantially all of the Company's union employees are covered by a
union-sponsored multi-employer defined benefit plan to which the Company
contributes amounts specified by the union contract. A separate actuarial
valuation for this plan is not made for the Company. Accordingly,
information with respect to accumulated plan benefits and net assets
available for benefits is not presented. Under the Employee Retirement
Income Security Act of 1974 as amended in 1980, an employer upon withdrawal
from a multi-employer plan is required, in certain cases, to continue
funding its proportionate share of the plan's unfunded vested benefits.
As of November 1, 1997, the union contract was renegotiated and as a result,
pension benefits were increased by approximately 25%. Amounts paid for
pension benefits for union employees totaled approximately $234,000 in 1997
and $184,000 in 1996.
The Company also has a 401(k) retirement plan for employees not covered
under the collective bargaining agreement. Under the plan, the Company
contributes up to 2% of participating employees' salaries. Amounts
contributed by the Company to the 401(k) plan totaled approximately $39,000
in 1997 and $29,000 in 1996.
7. SUBSEQUENT EVENTS
On December 31, 1997, Fundco, on behalf of the Company and Kentucky, entered
into two interest rare swap agreements with expiration dates of December 31,
2002, which effectively fix the average interest rate on notional amounts of
$4.2 million at 6.00& and $3.6 million at 5.98%, plus a spread based on the
Company's debt to cash flow ratio. These notional amounts change in the
future based on amounts outstanding under the Company's term and revolving
loan agreements. Under the terms of the agreements, the Company makes payments
at fixed rates and receives payments at variable rates based on the three-month
LIBOR rate.