Cagle's
1998 Annual Report
Fiscal Year Ended March 28, 1998
<PAGE>
Cagle's Inc. and Subsidiary
CHIEF EXECUTIVE OFFICER'S LETTER
To Our Stockholders
The past year was another tough year for our industry and our Company;
however, we remained profitable for the year. This is a credit to our
employees, contract growers and customers.
Even with the tight margin situation throughout most of the year the Company
continued to grow. The formation of a new Joint Venture company to construct
and operate a broiler complex in Simpson and Clinton Counties of Kentucky was
announced in November and will provide future growth.
The Company added to its further processing capabilities by acquiring a facility
in Atlanta. This facility was brought on line and into production in November
1997 and added much needed capacity to our IQF product lines. This facility
offers exciting new product development and production opportunities that were
previously limited.
The outlook for the next year is encouraging as grain cost and market prices
are presently favorable for producing more normal results. Obviously weather
and global demands can affect final performance.
Except for one major capital project planned for Fiscal 1999 (a freezer
warehouse at the Collinsville Plant) and normal equipment replacements, we
plan to use cash flow to reduce debt to more acceptable levels.
Your continued support as always is sincerely appreciated.
/s/ J. Douglas Cagle
J. Douglas Cagle
. 1
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company remained profitable for the year ended March 28, 1998 despite
depressed export markets and lower white meat prices domestically throughout
most of the year and the added impact of higher soybean meal which took away
much of the benefit derived from more normal corn prices.
During the course of the year the Company announced the formation of a new
Joint Venture to build a broiler complex in Kentucky which, when complete,
will have the production capacity of over 1.3 million broilers per week.
This Joint Venture, as did the existing Joint Venture, provides the Company
with a means of expansion with limited commitments of capital resources
otherwise required.
Year 2000 Compliance;
The Company has assessed the impact of the year 2000 on its reporting
systems and operations. The Company believes its plans, which are expected
to be fully implemented by the end of 1998, will adequately resolve year
2000 compliance issues and will result in an immaterial impact on the
Company's results of operations.
1998 Compared to 1997;
Net sales decreased by 2.46% as compared to Fiscal 1997. The decrease is
attributed to 2.65% less tonnage than in Fiscal 1997 combined with lower
average market prices throughout most of the year. Gross margins for the
year were slightly lower than for Fiscal 1997 (4.78% as compared to 4.95%).
This is again the result of lower selling prices, which more than offset
feed cost which averaged 13.6% lower for the year compared to Fiscal 1997.
Selling and delivery expense and general and administrative expense for
Fiscal 1998 as a percentage of sales were .22% lower than Fiscal 1997
(4.95% vs. 5.17%) with the major decrease being professional expense
(legal, accounting, etc.) due to the inclusion of consulting fees for the
insurance claims relating to the fire in June 1995 that were included in
Fiscal 1997 expenses and not in Fiscal 1998. Commissions were also notably
lower as a result of the lower sales in Fiscal 1998 than in Fiscal 1997.
Interest expense was 21.16% lower in Fiscal 1998 than in Fiscal 1997 and is
primarily the result of lower average debt levels.
Other income includes earnings from unconsolidated affiliates of $7,483,000
in Fiscal 1998 as compared to $7,753,000 of fees and profits in Fiscal 1997.
The Fiscal 1998 amount is reduced by $286,000 of start-up losses attributable
to the new Kentucky Joint Venture, which is scheduled to begin production in
late calendar year 1998.
<PAGE>
The provision for income taxes is computed at statutory rates allowing for
various tax credits available to the Company resulting in a net effective
rate of 36% as compared to 28% in Fiscal 1997.
. 2
<PAGE>
1997 Compared to 1996
Net sales increased by 14.5% ($45 million) as compared to Fiscal 1996.
This increase is attributed to increased production (up 23.8%) due to the
new Pine Mountain Valley facility operating at full one-shift capacity for
the entire year and higher market prices for broilers (12.3% as compared to
Fiscal 1996). Gross margins averaged lower than year-ago levels (4.95% vs.
5.6%) with high feed cost as the primary cause. Feed averaged 19.5% higher
than the average cost in Fiscal 1996. Cost of sales was reduced by $2.5
million as a result of recovery under the Company's business interruption
insurance claim from the Pine Mountain Valley fire loss.
Selling and delivery expenses and general and administrative expense as a
percentage of sales remained essentially the same as for the previous year,
3.08% for selling and delivery expense for each year and 2.08% vs. 2.01%,
respectively, for general and administrative expense.
Interest expense increased by 86.4% over Fiscal 1996 and is the result of
higher borrowing levels throughout the year.
Other income declined from previous-year levels due to the inclusion of
$8.9 million of difference in book value and proceeds from property
insurance in the Fiscal 1996 amount.
Fiscal 1997 includes $7,753,000 of fees and profits from unconsolidated
affiliates as compared to $4,940,000 in Fiscal 1996. Also included is a
charge of $635,000 for settlement of an OSHA citation at the Macon plant
and a favorable land condemnation ruling of $626,000.
The provision for income taxes is computed at statutory rates allowing for
various tax credits available to the Company resulting in a net effective
rate of 28%.
Financial Condition and Liquidity
The Company's balance sheet continues to be strong with a current ratio of
2.14 to 1 and a leverage ratio (funded debt to total capital) of .48 to 1,
and as of March 28, 1998 the Company had outstanding $28 million against its
revolving line of credit and had $6.7 million remaining available as needed
under revolving lines of credit. All of the Company's debt is unsecured.
As we currently view Fiscal 1999, conditions appear favorable for improved
earnings. Grain prices have continued to decline to more normal levels and
market prices for poultry have shown some improvement. These are the factors
most volatile in our business and variations due to weather demand,
international situations or otherwise can and will have a material effect
upon expected final performance.
. 3
<PAGE>
Five-Year Selected Financial Data
(In Thousands, Except Per Share Data)
52 Weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
March 28, March 29, March 30, April 1, April 2,
1998 1997 1996 1995 1994
--------- -------- -------- -------- ---------
OPERATING RESULTS:
Net sales................. $344,886 $353,567 $308,749 $349,770 $312,696
Operating expenses........ 345,498 354,345 307,105 331,140 299,425
--------- --------- -------- -------- --------
Operating income(loss).... (612) (778) 1,644 18,630 13,271
Interest expense.......... (3,673) (4,659) (2,499) (1,072) (1,336)
Other income, net......... 8,405 8,268 14,448 3,085 1,516
--------- --------- -------- -------- --------
Income before income taxes. 4,120 2,831 13,593 20,643 13,451
Provision for income taxes. 1,483 792 4,893 6,881 4,799
--------- -------- -------- -------- --------
Net Income................ $2,637 $2,039 $8,700 $13,762 $8,652
========= ======== ======== ======== ========
FINANCIAL POSITION:
Working capital..... $ 28,281 $ 31,940 $ 40,510 $17,592 $19,741
Total assets..... 139,419 139,397 142,687 88,771 69,220
Long-term debt and Capital
lease Obligations..... 48,366 49,798 58,508 15,233 11,819
Stockholders' equity..... 55,142 53,459 52,021 44,371 34,268
PERFORMANCE PER COMMON SHARE:*
Net Income:
Basic ..................... $0.53 $0.41 $1.73 $2.67 $1.66
Diluted ................... 0.53 0.41 1.73 2.66 1.66
Dividends.................. 0.12 0.12 0.12 0.105 0.085
Book value at the end of
the year ............... 11.04 10.68 10.39 8.81 6.58
Average number of common shares outstanding*
Basic ................ 4,994 5,006 5,018 5,152 5,224
Diluted ................... 5,003 5,017 5,032 5,165 5,242
*Restated to reflect the 25% stock dividend issued to stockholders of record
on January 3,1994 and the two-for-one stock split issued to stockholders of
record on January 3,1995.
_______________________________________
Dividend Policy
The board of directors considers dividends in light of operating results,
current earnings trends, and prevailing economic conditions.
Stockholders;
As of March 28, 1998, there were 308 stockholders of record of the Company's
Class A common stock.
Market Price of Common Stock;
The Company's common stock is listed and principally traded on the American
Stock Exchange, ticker symbol CGL. Quarterly dividend data and market highs
and lows for the past two years were:
Fiscal 1998 Fiscal 1997
. --------------------------- -----------------------------
Dividend High Low Dividend High Low
. -------- ------- -------- -------- --------- --------
Quarter:
First $0.030 $15 1/8 $10 7/8 $0.030 $16 3/8 $13 3/4
Second 0.030 17 1/4 14 3/4 0.030 16 12 1/2
Third 0.030 14 3/4 10 3/4 0.030 16 3/8 13
Fourth 0.030 12 7/8 10 1/4 0.030 17 5/8 11
. 4
<PAGE>
Management's Responsibility for Financial Statements
The management of Cagle's, Inc. and its subsidiary has the responsibility
for preparing the accompanying financial statements and for their integrity
and objectivity. The statements were prepared in accordance with generally
accounting principles applied on a consistent basis. In the preparation of the
financial statements, it is necessary to make informed estimates and judgments
based on currently available information as to the effect of certain events
and transactions. Management also prepared the other information in the
Annual Report and is responsible for its accuracy and consistency with the
financial statements.
Cagle's, Inc. and its subsidiary maintain accounting and other controls
which management believes provide reasonable assurance that financial
records are reliable, assets are safeguarded, and transactions are
properly recorded in accordance with management's authorization. However,
limitations exist in any system of internal control based upon the
recognition that the cost of that system should not exceed the benefits
derived.
Cagle's, Inc.'s independent auditors, Arthur Andersen LLP, are engaged to
audit the financial statements of Cagle's, Inc. and subsidiary and to express
an opinion thereon. Their audit is conducted in accordance with generally
accepted auditing standards to enable them to report whether the financial
statements present fairly, in all material respects, the financial position
and the results of operations and cash flows of Cagle's, Inc. and subsidiary
in conformity with generally accepted accounting principles.
/s/ J. Douglas Cagle /s/ Kenneth R. Barkley
J. Douglas Cagle Kenneth R. Barkley
Chairman and Chief Executive Office Senior Vice President Finance,
Treasurer and Chief Financial Officer
May 14, 1998
___________________________________________________
Report of Independent Public Accountants
To the Board of Directors and
Stockholders of Cagle's, Inc.:
We have audited the consolidated balance sheets of CAGLE'S, INC. (a Georgia
corporation) AND SUBSIDIARY as of March 28, 1998 and March 29, 1997 and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended March 28, 1998. 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 audits.
We conducted our audits 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 audits provide 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 Cagle's, Inc. and subsidiary
as of March 28, 1998 and March 29, 1997 and the results of their operations
and their cash flows for each of the three years in the period ended March
28, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
May 14, 1998
. 5
<PAGE>
Consolidated Balance Sheets
March 28, 1998 and March 29, 1997
(In Thousands, Except Par Values)
ASSETS 1998 1997
. ------------ -------------
CURRENT ASSETS:
Cash $ 226 $ 94
Trade accounts receivable, less allowance for
doubtful accounts of $752 and $408 in 1998
and 1997, respectively 17,269 18,001
Inventories 32,567 33,466
Insurance proceeds receivable 0 3,054
Deferred income tax assets 0 114
Other current assets 1,907 2,075
. ------------ -------------
Total current assets 51,969 56,804
. ------------ -------------
INVESTMENTS IN AND RECEIVABLES FROM
UNCONSOLIDATED AFFILIATES 27,069 19,570
. ------------ -------------
OTHER ASSETS 694 692
. ------------ -------------
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land 1,221 2,050
Buildings and improvements 46,960 48,486
Machinery, furniture, and equipment 49,473 45,394
Vehicles 4,402 4,067
Construction in progress 439 308
. ------------ -------------
102,495 100,305
Less accumulated depreciation (42,808) (37,974)
. ------------ -------------
59,687 62,331
. ------------ -------------
$139,419 $139,397
. ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt
and capital lease obligations $ 2,795 $ 3,325
Accounts payable 9,886 12,460
Accrued expenses 11,007 9,079
. ------------ -------------
Total current liabilities 23,688 24,864
. ------------ -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 48,366 49,798
. ------------ -------------
DEFERRED INCOME TAX LIABILITIES 12,223 11,276
. ------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value;
1,000 shares authorized, none issued 0 0
Common stock, $1 par value;
9,000 shares authorized,
5,006 shares issued in 1998 and 1997 5,006 5,006
Treasury stock (354) 0
Additional paid-in capital 7,946 7,946
Retained earnings 42,544 40,507
. ------------ -------------
55,142 53,459
. ------------ -------------
$139,419 $139,397
. ============ =============
The accompanying notes are an integral part of these consolidated
balance sheets.
. 6
<PAGE>
Consolidated Statements of Income;
For the Years Ended March 28, 1998, March 29, 1997, and March 30,1996
(In Thousands, Except Per Share Amounts)
1998 1997 1996
. ---------- ---------- ----------
NET SALES $344,886 $353,567 $308,749
COSTS AND EXPENSES:
Cost of sales 328,417 336,073 291,378
Selling and delivery 10,774 10,923 9,512
General and administrative 6,307 7,349 6,215
. ---------- ---------- ----------
345,498 354,345 307,105
. ---------- ---------- ----------
OPERATING (LOSS) INCOME (612) (778) 1,644
OTHER (EXPENSE) INCOME:
Interest expense (3,673) (4,659) (2,499)
Other income, net 8,405 8,268 14,448
. ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 4,120 2,831 13,593
PROVISION FOR INCOME TAXES 1,483 792 4,893
. ---------- ---------- ----------
NET INCOME $ 2,637 $ 2,039 $ 8,700
. ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 4,994 5,006 5,018
. ========== ========== ==========
Diluted 5,003 5,017 5,032
. ========== ========== ==========
PER COMMON SHARE:
Net income:
Basic and diluted $ 0.53 $ 0.41 $ 1.73
. ========== ========== ==========
Dividends $ 0.12 $ 0.12 $ 0.12
. ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
. 7
<PAGE>
Consolidated Statements of Stockholders' Equity
For the Years Ended March 28, 1998, March 29, 1997, and March 30,1996
(In Thousands)
Common Stock Treasury Stock Additional
-------------- -------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
. ------ ------ ------ ------ ------- --------
BALANCE, April 1,1995 5,034 $5,034 0 $ 0 $8,366 $30,971
Repurchase and retirement
of common stock (28) (28) 0 0 (420) 0
Net income 0 0 0 0 0 8,700
Cash dividends paid 0 0 0 0 0 (602)
. ------ ------ ------ ------ ------- --------
BALANCE, March 30,1996 5,006 5,006 0 0 7,946 39,069
Net income 0 0 0 0 0 2,039
Cash dividends paid 0 0 0 0 0 (601)
. ------ ------ ------ ------ ------- --------
BALANCE, March 29,1997 5,006 5,006 0 0 7,946 40,507
Purchase of treasury stock 0 0 (25) (354) 0 0
Net income 0 0 0 0 0 2,637
Cash dividends paid 0 0 0 0 0 (600)
. ------ ------ ------ ------ ------- --------
BALANCE, March 28,1998 5,006 $5,006 (25) $(354) $7,946 $42,544
. ====== ====== ====== ====== ======= ========
The accompanying notes are an integral part of these consolidated statements.
. 8
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended March 28, 1998, March 29, 1997, and March 30,1996
(In Thousands) 1998 1997 1996
. ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,637 $ 2,039 $ 8,700
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 7,840 7,761 5,289
Gain on disposal of property,
plant, and equipment (274) 0 (107)
Gain from insurance proceeds received for
property destroyed by fire (Note 2) 0 0 (8,902)
Income and management fee from unconsolidated
affiliates, net of distributions (4,499) (4,895) (2,878)
Changes in assets and liabilities:
Accounts receivable, net (24) 630 (3,618)
Inventories 899 (558) (7,626)
Insurance proceeds receivable 3,054 6,129 (9,183)
Other current assets (137) 406 (943)
Accounts payable (2,574) (1,029) (61)
Accrued expenses 1,969 1,303 (1,091)
Deferred income tax liabilities 1,061 1,839 4,145
. ------- ------- -------
Total adjustments 7,315 11,586 (24,975)
. ------- ------- -------
Net cash provided by (used in)
operating activities 9,952 13,625 (16,275)
. ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant,
and equipment (7,753) (6,776) (35,598)
Additions to investments
in unconsolidated affiliates 0 0 (100)
Decrease in other assets 770 346 (488)
Proceeds from disposal of property,
plant, and equipment 79 129 122
Insurance proceeds for property
destroyed by fire, net of costs (Note 2) 0 0 9,980
. ------- ------- -------
Net cash used in investing activities (6,904) (6,301) (26,084)
. ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 20,000 15,000 45,000
Payments of long-term debt and capital
lease obligations (21,962) (21,955) (1,727)
Repurchase and retirement of common stock 0 0 (448)
Purchase of treasury stock (354) 0 0
Cash dividends paid (600) (601) (602)
. ------- ------- -------
Net cash (used in) provided
by financing activities (2,916) (7,556) 42,223
. ------- ------- -------
NET INCREASE (DECREASE) IN CASH 132 (232) (136)
CASH AT BEGINNING OF YEAR 94 326 462
. ------- ------- -------
CASH AT END OF YEAR $ 226 $ 94 $ 326
. ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 3,504 $ 4,577 $ 2,290
. ======= ======= =======
Income taxes paid (refunded) $ 1,097 $(1,652) $ 2,755
. ======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
. 9
<PAGE>
Notes to Consolidated Financial Statements
March 28, 1998, March 29, 1997, and March 30,1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES;__________________________
Principles of Consolidation
The consolidated financial statements include the accounts of Cagle's,
Inc. and its wholly owned subsidiary (the "Company"). All significant
intercompany accounts and transactions have been eliminated. Investments
in unconsolidated affiliates are accounted for under the equity method
(Note 7).
Nature of Operations
The Company's operations, which are located in the Southeast, consist of
breeding, hatching, and growing chickens; feedmills; processing; and
further processing and marketing operations. The Company's products are
primarily sold in the United States to supermarkets, food distributors,
food processing companies, national fast-food chains, and institutional
users.
Inventories
Live field inventories of broilers 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 and amortized into broiler costs
over the estimated production lives based on monthly egg production. Finished
products; feed, eggs, and medication; and supplies are stated at the lower of
cost (first-in, first-out method) or market.
Inventories at March 28, 1998 and March 29, 1997 consist of the following
(in thousands):
. 1998 1997
. --------- ----------
Finished products $14,295 $12,188
Field inventory and breeders 14,036 16,294
Feed, eggs, and medication 2,582 3,472
Supplies 1,654 1,512
. --------- ----------
$32,567 $33,466
. ========= ==========
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method over the following lives:
Buildings and improvements 3 to 30 years
Machinery, furniture, and equipment 3 to 17 years
Vehicles 3 to 8 years
Maintenance and repairs are charged to expense 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.
Employee Insurance Claims
The Company is self-funded under a minimum premium arrangement for the
majority of employee claims under its group health plan. Since May 1992,
the union employees of the Company have been covered for health insurance
under a union health plan. The Company is self-insured for the majority of
its workers compensation risks. The Company's insurance programs are
administered by risk management specialists. Insurance coverage is obtained
for catastrophic workers compensation and group health exposures, as well
as those risks required to be insured by certain state laws. The Company's
accrual for group health and workers compensation liabilities of $3,943,000
and $3,143,000 as of March 28, 1998 and March 29, 1997, respectively, is
included in accrued expenses in the accompanying balance sheets.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share," effective March 28,
1998. Earnings per share have been computed based upon the weighted average
shares and dilutive potential common shares outstanding during the year. All
prior period earnings per share amounts have been restated to comply with
SFAS No. 128.
. 10
<PAGE>
The following table reconciles the denominator of the basic and diluted
earnings per share computations (in thousands):
1998 1997 1996
. ------ ----- -----
Weighted average common shares 4,994 5,006 5,018
Incremental shares from assumed
conversions of options 9 11 14
. ------ ----- -----
Weighted average common shares and
dilutive potential common shares 5,003 5,017 5,032
====== ===== =====
Fiscal Year
The Company's fiscal year closing date is the Saturday nearest March 31.
The fiscal year includes operations for a 52-week period in 1998, 1997,
and 1996.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the 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.
Fair Value of Financial Instruments
The book values of cash, trade accounts receivable, accounts payable, and
other financial instruments approximate their fair values principally because
of the short-term maturities of these instruments. The fair value of the
Company's long-term debt is estimated based on current rates offered to the
Company for debt of similar terms and maturities. Under this method, the
Company's fair value of long-term debt was not significantly different from
the stated value at March 28, 1998 and March 29, 1997.
Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates whether events and circumstances have
occurred which indicate that long-lived assets are impaired or that
remaining estimated lives may warrant revision and uses an estimate of
undiscounted cash flows over remaining lives of long-lived assets in
measuring whether the assets are recoverable.
Accounting for Stock-Based Compensation
The Company accounts for its stock-based compensation under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, no compensation cost has been recognized for stock options,
as all options were granted at an exercise price equal to or greater than
the estimated fair value of the common stock at the date of grant, as
determined by the Company's board of directors. The Company has adopted
the disclosure option of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires that companies which do not choose to
account for stock-based compensation as prescribed by this statement shall
disclose pro forma effects on earnings as if SFAS No. 123 had been adopted.
Additionally, certain other disclosures are required with respect to stock
compensation and the assumptions used to determine the pro forma effects of
SFAS No. 123.
No disclosure of pro forma earnings is required, as the Company did not grant
any stock options during fiscal years 1998, 1997 or 1996.
2.PINE MOUNTAIN VALLEY FIRE __________________________________________
On June 24, 1995, the Company's plant in Pine Mountain Valley, Georgia, was
destroyed by fire. The Company rebuilt the plant on the site, started
processing on a limited scale in November 1995, and reached prefire capacity
in January 1996.
As of March 30, 1996, the Company had received $9,980,000, net of costs, from
its insurance company in connection with assets destroyed by the fire. The
excess of the net property proceeds over the book value of the property of
$8,902,000 was recorded in other income.
The Company settled its insurance claims relating to business interruption
costs and lost profits due to the fire during the year ended March 29, 1997.
The Company recognized $2,538,000 and $10,928,000 relating to total proceeds
expected to be received under this claim as a reduction in cost of sales in
1997 and 1996, respectively. Proceeds not yet received under this claim as
of March 29, 1997 of $3,054,000 are included in insurance proceeds receivable
in the accompanying balance sheet.
The Company recognized $904,000 in 1996 related to proceeds received in
connection with inventory and spare parts destroyed by the fire as a
reduction of cost of sales in the accompanying statement of income.
. 11
<PAGE>
Notes to Consolidated Financial Statements, Continued
3.LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS __________________________
Long-term debt and capital lease obligations at March 28, 1998 and
March 29, 1997 consist of the following (in thousands):
1998 1997
. -------- --------
Term note payable to a syndicate of banks,
variable interest rates (ranging from 6.94%
to 7.16% at March 28, 1998), maturing June
30, 2003; unsecured $22,917 $25,000
Revolving credit agreement with a syndicate
of banks, maturing on July 31, 1999, variable
interest rates (ranging from 6.81% to 8.5% at
March 28, 1998); unsecured 28,000 19,000
Term note payable to an insurance company,
maturing on July 1, 2002; secured by certain
property, plant, and equipment 0 8,400
Capital lease obligations 0 463
Other notes payable at varying interest rates
and maturities 244 260
. -------- --------
51,161 53,123
Less current maturities (2,795) (3,325)
. -------- --------
. $48,366 $49,798
. ======== =========
The term note payable to a syndicate of banks provided for unsecured
borrowings up to $25,000,000. Principal and interest payments commenced
June 30, 1997 and continue until the note matures on June 30, 2003.
The revolving credit agreement with a syndicate of banks provides for
unsecured borrowings up to $35,000,000. Under this agreement, $5,000,000
of the $35,000,000 may be used for letters of credit. As of March 28, 1998,
a $250,000 letter of credit associated with the Company's insurance program
(Note 1) was outstanding and $6,750,000 was available under the revolving
credit agreement.
The term note payable to an insurance company bore interest at a fixed
rate of 8.6% through July 1, 1997, at which time the rate was subject to
adjustment. Principal payments plus interest commenced July 1, 1993 and
continued until July 1997, at which time the Company exercised its option
to prepay the note within 90 days after July 1, 1997, the interest rate
adjustment date.
The Company's debt agreements contain certain restrictive covenants which
require that the Company maintain (1) a current ratio of at least 1.5:1; (2)
an interest coverage ratio of at least 1.75:1, as defined; (3) a ratio of
total debt to capital, as defined, of not more than .50:1; (4) a minimum
tangible net worth, as defined, subject to increase based on the Company's
net earnings; and (5) capital expenditures not to exceed certain limits, as
defined in the debt agreements. At March 28, 1998, the Company was in
compliance with all covenants.
The Company has also leased property, plant, and equipment under a capital
lease with an initial term of 120 months. The net book value of assets under
the capital lease at March 28, 1998 and March 29, 1997 was $0 and $575,000,
respectively.
Aggregate maturities of long-term debt during the years subsequent to March
28, 1998 are as follows (in thousands):
1999 $ 2,795
2000 30,795
2001 2,799
2002 2,800
2003 2,802
Thereafter 9,170
. --------
$51,161
. 12
<PAGE>
4.INCOME TAXES _____________________________________________
The Company records deferred income taxes using enacted tax laws and rates
for the years in which the taxes are expected to be paid. Deferred income
taxes reflect the tax consequences on future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts.
The Revenue Act of 1987 rescinded the cash-basis method of accounting for tax
purposes, effective in fiscal 1989, previously used for the Company's
farming operations. Approximately $2,845,000 of previously recorded income
tax liabilities was indefinitely deferred. Under current tax law, such
liabilities will continue to be deferred as long as the Company maintains
compliance with certain revenue and ownership criteria.
Income tax provisions are reflected in the statements of income as follows
(in thousands):
1998 1997 1996
. ------- -------- --------
Current taxes $ 422 $(1,047) $ 748
Deferred taxes 1,061 1,839 4,145
. ------- -------- --------
. $ 1,483 $ 792 $ 4,893
A reconciliation between income taxes computed at the federal statutory rate
and the Company's provision for income taxes is as follows (in thousands):
. 1998 1997 1996
. ------- -------- --------
Federal statutory rate 34% 34% 35%
. ======= ======== ========
Federal income taxes at statutory rate $1,401 $ 962 $4,758
State income taxes, net of federal
Benefit 163 112 537
Jobs tax credits (81) (282) (402)
. ------- -------- --------
$1,483 $ 792 $4,893
. ======= ======== ========
Components of the net deferred income tax liability at March 28, 1998 and
March 29, 1997 relate to the following (in thousands):
. 1998 1997
. -------- --------
Deferred income tax liabilities:
Family farm cash-basis deferral $ 2,845 $ 2,845
Inventories 1,247 1,166
Property and depreciation 5,983 5,537
Income from joint ventures 2,978 2,350
Other 3,314 2,121
. -------- --------
16,367 14,019
. -------- --------
Deferred income tax assets:
Accrued expenses 1,759 1,489
Other 2,385 1,368
. -------- --------
4,144 2,857
. -------- --------
Net deferred income tax liability $12,223 $11,162
. ======== ========
5.STOCKHOLDERS' EQUITY _________________________________________
In November 1994, the board of directors approved a two-for-one split of
the Company's common stock in the form of a 100% stock dividend for
shareholders of record as of January 3, 1995. Par value remains $1 per share.
A total of 2,535,000 shares of common stock were issued in connection with
the split.
Beginning in 1990, the board of directors authorized the purchase of up to
$2,500,000 of the Company's stock on the open market. In November 1994, the
board increased the authorized amount to $7,500,000. As of March 28, 1998,
387,000 shares had been repurchased and retired by the Company at a total
cost of $5,851,000. In addition to shares repurchased under the above plan,
approximately 25,000 treasury shares were purchased during the year ended
March 28, 1998 at a total cost of $354,000.
6.STOCK OPTION PLAN _______________________________________
In May 1993, the board of directors approved an incentive stock option plan
(the "Plan"). Under the provisions of the Plan, options to purchase a maximum
of 125,000 shares may be granted through 2003. The administrator of the Plan,
appointed by the board of directors, determines the grantee, vesting period,
exercise date, and expiration dates for all options granted. In addition, the
Plan provides for the issuance of options at prices not less than market value
at the date of grant. During May 1993, the Company granted 31,250 options with
an exercise price of $9.30 under the Plan. No options have been exercised.
. 13
<PAGE>
Notes to Consolidated Financial Statements, Continued
7.INVESTMENTS IN AND RECEIVABLE FROM UNCONSOLIDATED AFFILIATES ___________
On March 26, 1993, the Company acquired a 50% equity interest in a joint
venture formed with an unrelated party to own and operate the Company's
processing facility at Camilla, Georgia.
The Company occasionally sells eggs and broilers to the joint venture and
purchases processed products from the joint venture. In addition, the Company
performs certain management and administrative services for the joint venture.
Sales to, purchases from, accounts payable and receivable from, and service
fees charged to the joint venture are based on terms consistent with those of
unrelated parties and are summarized as follows (in thousands):
. 1998 1997 1996
. -------- -------- --------
Sales $ 930 $ 3,202 $ 4,095
Purchases 24,869 15,251 18,557
Accounts receivable 606 47 20
Accounts payable 813 689 138
Administrative service fees 1,627 1,447 902
Additionally, the Company occasionally sells chicken by-products to and
purchases feed products from another affiliate. Sales to and purchases from
the affiliate were $1,926,000 and $1,729,000, respectively, during 1998.
Receivables from and payables to this affiliate were $72,000 and $62,000,
respectively, at March 28, 1998.
On November 14, 1997, the Company acquired a 30% equity interest in a joint
venture with its joint venture partner in Cagle Foods JV LLC. The new joint
venture will build a processing facility in Franklin, Kentucky. The Company
contributed certain property, plant and equipment and other assets in exchange
for its equity interest in the new joint venture.
The Company accounts for its investments in affiliates using the equity
method. The Company's share of affiliates' earnings and management fees
was $7,484,000 and $7,753,000 for the years ended March 28, 1998 and March
29, 1997, respectively, and is included in other income in the accompanying
statements of income. At March 28, 1998, undistributed retained earnings from
affiliates were approximately $12,183,000.
Summarized combined balance sheet information for unconsolidated affiliates
as of March 28, 1998 and March 29, 1997 is as follows (in thousands)
(unaudited):
. 1998 1997
. --------- ---------
Current assets $ 41,131 $ 39,905
Noncurrent assets 97,252 64,856
. --------- ---------
Total assets $ 138,383 $ 104,761
. ========= =========
Current liabilities $ 21,068 $ 15,084
Noncurrent liabilities 41,992 36,952
Owners' equity 75,323 52,725
. --------- ---------
Total liabilities and owners' equity $138,383 $104,761
. ========= =========
Summarized combined statement of income information for unconsolidated
affiliates for the years ended March 28, 1998 and March 29, 1997 is as
follows (in thousands) (unaudited):
. 1998 1997
. --------- ---------
Net sales $241,831 $225,484
Gross profit 25,289 26,095
Operating income 24,321 14,976
Income before taxes 20,302 10,282
8.MAJOR CUSTOMER _________________________________________
Sales to the Company's two largest customers represented 33%, 32%, and 33%
of net sales during fiscal 1998, 1997, and 1996, respectively. Additionally,
a major portion of the joint venture's sales (Note 7) is to one of the
Company's largest customers. The Company has an agreement with this customer
to supply chicken under a cost-plus arrangement, and approximately 20% of the
Company's production is committed to the customer. Under the arrangement,
production in excess of the customer's demands and by-products are sold to
other customers.
. 14
<PAGE>
9.BENEFIT PLANS _________________________________________
Under a collective bargaining agreement, the Company contributes to a
multiemployer pension plan for the benefit of certain of its employees who
are union members. 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 available. Under the
Employee Retirement Income Security Act of 1974, as amended in 1980, an
employer upon withdrawal from a multiemployer plan is required, in certain
cases, to continue funding its proportionate share of the plan's unfunded
vested benefits. The Company's contribution rate is a fixed-dollar amount
per eligible employee. The Company made total contributions to the union plan
of $251,000, $256,000, and $168,000 in 1998, 1997, and 1996, respectively.
The Company has a 401(k) retirement plan for employees not covered by a
collective bargaining agreement. Under the plan, the Company matches
contributions up to 2% of participating employees' salaries. Additional
contributions may be made at the discretion of the Company's board of
directors. The Company made matching contributions of $239,000, $235,000,
and $295,000 in 1998, 1997, and 1996, respectively. No discretionary company
contributions have been made to this plan.
The Company does not provide postretirement medical or other benefits to
employees.
10.COMMITMENTS AND CONTINGENCIES ____________________________
The Company leases certain of its buildings, equipment, and vehicles under
operating leases. The statements of income include rental expense relating
to operating leases of $1,704,000 in 1998, $2,024,000 in 1997, and $2,763,000
in 1996.
At March 28, 1998, future minimum payments under operating leases were as
follows (in thousands):
1999 $489
2000 107
2001 71
. ------
Total $667
. ======
The Company enters into contracts for the purchase of grain and other feed
ingredients. These contracts specify the quantity to be purchased, and the
cost is determined upon delivery using current market prices. The Company
estimates its purchase commitments under these contracts to be approximately
$22,327,000 at March 28, 1998, which approximates current market.
The Company is involved in various legal actions arising in the normal course
of business. In the opinion of management, the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
11.QUARTERLY FINANCIAL DATA (UNAUDITED) ___________________________
Quarterly financial data is as follows (in thousands, except per share data):
. Earnings
. Per Share
. Net Operating Net (Basic &
. Sales (Loss) Income Income* Diluted)**
. -
Fiscal year 1998 quarter ended:
June 28, 1997 $86,767 $ (645) $ 1,170 $ 0.23
September 27, 1997 96,687 (917) 259 0.05
December 27, 1997 82,532 (1,138) 239 0.05
March 28, 1998 78,900 2,088 969 0.19
Fiscal year 1997 quarter ended:
June 29, 1996 $83,814 $ (3,276) $(1,560) $(0.31)
September 28, 1996 92,021 (1,388) (639) (0.13)
December 28, 1996 85,506 891 1,547 0.31
March 29, 1997 92,226 2,995 2,691 0.54
* Net income for the quarter ended March 29, 1997 includes operating and
pretax income of $2,538,000 relating to recoveries under business
interruption insurance related to the fire at the Pine Mountain Valley
plant (Note 2).
** The sum of the 1998 quarterly earnings per share amounts is different
from the annual earnings per share amounts because of differences in the
weighted average number of common shares outstanding used in the quarterly
and annual computations.
. 15
<PAGE>
Cagle's, Inc.
Officers
J. DOUGLAS CAGLE
Chairman and Chief Executive Officer
KENNETH R. BARKLEY
Senior Vice President Finance/
Treasurer/CFO
JERRY D. GATTIS
President and Chief Operating Officer
JOHN J. BRUNO
Senior Vice President Sales and
Marketing
MARK M. HAM IV
Vice President Management
Information Systems
GEORGE L. PITTS
Corporate Secretary
JAMES DAVID CAGLE
Vice President New Product Sales
GEORGE DOUGLAS CAGLE
Vice President New Product
Development
JOHNNY BURKETT
Senior Vice President
Board of Directors
J. DOUGLAS CAGLE
Chairman, Cagle's, Inc.
KENNETH R. BARKLEY
Senior Vice President Finance/
Treasurer/CFO, Cagle's, Inc.
GEORGE DOUGLAS CAGLE
Vice President New Product
Development, Cagle's, Inc.
JAMES DAVID CAGLE
Vice President New Product Sales
Cagle's, Inc.
JERRY D. GATTIS
President and Chief Operating Officer Cagle's, Inc.
CANDACE CHAPMAN
Principal, C2Associates, Ltd.
MARK M. HAM IV
Vice President Management
Information Systems, Cagle's, Inc.
JOHN J. BRUNO
Senior Vice President Sales and
Marketing, Cagle's, Inc.
G. BLAND BYRNE
Partner
Byrne, Eldridge, Moore & Davis
Audit Committee
CANDACE CHAPMAN, Chairperson
G. BLAND BYRNE
GEORGE DOUGLAS CAGLE
CORPORATE HEADQUARTERS
2000 Hills Ave., N.W.
Atlanta, Georgia 30318
COLLINSVILLE, Alabama
Processing, Further Processing &
Distribution
ATLANTA, Georgia
Distribution & Further Processing
LOVEJOY, Georgia
Further Processing
DALTON, Georgia
Feed Mill, Hatchery & Growout
PINE MOUNTAIN VALLEY, Georgia
Processing & Deboning
BIRMINGHAM, Alabama
Freezer Warehouse
MACON, Georgia
Processing, Deboning & Further
Processing
FORSYTH, Georgia
Feed Mill, Hatchery & Growout
Subsidiary
Cagle's Farms Inc.
Officers
J. DOUGLAS CAGLE
Chairman and Chief Executive Officer
JERRY D. GATTIS
President and Chief Operating Officer
KENNETH R. BARKLEY
Senior Vice President Finance/
Treasurer/CFO
MARK M. HAM IV
Vice President Management
Information Systems
GEORGE L. PITTS
Corporate Secretary
Board of Directors
J. DOUGLAS CAGLE
Chairman and Chief Executive Officer Cagle's, Inc./Cagle's Farms Inc.
JERRY D. GATTIS
President and Chief Operating Officer Cagle's, Inc./Cagle's Farms Inc.
KENNETH R. BARKLEY
Senior Vice President Finance/ Treasurer/CFO Cagle's, Inc./Cagle's Farms Inc.
MARK M. HAM IV
Vice President Management
Information Systems
Cagle's, Inc./Cagle's Farms Inc.
Corporate Data
Annual Stockholders' Meeting ________________________
The Annual Stockholders' Meeting will be conducted at the
Corporate Headquarters,
2000 Hills Avenue, N.W., Atlanta,
Georgia, at 11:00 A.M. on
Friday, July 10, 1998.
Form 10-K; ____________________________
The Form 10-K Annual Report for 1998, as filed by the Company with the
Securities and Exchange Commission, is available to Cagle's, Inc.
stockholders after June 30, 1998 on request and without charge.
Write
KENNETH R. BARKLEY
SENIOR VICE PRESIDENT
FINANCE/TREASURER/CFO
Cagle's, Inc.
2000 Hills Ave., N.W.
Atlanta, Georgia 30318
General Information; _____________________________
Registrar and Transfer Agent
SUNTRUST BANK
Atlanta, Georgia
Legal Counsel
BYRNE, ELDRIDGE, MOORE
& DAVIS P.C.
Atlanta, Georgia
Auditors
ARTHUR ANDERSEN LLP
Atlanta, Georgia
. 16
<PAGE>
