CAGLE FOODS JV, L.L.C.
FINANCIAL STATEMENTS
As of and for the Year ended January 1, 2000 and January 2, 1999
and Independent Auditors Report
INDEPENDENT AUDITORS' REPORT
Steering Committee of Cagle Foods JV, L.L.C.:
We have audited the accompanying balance sheets of Cagle Foods JV, L.L.C.
(the "Company") as of January 1, 2000 and January 2, 1999 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 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 position
presenation. 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 the Company as of January 1,
2000 and January 2, 1999 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 29, 2000
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CAGLE FOODS JV, L.L.C.
BALANCE SHEETS
(In Thousands)
January 01, 2000 January 02, 1999
Assets
Current assets:
Cash $ 8,276 $ 305
Accounts receivable:
Related parties 13,064 6,925
Other 1,198 2,517
--------------- ---------------
14,262 9,442
Inventories 16,281 16,717
Prepaid expenses 338 306
--------------- ---------------
Total current assets 39,156 26,770
Investment in affiliated companies 1,256 1,224
Property, plant, and equipment:
Land 923 923
Land improvements 4,360 4,360
Buildings and building equipment 41,813 41,787
Machinery and equipment 26,702 27,120
Furniture and fixtures 622 578
Construction-in-process 375 149
--------------- -------------
74,795 74,917
Less accumulated depreciation 26,492 18,676
. --------------- -------------
. 48,303 56,241
Other assets 834 1,412
. --------------- -------------
$ 89,549 $ 85,647
. =============== =============
Liabilities and members' equity
Current liabilities:
Accounts payable $ 6,958 $ 9,714
Accrued expenses 5,285 4,228
Current portion of long-term debt 8,400 7,000
. --------------- -------------
Total current liabilities 20,643 20,942
Long-term debt 12,450 22,850
Members' Equity 56,456 41,855
. --------------- -------------
. $ 89,549 $ $85,647
. =============== =============
See notes to financial statements.
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CAGLE FOODS JV, L.L.C.
STATEMENTS OF INCOME
(In Thousands)
. Year ended Year ended
. Jan.1,2000 Jan.2,1999
-------------- --------------
Net sales:
Related parties $ 189,809 $ 179,564
Other 8,540 6,510
. -------------- --------------
Total Net Sales 198,349 186,074
Cost of products sold 176,136 165,110
Selling and administrative expenses 4,543 4,343
. -------------- --------------
180,679 169,453
. -------------- --------------
Operating income 17,670 16,631
Other income (expense):
Other income 479 421
Rental income 2,913 2,913
Interest expense (2,307) (2,628)
Other expense (3,055) (2,392)
. --------------- --------------
Net income $ 15,700 $ 14,935
. =============== ==============
See notes to financial statements.
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CAGLE FOODS JV, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
(In Thousands)
Executive Cagle's,
Holdings Ltd. Inc. Total
------------- --------- --------
Balance - December 27, 1997 $ 16,434 $ 16,434 $ 32,868
Net Income 7,467 7,467 14,934
Distribution of income (2,974) (2,974) (5,948)
------------ --------- ---------
Balance - December 27, 1997 $ 20,927 $ 20,927 $ 41,854
Net Income 7,850 7,850 15,700
Distribution of income (549) (549) (1,098)
------------ --------- ---------
Balance - January 1, 2000 $ 28,228 $ 28,228 $ 56,456
See notes to financial statements.
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CAGLE FOODS JV, L.L.C.
STATEMENTS OF CASH FLOWS
(In Thousands)
Year ended Year ended
Jan.1,2000 Jan.2,1999
------------ ------------
Operating activities:
Net income $ 15,700 $ 14,935
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,325 5,335
Undistributed income of affiliates (390) (426)
Loss on sales of property, plant and equipment 15 6
Changes in operating assets and liabilities:
Accounts receivable (4,820) 3,779
Inventories 436 (2,658)
Prepaid expenses (32) 298
Other assets 68 (1,010)
Accounts payable (2,755) 2,898
Accrued expenses 1,057 (87)
------------- -------------
Net cash provided by operating activities 17,604 23,070
Investing activities:
Proceeds from the sale of property,
plant, and equipment 1,638 41
Purchases of property, plant, and equipment (1,532) (8,413)
Distribution of Income from affiliates 359 954
------------- -------------
Net cash used in investing activities 465 (7,418)
Financing activities:
Long-term borrowings 0 8,000
Payments of long-term debt (9,000) (17,600)
Distribution of income (1,098) (5,949)
------------- -------------
Net cash used in financing activities (10,098) (15,549)
------------- -------------
Net decrease in cash and cash equivalents 7,971 103
Cash and cash equivalents:
Beginning of period 305 202
------------- -------------
End of period $ 8,276 $ 305
============= =============
Supplemental disclosures of cash flow
Cash paid during the year for interest $ 2,201 $ 2,783
. ============= =============
See notes to financial statements.
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Cagle Foods JV, L.L.C.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
JANUARY 1, 2000 AND JANUARY 2, 1999
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 L.P. The Company's operations are located in Camilla,
Georgia. 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 the joint venture
partners (see Note 3). Keystone Foods, LLC is an entity related through common
ownership with Executive Holdings, L.P.
Revenue Recognition
The Company recognizes revenue when product is shipped to customers.
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 January 1, 2000 and January 2, 1999, respectively, consist of
the following (in thousands):
1999 1998
-------- --------
Finished products $ 3,995 $ 4,059
Field inventory, breeders, and eggs 10,495 10,975
Feed, ingredients, and medication 1,348 1,207
Supply Inventory 442 476
-------- --------
$ 16,280 $ 16,717
. ======== ========
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
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 no impairment existed at January 1, 2000.
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Other Assets
Other assets consist primarily of loan origination fees which are amortized on
a straight-line basis over seven years. Accumulated amortization related to
loan origination fees was $509,000 at January 1, 2000 and $841,000 at January 2,
1999.
Investments in Unconsolidated Affiliates
The equity method of accounting is used to account for the Company's investments
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 based on
confirmation with the counter-party.
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 a 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.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the Company for year
2001. The Company has not completed the process of evaluating the impact that
will result from adopting SFAS 133. The Company is therefore unable to disclose
the impact that adopting SFAS 133 will have on its financial position and
results of operations when such statement is adopted.
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2. LONG-TERM DEBT
Long-term debt at January 1, 2000 and January 2, 1999, respectively, consists
of the following (in thousands):
1998 1997
. ----------- ------------
Note Payable to Cagle's, Inc., variable
interest rate (8.5% at January 1, 2000
and 7% at January 1, 1999),maturing on
March 27, 2000 $ 1,400 $ 1,400
Notes payable to GA/KY Fundco LLC under a
revolving credit agreement, variable interest rate
(9.5% at January 1, 2000 and 6.2% at
January 1, 1999) 0 2,000
Notes payable to GA/KY Fundco LLC under a
term loan agreement, variable interest rate
(9.1% at Jan. 1, 2000 and 6.2% at Jan. 2, 1999)
due in installments commencing March 31, 1998
through Dec. 31, 2002 19,450 26,450
. ----------- ------------
20,850 29,850
Less amounts currently due 8,400 7,000
. ----------- ------------
Total long-term debt $ 12,450 $ 22,850
On November 7, 1997, GA/KY Fundco L.L.C. ("Fundco") (a 50% owned subsidiary)
executed a loan agreement for a $95 million term loan facility and $30 million
revolving loan facility at variable interest rates 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. The proceeds were used to repay the
existing term and revolving loans.
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. At January 1, 2000, Kentucky had $62.1 million
outstanding for the term loan facility and $26.6 million outstanding for the
revolving loan facility.
Aggregate maturities of long-term debt during the years subsequent to January 1,
2000 under the term and revolving loan of Fundco related to the portion borrowed
by the Company and the note payable to Cagle's, Inc. are as follows (in
thousands):
Year Ended
December 30, 2000 8,400
December 29, 2001 7,500
December 28, 2002 4,950
. -------
$20,850
. =======
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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 January 1, 2000 and January 2, 1999, the Company had
two outstanding interest rate swap agreements having an aggregate notional
amount of $4.2 million and $11.2 million, respectively. The notional amount
declines over the term of the swap agreement. Approximately $5,361 and
($77,745) in unrealized gains/(losses) exist on these agreements at January 1,
2000 and January 2, 1999, respectively. These agreements effectively fix the
average interest rate on $4.2 million of 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.
On December 31, 1997, Fundco, on behalf of the Company and Kentucky, entered
into two additional interest rate swap agreements with expiration dates of
December 31, 2002, which effectively fix the rate on notional amounts of $61.7
million at 5.99%, 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. Approximately $1,058,162
and $53,098 in unrealized gains exist on these agreements at January 1, 2000 and
January 2, 1999, respectively. 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 rate swap
agreement. However, the Company does not anticipate nonperformance by the
counter-parties.
At January 1, 2000 the Company had an unused standby letter of credit amounting
to $350,000.
3. RELATED PARTY TRANSACTIONS
Sales to the Company's owners (Executive Holdings, L.P. and Cagle's, Inc.)
represented 95.3% and 96.0% of net sales during the year ended January 1, 2000
and January 2, 1999, respectively. The Company sells deboned chicken at cost
plus $.03 per eviscerated pound to Executive Holdings, L.P. The Company also
sells other chicken components at market price to Cagle's, Inc.
Executive Holdings, L.P. 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 1999 and 1998 are
summarized as follows (in thousands):
. Liberty
Executive Cagle's Keystone Assurance
Holdings Ltd. Inc. LLC Ltd.
1999
Sales $182,915 $ 6,198 696 0
Rental income for further
processing plant 2,913 0 0 0
Administrative service and
other fees 1,275 1,614 0 0
Balances at year end:
Accounts receivable 10,534 272 1,254 0
Note payable 0 1,400 0 0
Accounts Payable 0 0 266 0
1998
Sales $157,707 $20,887 970 0
Rental income for further
processing plant 2,913 0 0 0
Administrative service and
other fees 1,196 1,515 0 0
Balances at year end:
Accounts receivable 7,510 865 718 0
Note payable 0 1,400 0 0
Accounts Payable 2,168 0 0 0
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The Company entered into a lease agreement beginning January 1, 1998 with
Keystone Foods for the Company's further processing facility for a period of 10
years at an annual rental amount of $2,912,500. The property, plant, and
equipment associated with this lease as of January 2, 1999 are as follows:
Land $ 100
Building 21,131
Machinery & Equipment 3,914
. --------
. 25,145
Less accumulated depreciation (2,010)
. --------
Net leased property $23,135
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 January 1, 2000 and January 2, 1999 was
approximately $3,856,000 and $3,974,000, respectively.
Future minimum payments under noncancelable operating leases with initial terms
of one year or more, including payments made on behalf of Keystone Foods by the
Company, consisted of the following at January 1, 2000 (in thousands):
December 30, 2000 3,782
December 29, 2001 3,694
December 28, 2002 3,947
January 3, 2004 3,895
Thereafter 6,745
--------
$22,063
During 1994, the Company entered into an agreement with the City of Camilla,
Georgia whereby the City agreed to construct a water tower and wastewater
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 wastewater treatment services. If the
City is unable to provide water and wastewater 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 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 wastewater 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 incurred approximately $619,000
in costs to be reimbursed by the City. During 1997, the Company received
reimbursements totaling approximately $482,000. The remaining amounts were
received during 1998. The Company will be required to reimburse the City over a
20-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 January 1, 2000 and January 2, 1999 from this affiliate allocated to the
Company was approximately $390,000 and $363,000, respectively. The Company
received distributions of $350,000 during 1999. The Company purchased, at
prices approximating market, $33.1 million and $53.4 million in feed ingredients
from this affiliate during 1999 and 1998, respectively.
<PAGE>
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 made
capital contributions of $3,000. Effective July 1, 1998, Cagle's-Keystone
Foods, L.L.C. became a member of the Credit Company, at which time Cagle's-
Keystone made a capital contribution of $14,000. The Credit Company was formed
for the purpose of financing the facilities of the Company's and Cagle's-
Keystone Foods' contract growers. The investment is being accounted for under
the equity method. The undistributed income from this affiliate allocated to
the Company was approximately $11,000 in 1999 and $63,000 in 1998. The Company
received distributions of $12,000 during 1998.
The Credit Company executed a loan agreement for a $37.7 million revolving loan
facility at variable interest rates. The Company and Kentucky have guaranteed
the borrowings under the loan agreement. The Credit Company has received
advances of approximately $33.7 million on the revolving loan facility as of
January 1, 2000. The Credit Company has consumer loans receivable of
approximately $32.6 million at January 1, 2000.
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
negotiated and as a result, pension benefits were increased by approximately
25%. Amounts paid for pension benefits for union employees totaled
approximately $340,000 in 1999 and $356,000 in 1998.
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 $41,000 in 1999 and $42,000 in 1998..
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