UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2007;
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from TO
Golden Oval Eggs, LLC
(Exact name of registrant as specified in its charter)
Delaware |
| 20-0422519 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. employer identification number) |
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1800 Park Avenue East |
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Renville, MN |
| 56284 |
(Address of principal executive offices) |
| (Zip code) |
Telephone: (320) 329-8182
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
As of May 31, 2007, there were 4,733,527 of the Company’s Class A Units and 697,350 of the Company’s Class B Units issued and outstanding.
TABLE OF CONTENTS
Golden Oval Eggs, LLC
Form 10-Q
For The Quarter Ended May 31, 2007
Description |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 1. Condensed Financial Statements
GOLDEN OVAL EGGS, LLC
Consolidated Condensed Balance Sheets
May 31, 2007 and August 31, 2006
(In Thousands)
(Unaudited)
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| May 31, |
| August 31, |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 352 |
| $ | 222 |
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Accounts receivable |
| 18,479 |
| 14,854 |
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Inventories |
| 18,189 |
| 16,005 |
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Restricted cash |
| 1,476 |
| 779 |
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Other current assets |
| 511 |
| 1,076 |
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Total current assets |
| 39,007 |
| 32,936 |
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Property, plant and equipment |
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Land and land improvements |
| 11,642 |
| 11,553 |
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Buildings |
| 41,561 |
| 40,669 |
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Leasehold improvements |
| 888 |
| 860 |
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Equipment |
| 72,159 |
| 72,312 |
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Construction in progress |
| 140 |
| 57 |
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| 126,390 |
| 125,451 |
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Accumulated depreciation |
| (54,314 | ) | (45,622 | ) | ||
Total property, plant and equipment, net |
| 72,076 |
| 79,829 |
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Other assets |
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Investments |
| 1,669 |
| 1,576 |
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Intangible assets, net |
| 19,300 |
| 20,724 |
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Goodwill |
| 22,858 |
| 22,858 |
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Note receivable |
| 136 |
| 77 |
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Total other assets |
| 43,963 |
| 45,235 |
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Total assets |
| $ | 155,046 |
| $ | 158,000 |
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See accompanying notes to consolidated condensed financial statements
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| May 31, |
| August 31, |
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Liabilities and Members’ Equity |
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Current liabilities |
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Revolving line of credit |
| $ | 11,150 |
| $ | 3,869 |
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Accounts payable |
| 11,376 |
| 7,665 |
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Accrued interest |
| 2,790 |
| 812 |
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Accrued compensation |
| 1,241 |
| 1,485 |
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Other current liabilities |
| 2,847 |
| 2,877 |
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Current maturities of long-term debt |
| 9,461 |
| 9,461 |
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Total current liabilities |
| 38,865 |
| 26,169 |
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Long-term debt, less current maturities |
| 87,898 |
| 94,257 |
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Members’ equity |
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Members’ equity |
| 27,302 |
| 36,701 |
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Non-controlling interest in consolidated entities |
| 981 |
| 873 |
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Total members’ equity |
| 28,283 |
| 37,574 |
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Total liabilities and members’ equity |
| $ | 155,046 |
| $ | 158,000 |
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See accompanying notes to consolidated condensed financial statements
2
GOLDEN OVAL EGGS, LLC
Consolidated Condensed Statements of Operations
For the Periods Ended May 31, 2007 and 2006
(In Thousands, except per unit data)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| May 31, |
| May 31, |
| May 31, |
| May 31, |
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| 2007 |
| 2006 |
| 2007 |
| 2006 |
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Net sales |
| $ | 53,035 |
| $ | 19,217 |
| $ | 147,098 |
| $ | 57,332 |
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Cost of goods sold |
| 47,025 |
| 16,220 |
| 134,001 |
| 47,215 |
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Gross profit |
| 6,010 |
| 2,997 |
| 13,097 |
| 10,117 |
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Operating expenses |
| 4,750 |
| 1,945 |
| 15,822 |
| 6,179 |
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Income (loss) from operations |
| 1,260 |
| 1,052 |
| (2,725 | ) | 3,938 |
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Other income (expense) |
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Interest expense |
| (2,513 | ) | (784 | ) | (7,477 | ) | (2,008 | ) | ||||
Non-controlling interest in income (loss) of consolidated entities |
| (22 | ) | 24 |
| (84 | ) | 3 |
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Other income |
| 255 |
| 240 |
| 853 |
| 727 |
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Total other expense |
| (2,280 | ) | (520 | ) | (6,708 | ) | (1,278 | ) | ||||
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Net income (loss) |
| $ | (1,020 | ) | $ | 532 |
| $ | (9,433 | ) | $ | 2,660 |
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Weighted average Members’ units outstanding |
| 5,420 |
| 4,698 |
| 5,420 |
| 4,692 |
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Net income (loss) per Members’ unit, basic and diluted |
| $ | (0.19 | ) | $ | 0.11 |
| $ | (1.74 | ) | $ | 0.57 |
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Distributions per unit |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
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See accompanying notes to consolidated condensed financial statements
3
GOLDEN OVAL EGGS, LLC
Consolidated Condensed Statements of Cash Flows
For the Periods Ended May 31, 2007 and 2006
(In Thousands)
(Unaudited)
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| Nine Months Ended |
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| May 31, |
| May 31, |
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| 2007 |
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Cash flows from operating activities |
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Net income (loss) |
| $ | (9,433 | ) | $ | 2,660 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities |
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Depreciation |
| 8,704 |
| 5,541 |
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Amortization |
| 1,424 |
| 164 |
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Gain on sale of property, plant & equipment |
| 2 |
| (9 | ) | ||
Non-controlling interest in income of consolidated entities, net of distributions |
| 108 |
| (70 | ) | ||
Changes in operating assets and liabilities |
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Accounts receivable |
| (3,625 | ) | (1,291 | ) | ||
Inventories |
| (2,184 | ) | (809 | ) | ||
Other current assets |
| 565 |
| (1,843 | ) | ||
Accounts payable |
| 3,711 |
| (200 | ) | ||
Accruals and other current liabilities |
| 1,738 |
| 90 |
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Net cash provided by operating activities |
| 1,010 |
| 4,233 |
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Cash flows from investing activities |
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Purchases of property, plant and equipment |
| (958 | ) | (2,389 | ) | ||
Proceeds from sale of property, plant and equipment |
| 5 |
| 22 |
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Advance of note receivable |
| (59 | ) | (40 | ) | ||
Purchases of investment in other cooperatives |
| (102 | ) | (32 | ) | ||
Retirement of investment in other cooperatives |
| 9 |
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Net cash used by investing activities |
| (1,105 | ) | (2,439 | ) | ||
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Cash flows from financing activities |
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Proceeds from issuance of long term debt |
| — |
| 3,000 |
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Net increase (decrease) in revolving line of credit |
| 7,281 |
| (1,836 | ) | ||
Payments of long-term debt |
| (6,359 | ) | (2,758 | ) | ||
Decrease (increase) in restricted cash |
| (697 | ) | (665 | ) | ||
Net cash provided (used) by financing activities |
| 225 |
| (2,259 | ) | ||
Net increase (decrease) in cash and cash equivalents |
| 130 |
| (465 | ) | ||
Cash and cash equivalents - beginning of period |
| 222 |
| 690 |
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Cash and cash equivalents - end of period |
| $ | 352 |
| $ | 225 |
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4
Supplementary disclosures of cash flow information |
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Cash paid during the period for: |
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Interest, net of capitalized interest of $129 and $235 during 2007 and 2006, respectively |
| $ | 7,682 |
| $ | 2,799 |
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Supplementary disclosures of non-cash transactions |
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Members units issued to directors and officers (Note 4) |
| $ | 177 |
| $ | 747 |
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See accompanying notes to consolidated condensed financial statements
5
GOLDEN OVAL EGGS, LLC
Notes to Consolidated Condensed Financial Statements
May 31, 2007 and August 31, 2006
(In Thousands Except Unit Data)
1. Organization Golden Oval Eggs, LLC (the “Company”) was organized as a Delaware limited liability company to effect the reorganization of Midwest Investors of Renville, Inc. (the “Cooperative”) effective August 31, 2004. The Cooperative was incorporated as a cooperative under the laws of the state of Minnesota in March 1994. The Company operates as the Cooperative’s successor and its operations are a continuance of the operations of the Cooperative. The accompanying consolidated condensed financial statements for all periods presented are those of the Company.
2. Basis of Presentation The accompanying consolidated condensed balance sheet as of August 31, 2006, which has been derived from audited consolidated financial statements, and the unaudited interim consolidated condensed financial statements at May 31, 2007 and for the three-month periods ended May 31, 2007 and 2006 of the Company have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission rules and regulations. Certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods presented. These consolidated condensed financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2006. The results of operations for the periods ended May 31, 2007 are not necessarily indicative of results to be expected for any other interim period or for the entire year.
3. Inventories Pullet and layer hen inventories are stated at the cost of production, which includes the costs of the chicks, feed, overhead and labor. Layer hen flock costs are capitalized to the point at which the pullet goes into production and are amortized over the productive lives of the flocks, generally 18 to 24 months. Feed, supplies and liquid egg and egg products inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consisted of the following:
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| May 31, |
| August 31, |
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Hens and pullets |
| $ | 10,634 |
| $ | 10,050 |
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Eggs and egg products |
| 4,195 |
| 3,409 |
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Feed, supplies and other |
| 3,360 |
| 2,546 |
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Total inventories |
| $ | 18,189 |
| $ | 16,005 |
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4. Stock Based Compensation The Company has bonus and compensation plans in place for management. Under these agreements management may receive up to 50% of certain performance bonuses in the form of Class A Units. The Company accrues for management bonuses during the year based upon the estimated amount that will be earned by year-end. Upon approval by the Board of Managers, the bonuses are paid to management. The number of units to be issued is based upon the higher of the book or market value of the Class A Units at the time the bonus is awarded. For the nine months ended May 31, 2007 and 2006, a total of 20,895 and 107,203 Class A units were issued to management at a per unit value of $7.63 for 20,895 units in 2007, and $6.05 for 107,203 units in 2006, respectively.
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The Class A units are nontransferable and subject to forfeiture ratably over the following three years. The employee must be employed on the anniversary date of issuance to avoid forfeiture. In the event that termination of the employee occurs the Company will record any forfeiture of units as a reduction to compensation expense in the period in which the forfeiture occurs. For the nine months ended May 31, 2007 and 2006 there were forfeitures of 2,045 and 0.
The members of the Board of Managers are granted 2,000 Class A Units for each year served on the board following each year of service. The Company recognizes compensation expense for these awards based upon the fair value on the date they are granted. For the nine months ended May 31, 2007 and 2006 a total of 12,000 units at a unit value of $2.60 and 14,000 units at a unit value of $7.02 were awarded.
Below is a summary of stock activity pursuant to these compensation plans for the nine months ended:
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| May 31 |
| May 31 |
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| 2007 |
| 2006 |
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| Units |
| $ |
| Units |
| $ |
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Issued to management |
| 20,895 |
| $ | 159 |
| 107,203 |
| $ | 649 |
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Issued to directors |
| 12,000 |
| 31 |
| 14,000 |
| 98 |
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Forfeitures |
| (2,045 | ) | (13 | ) | — |
| — |
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Total |
| 30,850 |
| $ | 177 |
| 121,203 |
| $ | 747 |
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5. Use of Estimates The preparation of consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
6. Intangibles and Goodwill On June 30, 2006, the Company completed the MoArk Acquisition. The purchase price consisted of $38,000 paid in cash, the issuance by the Company of a $17,000 promissory note, and $5,000 paid by the issuance of 697,350 newly-created Class B Units. The $17,000 promissory note contains a contingent warrant provision which allows the note holder, at the Holder’s option, to exercise that number of units of membership interests equal to ten (10%) of the issued and outstanding units of the Company, if the note has not been paid in full on or before the Maturity Date. Also on June 30, 2006, the Company entered into an amended and restated credit agreement, as described in Liquidity and Capital Resources. The Company has allocated the purchase price in accordance with SFAS 141 “Business Combinations” and recorded $19,000 of intangible assets to be amortized over the relevant life of the underlying assets, and $22,800 in goodwill that is not amortized, but will be tested at least annually for impairment under SFAS 142, “Goodwill and Other Intangible Assets.” During the quarter ended May 31, 2007, the Company considered whether an event had occurred or circumstances had changed that more likely than not would reduce the fair value of the Company below its carrying amount. Examples of such events or circumstances include:
a. A significant adverse change in legal factors or in the business climate;
b. An adverse action or assessment by a regulator;
c. Unanticipated competition;
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d. A loss of key personnel; or
e. A more-likely-than-not expectation that a significant portion of the Company will be sold or otherwise disposed of.
After such consideration, Management concluded that circumstances and events did not indicate that an interim test of goodwill recoverability was required.
7. Contingencies On March 29, 2007 the Attorney General of Iowa files a suit in relation to the Thompson, Iowa Waste Water Facility. Please refer to Item 1. Legal Proceedings under Part II of this Quarterly Report on Form 10-Q for a fuller description of legal proceedings involving the Company.
8. Credit Agreement Effective April 30, 2007, Golden Oval Eggs, LLC (the “Company”) and its two subsidiaries, GOECA, LP and Midwest Investors of Iowa, a cooperative (collectively, the “Borrowers”) entered into a First Amendment to Amended and Restated Credit Agreement (the “Amendment”) with Metropolitan Life Insurance Company, as a bank, CoBank, ACB and the other financial institutions or entities that are signatories thereto (the “Lenders”). CoBank, ACB is also the administrative agent for the Lenders.
The Lenders and the Borrowers entered into an Amended and Restated Credit Agreement dated as of June 30, 2006 (the “Credit Agreement”). The Amendment amends certain provisions of the Credit Agreement, including covenants relating to net worth, current ratios, working capital, leverage ratios, fixed charge coverage ratios. By the Amendment, the Lenders also waived defaults of these covenants for the period ending February 28, 2007, as well as certain other covenants relating to compliance with laws and environmental matters. Further, the Amendment extended the termination date of the Credit Agreement from April 30, 2007 to March 1, 2008. Please refer to 8K filed May 9, 2007 for details on Credit Agreement. 8K filed May 9, 2007 for details on Credit.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements that are based on current expectations, beliefs, intentions or future strategies of the management of Golden Oval Eggs, LLC (“we”, “us”, “our”, or the “Company”). When used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations or elsewhere in this Quarterly Report on Form 10-Q, the words “believe,” “expect,” “anticipate,” “will,” “estimate” and similar verbs or expressions are intended to identify such forward-looking statements. If our management’s assumptions prove incorrect or should unanticipated circumstances arise, our actual results could differ materially from those anticipated. These differences could be caused by a number of factors or combination of factors including, but not limited to, those factors described in Part I, Item 1A. “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended August 31, 2006, as well as those identified in other filings with the Securities and Exchange Commission. Readers are strongly urged to consider such factors when evaluating any forward-looking statement. The Company undertakes no obligation to update any forward-looking statements to reflect future events or developments.
The following is a discussion and analysis of our financial condition and results of operations as of and for the three month and nine months periods ended May 31, 2007 and 2006. This section should be read in conjunction with the condensed financial statements and related notes in Item 1 of this Quarterly Report and our Annual Report on Form 10-K for the year ended August 31, 2006.
Summary
Golden Oval Eggs, LLC is a Delaware limited liability company, primarily engaged in the business of producing, processing, marketing and distributing egg products. The Company operates seven production facilities in the United States. On June 30, 2006, the Company closed its acquisition of certain assets of MoArk, LLC and its subsidiaries relating to the business of manufacturing, marketing, selling and distributing liquid egg products, as more fully described in the Company’s Annual Report on Form 10-K for the year ended August 31, 2006. With the completion of the MoArk Acquisition, the Company moved into the further processed egg business.
The Company produces a wide range of egg products, from unpasteurized liquid eggs, further processed egg products for other food manufacturers, and finished goods for sale to retailers and food service customers. Products are sold to other food manufacturers, restaurants, supermarkets and foodservice distributors.
The Company produces less than half of its annual needs from eggs produced at layer barns at the Company’s Renville, Minnesota and Thompson, Iowa facilities. The remainder is satisfied from purchases of eggs or liquid product in market based transactions.
The Company’s operating income or loss is materially affected by wholesale liquid egg prices and pricing of further processed products, each of which can fluctuate widely and are outside of the Company’s control. Liquid eggs are a commodity product and prices fluctuate in response to supply/demand factors. The Company also sells a portion of its products under contracts at non-market prices. Depending upon market circumstances, the prices generated by the Company’s non-market volume tend to be less or more than what the prevailing open market prices would generate.
The Company’s cost of production is materially affected by feed, purchased egg and liquid egg costs, which averaged approximately 54% of the Company’s total costs in the first three quarters of fiscal year 2007 as compared to 48% for the first two quarters of fiscal 2007. As a result of the MoArk acquisition on June 30, 2006, feed alone has dropped from 34% of sales for the quarter ended May 31, 2006, to 19% for the quarter ending May 31, 2007, reducing somewhat the Company’s exposure to volatile corn and soybean
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markets. Agricultural commodity prices influence purchased eggs and open market liquid egg prices although not necessarily in the same direction, to the same degree or at the same time.
Results of Operations
Results of Operations — Third Quarter Fiscal Year 2007 Compared to Third Quarter Fiscal Year 2006
Net Sales Net sales for the third quarter of fiscal 2007 were $53.0 million, an increase of $33.8 million, or 176% over the third quarter of the prior fiscal year. Business acquired in the MoArk acquisition accounted for $33.3 million, or 98% of the increase. The remainder of the increase or $0.5 million is from the Company’s interest in United Mills, which is consolidated in the financial statements, and is due to an increase in United Mills’ sales because of higher feed costs . Sales of liquid unpasteurized eggs from the facilities in place prior to the MoArk acquisition were unchanged. Sales pounds from those facilities to outside parties declined by 20%, caused by increased utilization of output in company owned facilities, offset by an increase in average selling prices of 25.2%. Pounds sold in the third quarter of fiscal 2007 were 94.1 million, an increase of 39.6 million, or 73% over the same period in the prior year. Pounds from the facilities acquired from MoArk accounted for 50.8 million of the increase, offsetting an 11.2 million pound decline in pounds sold to outside parties from the Renville, Minnesota and Thompson, Iowa facilities as total production declined approximately 9% due to reduced bird numbers, and more production is used internally as an ingredient in the further processed plants. Shipments to company facilities are not accounted for as sales on a consolidated basis. The average selling price per pound for the quarter increased from $0.353 to $0.564, an increase of $0.211, or 59.8% over the prior year same period, with $0.157 due to the inclusion of further processed products which command a higher selling price per pound in the marketplace, as well as overall strengthening in liquid whole egg prices at the Renville and Thompson locations, which accounted for $0.054 of the increase.
Cost of Goods Sold Cost of goods sold for the third quarter of fiscal 2007 was $47.0 million, an increase of $30.8 million or 190% of cost of goods sold for the third quarter of fiscal 2006. The majority of the increase was associated with the acquired businesses. Gross profit for the period doubled from $3.0 million a year ago to $6.0 million in the current period. Since the Company does not produce all of its liquid egg needs from its own birds, it is a purchaser of eggs and liquid eggs in the market. An increase in egg and liquid egg pricing that increases sales also increases cost of goods, although not proportionately. Costs did grow faster than sales, resulting in a decline in gross margin as a percentage of sales from 15.6% in the third quarter 2006 to 11.3% in the current quarter. Feed prices rose by more than 50% per ton, driven by higher corn and soybean meal costs. This impact of the increase was mitigated somewhat by the fact that as a result of the MoArk acquisition on June 30, 2006, feed alone has dropped from 34% of sales for the third quarter of 2006 to 19% for the current quarter. The impact of higher feed costs at the Renville and Thompson facilities was $2.4 million unfavorable variance for the quarter. In the acquired businesses, prices for carton eggs rose to very high levels, and with them, the cost of eggs purchased for breaking as eggs were diverted to supermarkets and other users of carton eggs. In contrast to the second quarter, the price of liquid eggs did move in relation to the cost of purchased eggs, allowing the acquired facilities to capture the margin to cover the costs of converting the eggs into liquid, significantly improving profitability.
Operating Expenses Operating expenses for the third quarter of fiscal 2007 were $4.7 million, an increase of $2.8 million, or 144%, from the third quarter of fiscal 2006. As was the case in the first two quarters, the increase is primarily due to additional sales, management and administrative expenses associated with the MoArk acquisition, as the majority of the employees of the acquired facilities became Golden Oval employees. Additionally, marketing expenses, including the Land O’ Lakes licensed products test market costs, are incremental in the current period. Amortization of intangible assets and deferred financing costs associated with the MoArk Acquisition accounted for $0.4 million for the period. Operating expenses decreased as a percent of net sales from 10.1% from third quarter of fiscal 2006 to 9.0% in the third quarter of fiscal 2007.
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Income from Operations The cumulative effect of the events described above was to produce positive income from operations of $1.3 million, and increase of $0.2 million, or 20% over same quarter last year. This is also the first quarter of the current fiscal year to report an operating profit.
Total Other Expense Total other expense increased from $0.5 million to $2.3 million, an increase of $1.8 million for the period. Nearly all of the increase is due to interest expenses on higher debt levels associated with the acquisition.
Income Taxes As a limited liability company, the Company expects to be treated as a partnership for federal income tax purposes. Therefore, the Company will pay no federal income tax and instead, the Company’s members will include their pro-rata share of the Company’s net income as an item of income for the purposes of their own federal income tax returns.
Net Income (loss) Net income for the quarter ended May 31, 2007 resulted in a loss of $(1.0) million, or $(0.19) per basic and diluted members’ unit, as compared to a profit of $0.5 million, or $0.11 per unit for the same period a year ago.
Results of Operations — Nine Months ended May 31, 2007 Compared to Nine Months ended May 31, 2006
Net Sales Net sales for the first nine months of fiscal 2007 were $147.1 million, an increase of $89.8 million, or 157% over the first nine months of the prior fiscal year. Business acquired in the MoArk acquisition accounted for $89.8 million, or 100% of the increase. A $2.8 million increase in sales attributable to the Company’s interest in United Mills, which is consolidated in the financial statements, due to an increase in United Mills’ sales because of higher feed costs , is offset by a $2.8 million decrease in sales of liquid unpasteurized eggs from the facilities in place prior to the acquisition. The decline in sales pounds to outside parties of 14.3%, caused by increased utilization of output in company owned facilities, is partially offset by an increase in average selling prices of 10.5%. Pounds sold in the first nine months of fiscal 2007 were 292.6 million, an increase of 132.9 million, or 83.2% over the same period year ago. Pounds from the facilities acquired from MoArk accounted for 155.7 million of the increase, offsetting a 22.8 million pound decline in pounds sold to outside parties from the Renville, Minnesota and Thompson, Iowa facilities as total production declined approximately 14.3% due to reduced bird numbers, and more production being used internally as an ingredient in the further processed plants. Shipments to company facilities are not accounted for as sales on a consolidated basis. The average selling price per pound for the first nine months of fiscal 2007 increased from $0.359 to $0.503, an increase of $0.144, or 40.1% over the prior year same period, with $0.137 due to the inclusion of further processed products which command a higher selling price per pound in the marketplace, as well as overall strengthening in liquid whole egg prices at the Renville and Thompson locations, which accounted for $0.007 of the increase.
Cost of Goods Sold Cost of goods sold for the first three quarters of fiscal 2007 was $134.0 million, an increase of $86.8 million or 184% of the figure for same of fiscal 2006 and slightly less than the amount that sales increased, resulting in an increase of $3.0 million in gross profit on increased sales. The majority of the increase was associated with the acquired businesses. Significant unfavorable cost pressures were experienced in the period. Feed prices have risen by more than 33% per ton, driven by higher corn and soybean meal costs, resulting in $5.5 million of additional feed expense at the Renville and Thompson facilities. In the acquired businesses, two factors had a negative impact on results. First, prices for carton eggs rose to very high levels, and with them, the cost of eggs purchased for breaking as eggs were diverted to supermarkets and other users of carton eggs. Secondly, in the first half of the year the value of the liquid eggs did not move simultaneously higher, thereby substantially reducing or eliminating the margin to cover the costs of converting the eggs into liquid. The acquired facilities typically captured this margin to break an egg before adding value, and as this margin shrank, results in the acquired facilities were adversely affected. The decline in gross profit as a result of the cost pressures effectively accounted for the loss for the period.
Operating Expenses Operating expenses for the first three quarters of fiscal 2007 were $15.8 million, an increase of $9.6 million, or 156%, from the same of fiscal 2006. The increase is primarily due
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to additional sales, management and administrative expenses associated with the MoArk Acquisition, as the majority of the employees of the acquired facilities became Golden Oval employees. Additionally, marketing expenses, including the Land O’ Lakes licensed products test market costs, are incremental in the current period. Amortization of intangible assets and deferred financing costs associated with the MoArk Acquisition accounted for $1.3 million for the period. Operating expenses were constant as a percent of net sales at 10.8%.
Total Other Expense Total other expense increased from $1.3 million to $6.7 million, an increase of $5.4 million for the period. Interest expenses on higher debt levels associated with the acquisition accounted for the entire $5.4 million.
Income Taxes As a limited liability company, the Company expects to be treated as a partnership for federal income tax purposes. Therefore, the Company will pay no federal income tax and instead, the Company’s members will include their pro-rata share of the Company’s net income as an item of income for the purposes of their own federal income tax returns.
Net Income (loss) Net income for the nine months ended May 31, 2007 resulted in a loss of $(9.4) million, or $(1.74) per basic and diluted members’ unit, as compared to a profit of $2.7 million, or $0.57 per unit for the same period a year ago.
Liquidity and Capital Resources
The Company’s working capital at May 31, 2007 was $0.1 million compared to $6.8 million at August 31, 2006. The Company’s current ratio was 1.00 at May 31, 2007 compared to 1.26 at August 31, 2006. On June 30, 2006, the Company entered into an amended and restated credit agreement with CoBank ACB and the Metropolitan Life Insurance Company. The amended and restated credit agreement provided for a $93.0 million line of credit, consisting of a $15.0 million revolving note terminating on April 30, 2007 and $78.0 million in term notes due beginning in 2014. The amended and restated credit agreement provided $38.0 million in new debt to finance the MoArk acquisition and amended certain restrictive covenants contained in the prior agreement, as amended. On April 30, 2007, the Company entered into a first amendment to the existing credit agreement which renewed the $15.0 million revolving note through March 1, 2008 and amended certain covenants. For the third quarter of 2007, the Company was current on all interest and principal payments. Further, for the quarter ending May 31, 2007 the Company is required by certain provisions of its credit agreements to maintain a minimum tangible net worth of not less than $28.0 million plus 40% of earnings plus 100% of equity contributed after August 31, 2006. The Company met this covenant for the third quarter of 2007. For the subsequent quarters of the term of the revolving line of credit, the Company must meet the tangible net worth covenant described above, as well as covenants requiring a minimum current ratio of not less than 1.0 to 1.0; working capital of no less than zero; a leverage ratio of less than 5.0 to 1.0; a fixed charge coverage ratio no less than 1.00 to 1.
While the Company has collateral in excess of the cap used to determine availability on the revolving loan portion of its facility, the Company may require significant additional capital resources in order to proceed with potential future expansions or to otherwise respond to competitive pressures in the industry. In addition, the Company may seek additional capital from an offering of its equity securities or by incurring additional indebtedness, or both. No assurance can be given that additional working capital will be obtained in an amount that is sufficient for the Company’s needs, in a timely manner or on terms and conditions acceptable to the Company or its members. The Company’s financing needs are based upon management estimates as to future revenue and expense. The Company’s business plan and its financing needs are also subject to change based upon, among other factors, market and industry conditions, its ability to increase cash flow from operations and its ability to control costs and expenses. The Company’s efforts to raise additional funds from the sale of equity may be hampered by the fact that the Company’s securities are illiquid and are subject to restrictions on transfer. The Company’s efforts to raise additional funds from incurring additional indebtedness may be hampered by the fact that the Company has significant outstanding indebtedness and all of the Company’s assets are pledged to its lenders to secure existing debt. In addition, the covenants of the Company’s credit agreement restrict the Company’s ability to make distributions, create liens, incur indebtedness and sell assets and properties.
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The Company’s long-term debt at May 31, 2007, including current maturities, was $97.3 million compared to $103.7 million at August 31, 2006. As of May 31, 2007, $11.1 million has been drawn against the $15.0 revolving line of credit, compared to $3.9 million as of August 31, 2006. Substantially all trade receivables and inventories collateralize the Company’s line of credit; property, plant and equipment collateralize the Company’s long-term debt under its credit agreement and the note issued to Land O’Lakes, Inc.
With respect to the improvements that will be required to the Thompson, Iowa wastewater system (see Part II, Item 1 “Legal Proceedings”), the Company is currently estimating the cost of these improvements. Management does not believe the cost of these improvements will adversely impact the liquidity or capital resources of the Company.
Net cash flow from operations was $ 1.0 million for the first three quarters of fiscal 2007 compared to $4.2 million in the first three quarters of fiscal 2006. Principal payments on long-term debt were $6.4 million and additions to fixed assets were $1.0 million. There were no distributions to unit holders during the first three quarters of fiscal 2007. An additional $0.7 million was added to restricted cash to provide for the principal payment on the 1999 and 2001 bonds due in July 2007. Effective September 1, 2006, we issued 20,895 Class A units to pay $0.2 million in management bonuses. The management bonuses were earned during fiscal year 2006. On May 22, 2007, 12,000 Class A Units were issued to pay $0.03 million in Board of Managers compensation. The Board of Managers’ compensation was earned and accrued during fiscal years 2006 and 2007.
Critical Accounting Policies and Estimates
The above discussion and analysis of our results of operations and financial condition are based upon our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events may change and even the best estimates and judgments may require adjustment. For a complete description of the Company’s significant accounting policies, please see Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended August 31, 2006. There have been no changes to critical accounting policies identified in our Annual Report on Form 10-K for the year ended August 31, 2006.
Impact of Recently Issued Accounting Pronouncements
Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in our Annual Report form 10-K for the year ended August 31, 2006 for a discussion of the impact of recently issued accounting pronouncements.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement. FAS 157 is effective for the Company on September 1, 2008 and will be applied prospectively. Management is currently evaluating the impact of FAS 157 on its consolidated financial statements.
In December 2004, the FASB issued SFAS Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares to be recognized in the income statement based on their fair values. SFAS No. 123(R) also requires the benefits of tax deductions
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in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. In the first quarter of fiscal 2007, we adopted SFAS No. 123(R). SFAS No. 123 (R) requires that entities recognize the services received in a share based payment transaction as services are received. The compensation cost for an award of share- based employee compensation classified as equity shall be recognized over the requisite service period The requisite service period for share based bonuses awarded company management is four (4) years, the year the bonus was earned plus the subsequent three (3) year vesting period. The result of adoption of SFAS No. 123 (R) did not have a material impact on the consolidated financial statements. No stock options were outstanding at the date of adoption and none are currently outstanding.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 addresses the diversity in practice in quantifying financial statement misstatements and establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on a company’s financial statements and related disclosures. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 has not had a material impact on our financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities, to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS No. 159 on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the market risk reported in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, Dana Persson, and Chief Financial Officer, Thomas A. Powell, have reviewed the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon this review, they have concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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As previously disclosed, three notices of violation were issued against us by the Iowa Department of Natural Resources regarding alleged violations at our Thompson, Iowa facility of National Pollution Discharge and Elimination System (“NPDES”) permit limits for biochemical oxygen demand, total suspended solids, and ammonia nitrogen. Two additional notices of violation have since been issued on the same matter. On December 5, 2006, the Iowa Environmental Protection Commission referred the matter to the Iowa Attorney General.
On March 29, 2007, the Iowa Attorney General’s office filed suit against Golden Oval Eggs, LLC requesting civil penalties and injunctive relief from further permit violations. We have received an extension from the Iowa District Court for Winnebago County until August 31, 2007 to submit our answer, which will allow time for us to negotiate a consent decree with the State of Iowa. We are currently negotiating the terms of the consent decree with the Iowa Attorney General’s office, and we expect the terms to include an obligation by us to make improvements to the wastewater treatment system to prevent further permit violations on an agreed-upon timeline, as well as the amount of civil penalties. In addition, management has begun a competitive bidding process for improvements to the wastewater treatment system and our Board of Managers has established a preliminary budget for capital improvements spending. At this time, the cost associated with the interim solution, permanent improvement to the wastewater treatment facility, compliance with the NPDES permit, and the amount of penalty or fine imposed by the Iowa Attorney General cannot be estimated, however they may be significant, both individually and in the aggregate.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company’s Annual Meeting of Members was held on April 4, 2007. Of the 4,721,527 Class A Units and 697,350 Class B Units outstanding and entitled to vote at the meeting as of February 28, 2007,
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2,198,651 Class A Units and no Class B Units were present, either in person or by ballot. The following describes the maters considered by the Company’s members at the Annual Meeting, as well as the results of the votes cast at the Annual Meeting.
Proposal 1: Election of two managers to serve on the Company’s Board of Managers for terms expiring at the Annual Meeting of the Company’s Members to be held in 2010 or until such manager’s successor is elected and shall qualify.
Nominees |
| Votes For |
| Votes Withheld |
|
|
|
|
|
|
|
Rodney Hebrink |
| 2,060,139 |
| 138,512 |
|
|
|
|
|
|
|
Paul Wilson |
| 2,025,672 |
| 172,976 |
|
The terms of Messrs. Chris Edgington, Marvin Breitkreutz, Mark Chan, Howard Dahlager and James N. Reith continued after the Annual Meeting although Mr. Reith resigned as a manager effective April 19, 2007.
None.
Exhibit |
| Description |
|
|
|
31.1 |
| Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|
|
|
31.2 |
| Certification of the Chief Financial Officer pursuant to pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|
|
|
32 |
| Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GOLDEN OVAL EGGS, LLC | ||||
|
| |||
| By: | /s/ Dana Persson |
| |
| President and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
|
| |||
| By: | /s/ Thomas A. Powell |
| |
| Vice President and Chief Financial | |||
| Officer | |||
| (Principal Financial and Accounting | |||
| Officer) | |||
|
| |||
Date: July 16, 2007 |
| |||
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