UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (mark one) |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended November 30, 2002 OR |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission file number: 000-04892 CAL-MAINE FOODS, INC. (Exact name of registrant as specified in its charter) Delaware 64-0500378 (State or other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 3320 Woodrow Wilson Avenue, Jackson, Mississippi 39209 (Address of principal executive offices) (Zip Code) (601) 948-6813 (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 ----- ----- Number of shares outstanding of each of the issuer's classes of common stock (exclusive of treasury shares), as of December 30, 2002. Common Stock, $0.01 par value 10,564,388 shares Class A Common Stock, $0.01 par value 1,200,000 shares
CAL-MAINE FOODS, INC. INDEX Page Part I. Financial Information Number ------ Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - November 30, 2002 and June 1, 2002 3 Condensed Consolidated Statements of Operations - Three Months and Six Months Ended November 30, 2002 and December 1, 2001 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended November 30, 2002 and December 1, 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures of Market Risk 12 Item 4. Controls and Procedures 12 Part II. Other Information Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Certifications 15 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CAL-MAINE FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) <TABLE> <CAPTION> November 30, 2002 June 1, 2002 ----------------- ------------ (unaudited) (note1) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 4,339 $ 4,878 Trade and other receivables 29,745 17,380 Recoverable federal income taxes 7,209 6,031 Inventories 50,728 46,108 Prepaid expenses and other current assets 1,588 911 ---------------------------------------------------- Total current assets 93,609 75,308 Notes receivable and investments 7,307 7,116 Goodwill 3,147 3,147 Other assets 1,813 1,865 Property, plant and equipment 263,304 258,696 Less accumulated depreciation (122,115) (116,478) ---------------------------------------------------- 141,189 142,218 ---------------------------------------------------- TOTAL ASSETS $ 247,065 $ 229,654 ==================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 21,000 $ 7,000 Accounts payable and accrued expenses 35,081 28,867 Current maturities of long-term debt 10,364 10,364 Deferred income taxes 11,767 11,767 ---------------------------------------------------- Total current liabilities 78,212 57,998 Long-term debt, less current maturities 103,883 107,998 Other non-current liabilities 1,450 1,450 Deferred income taxes 9,056 7,748 ---------------------------------------------------- Total liabilities 192,601 175,194 Stockholders' equity: Common stock $0.01 par value per share: Authorized shares - 30,000,000 Issued and outstanding shares - 17,565,200 at November 30, 2002 and June 1, 2002 176 176 Class A common stock $0.01 part value, authorized, issued and outstanding 1,200,000 shares 12 12 Paid-in capital 18,784 18,784 Retained earnings 48,591 48,587 Common stock in treasury-6,863,512 shares at November 30,2002 and June 1, 2002 (13,099) (13,099) ---------------------------------------------------- Total stockholders' equity 54,464 54,460 ---------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 247,065 $ 229,654 ==================================================== </TABLE> See notes to condensed consolidated financial statements. 3
CAL-MAINE FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) <TABLE> <CAPTION> 13 Weeks Ended 26 Weeks Ended November 30, 2002 December 1, 2001 November 30, 2002 December 1, 2001 --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 94,984 $ 83,759 $177,202 $ 156,187 Cost of sales 79,629 74,365 151,776 144,096 --------------------------------------------------------------------------------------- Gross profit 15,355 9,394 25,426 12,091 Selling, general and administrative 10,275 10,455 20,832 20,469 --------------------------------------------------------------------------------------- Operating income (loss) 5,080 (1,061) 4,594 (8,378) Other income (expense): Interest expense, net (2,122) (2,255) (4,341) (4,321) Other 158 125 211 7 --------------------------------------------------------------------------------------- (1,964) (2,130) (4,130) (4,314) --------------------------------------------------------------------------------------- Income (loss) before income taxes 3,116 (3,191) 464 (12,692) Income tax expense (benefit) 1,107 (1,132) 167 (4,533) --------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 2,009 $ (2,059) $ 297 $ (8,159) ======================================================================================= Net income (loss) per common share: Basic $ .17 $ (.18) $ .03 $ (.69) ======================================================================================= Diluted $ .17 $ (.18) $ .03 $ (.69) ======================================================================================= Weighted average shares outstanding: Basic 11,764 11,765 11,764 11,821 ======================================================================================= Diluted 11,813 11,765 11,836 11,821 ======================================================================================= See notes to condensed consolidated financial statements. </TABLE> 4
CAL-MAINE FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <TABLE> <CAPTION> 26 Weeks Ended November 30, 2002 December 1, 2001 --------------------------------------------- <S> <C> <C> Cash flows used in operating activities $ (3,053) $ (9,057) Cash flows from investing activities: Purchases of property, plant and equipment (2,451) (4,633) Construction of production facilities (5,014) (4,579) Payments received on notes receivable and from investments 48 94 Increase in note receivable, investments and other assets (110) 0 Net proceeds from sale of property, plant and equipment 449 373 --------------------------------------------- Net cash used in investing activities (7,078) 8,745) Cash flows from financing activities: Net borrowings on notes payable to banks 14,000 7,500 Long-term borrowings 0 8,600 Principal payments on long-term debt and capital leases (4,115) (3,642) Purchases of common stock for treasury 0 (571) Payment of dividends (293) (297) --------------------------------------------- Net cash provided by financing activities 9,592 11,590 --------------------------------------------- Decrease in cash and cash equivalents (539) (6,212) Cash and cash equivalents at beginning of period 4,878 13,129 --------------------------------------------- Cash and cash equivalents at end of period $ 4,339 $ 6,917 ============================================= See notes to condensed consolidated financial statements. </TABLE> 5
CAL-MAINE FOODS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (in thousands, except share amounts) November 30, 2002 (unaudited) 1. Presentation of Interim Information The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management , all adjustments (consisting of normal occurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended November 30, 2002 are not necessarily indicative of the results that may be expected for the year ending May 31, 2003. The balance sheet at June 1, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Cal-Maine Foods, Inc.'s annual report on Form 10-K for the fiscal year ended June 1, 2002. 2. Inventories Inventories consisted of the following: November 30, 2002 June 1, 2002 ---------------------------------------- Flocks $ 31,976 $ 30,836 Eggs 3,862 2,257 Feed and supplies 12,048 10,073 Livestock 2,842 2,942 ---------------------------------------- $ 50,728 $ 46,108 ======================================== 3. Other Matters During the second quarter of fiscal 2003, the Company recognized $2,947 in vendor settlements pertaining to overcharges for vitamins and methionine purchased by the Company over a number of years. The settlements are reflected in the accompanying condensed consolidated financial statements as a reduction of cost of sales in the period ended November 30, 2002. Other receivables at November 30, 2002 include $2,400 of the settlements, which is expected to be collected in fiscal 2003. 6
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Cal-Maine Foods, Inc. (the" Company") is primarily engaged in the production, grading, packing and sale of fresh shell eggs. The Company's fiscal year end is the Saturday closest to May 31. The Company's operations are fully integrated. At its facilities it hatches chicks, grows pullets, manufactures feed, and produces, processes, and distributes shell eggs. The Company currently is the largest producer and distributor of fresh shell eggs in the United States. Shell egg sales, including feed sales to outside egg producers, account for 98% of the Company's net sales. The Company primarily markets its shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. Shell eggs are sold directly by the Company primarily to national and regional supermarket chains. The Company currently uses contract producers for approximately 15% of its total egg production. Contract producers operate under agreements with the Company for the use of their facilities in the production of shell eggs by layers owned by the Company, which owns the eggs produced. Also, shell eggs are purchased from outside producers for resale, as needed, by the Company. The Company's operating income or loss is significantly affected by wholesale shell egg market prices, which can fluctuate widely and are outside of the Company's control. Retail sales of shell eggs are greatest during the fall and winter months and lowest during the summer months. Prices for shell eggs fluctuate in response to seasonal factors and a natural increase in egg production during the spring and early summer. The Company's cost of production is materially affected by feed costs, which average about 56% of the Company's total farm egg production cost. Changes in feed costs result in changes in the Company's cost of goods sold. The cost of feed ingredients is affected by a number of supply and demand factors such as crop production and weather, and other factors, such as the level of grain exports, over which the Company has little or no control. According to U.S. Department of Agriculture reports, during the past twelve calendar months in 2002, the chick hatch has been lower than in the same twelve-month period in 2001, resulting in lower projected hen numbers for 2003. This could result in decreased egg production and upward pressure on egg prices. Egg demand is very good for domestic use, with export demand down slightly. Although the fall 2002 grain crop was adequate, current grain commodities futures trading levels indicate that the cost of feed ingredients may be at higher price levels during 2003. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's Condensed Consolidated Statements of Operations expressed as a percentage of net sales. <TABLE> <CAPTION> Percentage of Net Sales 13 Weeks Ended 26 Weeks Ended Nov. 30, 2002 Dec. 1, 2001 Nov. 30, 2002 Dec. 1, 2001 ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 83.8 88.8 85.7 92.3 ---------------------------------------------------------------------------- Gross profit 16.2 11.2 14.3 7.7 Selling, general & administrative 10.8 12.5 11.7 13.1 ---------------------------------------------------------------------------- Operating income (loss) 5.4 (1.3) 2.6 (5.4) Other expense (2.1) (2.5) (2.3) (2.7) ---------------------------------------------------------------------------- Income (loss) before taxes 3.3 (3.8) .3 (8.1) Income tax expense (benefit) 1.2 (1.3) .1 (2.9) ---------------------------------------------------------------------------- Net income (loss) 2.1% (2.5)% .2% (5.2)% ============================================================================ </TABLE> 7
NET SALES Net sales for the second quarter of fiscal 2003 were $95.0 million, an increase of $11.2 million, or 13.4% as compared to net sales of $83.8 million for the second quarter of fiscal 2002. Total dozens of eggs sold increased in the current quarter and egg selling prices increased as compared with prices last year. Dozens sold for the current quarter were 144.9 million dozen, an increase of 2.2 million dozen, or 1.5% as compared to the second quarter of last year. Domestic demand for eggs is good, and an export order during the current quarter helped tighten overall egg supply. This resulted in higher egg selling prices during the current quarter. The Company's net average selling price per dozen for the fiscal 2003 second quarter was $.622, compared to $.557 for the second quarter of last year, an increase of 11.7%. Net sales for the twenty-six weeks ended November 30, 2002 were $177.2 million, an increase of $21.0 million, or 13.4%. As in the current quarter, total dozens sold increased and net egg selling prices increased. Dozens sold for the current twenty-six week period were 280.9 million as compared to 276.7 million for last fiscal year, an increase of 1.5%. As discussed above, favorable egg market conditions resulted in increased egg selling prices. For the current twenty-six week period, the Company's net average selling price per dozen was $.598, compared to $.532 per dozen last year, an increase of $.066 per dozen, or 12.4%. COST OF SALES Total cost of sales for the second quarter ended November 30, 2002 was $79.6 million, an increase of $5.2 million, or 7.0%, as compared to the cost of sales of $74.4 million for last year's second quarter. The increase is due to increases in dozens sold, higher costs of eggs purchased from outside producers and an increase in the cost of feed ingredients, offset by the Company's share of a feed ingredient lawsuit. Dozens of eggs sold increased 2.2 million for the current quarter. The cost of eggs purchased from outside producers increased due to higher egg market selling prices. Feed cost for the second quarter ended November 30, 2002 was $.220 per dozen, an increase of 11.0%, as compared to last fiscal year's cost per dozen of $.198. During the current quarter, the Company recognized $2.9 million as a reduction in cost of sales for its share in the settlement of certain class action feed ingredient lawsuits. The claim is for alleged overcharges by certain vitamin and methionine suppliers. Settlement discussions are ongoing with other vitamin and methionine suppliers and management believes that additional settlements are likely during the remainder of fiscal 2003 or during fiscal 2004. The increase in egg selling prices and dozens sold, offset by the increases in cost of sales, resulted in a net increase in gross profit from 11.2% of net sales for the quarter ended December 1, 2001 to 16.2% of net sales for the current quarter ended November 30, 2002. For the twenty-six week period ended November 30, 2002, total cost of sales was $151.8 million, an increase of $7.7 million, or 5.3%, as compared to the cost of sales of $144.1 million for last year. As in the quarter, the increase in cost of sales is the result of more dozens sold, higher cost of eggs purchased from outside producers and an increase in the cost of feed ingredients offset by the Company's share of the class action lawsuit settlement. Eggs sold increased 4.2 million dozen in the current year. Feed cost for the current twenty-six weeks was $.208 per dozen, compared to $.196 per dozen for last year, an increase of 6.1%. As in the quarter, the increase in egg selling prices, offset by the increases in cost of sales, resulted in a net increase in gross profit from 7.7% of net sales for last year to 14.3% for the current fiscal year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expense for the second quarter ended November 30, 2002 was $10.3 million, a decrease of $180,000, as compared to $10.5 million for last fiscal year's second quarter. On a cost per dozen sold basis, selling, general and administrative expense remained about the same, $.071 per dozen for the current quarter as compared to $.073 for last year. As a percent of net sales, selling, general and administrative expense decreased from 12.5% for fiscal 2002 second quarter to 10.8% for the current quarter. For the twenty-six weeks ended November 30, 2002, selling, general and administrative expense was $20.8 million, an increase of $363,000, as compared to $20.5 million for the same period last fiscal year. On a cost per dozen sold basis, selling, general and administrative expense was $.074 for the current twenty-six weeks and for last year. As a percent of net sales, selling, general and administrative expense has decreased from 13.1% for fiscal 2002 to 11.7% for the current fiscal year. 8
OPERATING INCOME (LOSS) As the result of the above, operating income was $5.1 million for the second quarter ended November 30, 2002, as compared to an operating loss of $1.1 million for last year's fiscal second quarter. As a percent of net sales, the current fiscal 2003 quarter had a 5.4% operating income, compared to a 1.3% operating loss for last year. For the twenty-six weeks ended November 30, 2002, operating income was $4.6 million, compared to an operating loss of $8.4 million for last fiscal year. As a percent of net sales, the current fiscal period had a 2.6% operating income, compared to a 5.4% operating loss for the same period last year. OTHER EXPENSE Other expense for the second quarter ended November 30, 2002 was $2.0 million, a decrease of $166,000, as compared to $2.1 million for last year's second quarter. This net decrease for the current quarter was the result of a decrease of $133,000 in net interest expense and a $33,000 increase in other income. As a percent of net sales, other expense was 2.1% for the current fiscal second quarter, compared to 2.5% last year. For the twenty-six weeks ended November 30, 2002, other expense was $4.1 million, a decrease of $184,000 as compared to an expense of $4.3 million for last year. For the current period, net interest expense increased $20,000 and other income increased $203,000. The increase in other income resulted from increased equity in income of affiliates. As a percent of net sales, other expense was 2.3% for the current period, as compared to 2.7% for the same period last year. INCOME TAXES As a result of the above, the Company's pre-tax income was $3.1 million for the quarter ended November 30, 2002, compared to a pre-tax loss of $3.2 million for last year's quarter. For the current quarter, income tax expense of $1.1 million was recorded with an effective tax rate of 35.5%, as compared to an income tax benefit of $1.1 million with an effective rate of 35.5% for last year's comparable quarter. For the twenty-six week period ended November 30, 2002, the Company's pre-tax income was $464,000, compared to pre-tax loss of $12.7 million for last year. For the current twenty-six week period, income tax expense of $167,000 was recorded with an effective tax rate of 36.0%, as compared to an income tax benefit of $4.5 million, with an effective rate of 35.7% for last year's comparable period. NET INCOME (LOSS) Net income for the second quarter ended November 30, 2002 was $2.0 million, or $.17 per basic and diluted share, compared to net loss of $2.1 million, or $.18 per basic share for last fiscal year's second quarter. For the twenty-six week period ended November 30, 2002, net income was $297,000, or $.03 per basic and diluted share, compared to last fiscal year's net loss of $8.2 million, or $.69 per basic share. CAPITAL RESOURCES AND LIQUIDITY 9
The Company's working capital at November 30, 2002 was $15.4 million compared to $17.3 million at June 1, 2002. The Company's current ratio was 1.20 at November 30, 2002 as compared with 1.30 at June 1, 2002. The Company's need for working capital generally is highest in the last and first fiscal quarters ending in May and August, respectively, when egg prices are normally at seasonal lows. Seasonal borrowing needs frequently are higher during these quarters than during other fiscal quarters. The Company has a $35.0 million line of credit with three banks of which $21.0 million was outstanding at November 30, 2002. The Company's long-term debt at November 30, 2002, including current maturities, amounted to $114.2 million, as compared to $118.4 million at June 1, 2002. For the twenty-six weeks ended November 30, 2002, $3.1 million in net cash was used in operating activities. This compares to $9.1 million that was used in operating activities for the comparable period last fiscal year. In the current twenty-six week period, $2.5 million was used for purchases of property, plant and equipment, $449,000 net proceeds were received from sales of property, plant and equipment, and $5.0 million used for construction projects. Payments of $293,000 were made for dividends on the common stock. Additional cash of $14.0 million was received from net borrowings on the notes payable to banks and repayments of $4.1 million were made on long-term debt. The net result was a decrease in cash of approximately $539,000. For the comparable period last year, $4.6 million was used for purchases of property, plant and equipment, $373,000 net proceeds were received from sales of property, plant and equipment, and $4.6 million used for construction projects. Net cash of $94,000 was received in payments on notes receivable. Approximately $571,000 was used for purchase of common stock for the treasury and $297,000 was used for payments of dividends on the common stock. Additional cash of $7.5 million was received on the notes payable to banks and additional long-term borrowings of $8.6 million were received. Repayments of $3.6 million were made on long-term debt. The net result was a decrease in cash of approximately $6.2 million. Substantially all trade receivables and inventories collateralize the Company's line of credit, and property, plant and equipment collateralize the Company's long-term debt. The Company is required by certain provisions of these loan agreements to (1) maintain minimum levels of working capital and net worth; (2) limit dividends, capital expenditures, lease obligations and additional long-term borrowings; and (3) maintain various current and cash-flow coverage ratios, among other restrictions. At June 1, 2002, the Company did not meet certain of these provisions on its long-term debt agreements and obtained waivers of these requirements through fiscal 2003. As of November 30, 2002, the Company is in compliance with the provisions of all loan agreements as waived or amended. Under certain of the loan agreements, the lenders have the option to require the prepayment of any outstanding borrowings in the event of a change in the control of the Company. In fiscal 2001, the Company began construction of a new shell egg production and processing facility in Guthrie, Kentucky, with completion of the facility expected in fiscal 2004. The total cost of the facility is approximately $18.0 million, of which $9.9 million was incurred through November 30, 2002. The Company has commitments from an insurance company to receive $10.0 million in long-term borrowings and from a leasing company to receive $7.5 million applicable to the Guthrie facility. Including the construction project, the Company has projected capital expenditures of $14.0 million in fiscal 2003, which will be funded by cash flows from operations and additional long-term borrowings. Impact of Recently Issued Accounting Standards. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 supersedes Statement of Financial 10
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," (SFAS No. 121), however, it retains the fundamental provisions of SFAS No. 121 related to the recognition and measurement of the impairment of long-lived assets to be "held and used." In addition, SFAS No. 144 provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset to be disposed other than by sale (e.g., abandoned) be classified as "held and used" until it is disposed of, and establishes more restrictive criteria to classify an asset as "held for sale." The Company adopted SFAS No. 144 effective June 2, 2002. The adoption did not have an effect on the Company's consolidated results of operations or financial position. Forward Looking Statements. The foregoing statements contain forward-looking statements, which involve risks and uncertainties, and the Company's actual experience may differ materially from that discussed above. Factors that may cause such a difference include, but are not limited to, those discussed in "Factors Affecting Future Performance" below, as well as future events that have the effect of reducing the Company's available cash balances, such as unanticipated operating losses or capital expenditures related to possible future acquisitions. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements. See also the Company's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. Factors Affecting Future Performance. The Company's future operating results may be affected by various trends and factors beyond the Company's control. These include adverse changes in shell egg prices and in the grain markets. Accordingly, past trends should not be used to anticipate future results and trends. Further, the Company's prior performance should not be presumed to be an accurate indication of future performance. Critical Accounting Policies. The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of 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 these estimates. Management suggests that the Company's Summary of Significant Accounting Policies, as described in Note 1 of the Notes to Consolidated Financial Statements included in Cal-Maine Foods, Inc. and Subsidiaries annual report on Form10-K for the fiscal year ended June 1, 2002, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company believes the critical accounting policies that most impact the Company's consolidated financial statements are described below. Allowance for Doubtful Accounts. In the normal course of business, the Company extends credit to its customers on a short-term basis. Although credit risks associated with our customers are considered minimal, the Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts. In circumstances where management is aware of a specific customer's inability to meet its financial obligations to the Company (e.g. bankruptcy filings), a specific reserve is recorded to reduce the receivable to the amount expected to be collected. For all other customers, the Company recognizes reserves for bad debts based on the length of time the receivables are past due, generally 100% for amounts more than 60 days past due. Inventories. Inventories of eggs, feed, supplies and livestock are valued principally at the lower of cost (first-in, first-out method) or market. If market prices for eggs and feed grains move substantially lower, the Company would record adjustments to write-down the carrying values of eggs and feed inventories to fair market value. The cost associated with flock inventories, consisting principally of chick purchases, feed, labor, contractor payments and overhead costs, are accumulated during the growing period of approximately 18 weeks. Capitalized flock costs are then amortized over the productive lives of the flocks, generally one to two years. Flock mortality is charged to cost of sales as incurred. High mortality from disease or extreme temperatures would result in abnormal adjustments to write-down flock inventories. Management continually monitors each flock and attempts to take appropriate actions to minimize the risk of mortality loss. Long-Lived Assets. Depreciable long-lived assets are primarily comprised of buildings and improvements and machinery and equipment. Depreciation is provided by the straight-line method over the estimated useful lives, which are 15 to 25 11
years for buildings and improvements and 3 to 12 years for machinery and equipment. An increase or decrease in the estimated useful lives would result in changes to depreciation expense. The Company continually reevaluates the carrying value of its long-lived assets, for events or changes in circumstances, which indicate that the carrying value may not be recoverable. As part of this reevaluation, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposal. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized to reduce the carrying value of the long-lived asset to the estimated fair value of the asset. Investment in Affiliates. The Company has invested in other companies engaged in the production, processing and distribution of shell eggs and egg products. The Company's ownership percentages in these companies range from less than 20% to 50%. Therefore, these investments are recorded using the cost or the equity method, and accordingly, not consolidated in the Company's financial statements. Changes in the ownership percentages of these investments might alter the accounting methods currently used. The Company is a guarantor of approximately $9 million of long-term debt of one of the affiliates. Goodwill. Goodwill primarily relates to the fiscal 1999 acquisition of Hudson Brothers, Inc. Goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. An impairment loss would be recorded if the recorded goodwill exceeds its implied fair value. The Company has only one operating segment, which is its sole reporting unit. Accordingly, goodwill is tested for impairment at the entity level. Significant adverse industry or economic changes, or other factors not anticipated could result in an impairment charge to reduce recorded goodwill. Income Taxes. The Company determines its effective tax rate by estimating its permanent differences resulting from differing treatment of items for tax and accounting purposes. The Company is periodically audited by taxing authorities. Any audit adjustments affecting permanent differences could have an impact on the Company's effective tax rate. ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK There have been no material changes in the market risk reported in the Company's fiscal 2002 annual report on Form 10-K. ITEM 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective based on their evaluation of such controls and procedures as of a date within 90 days prior to the filing of this report. There were no significant changes in internal controls or in other factors that significantly affect internal controls subsequent to the date of their most recent evaluation. 12
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 26, 2002, Cal-Maine Farms, Inc.("Cal-Maine Farms"), a Delaware corporation and a wholly owned subsidiary of the Company, was served with process in a civil complaint filed in the First Judicial District of Hinds County, Mississippi, on behalf of four plaintiffs, Hunter McWhorter, a minor, his two parents, and Michael Green, an adult. In addition to Cal-Maine Farms, Fred Adams, Dolph Baker, Charlie Collins, R. K. Looper and B.J. Raines, officers of the Company, are also named as defendants. Six other named defendants include Cargill, Incorporated, George's Farms, Inc., Peterson Farms, Inc., Simmons Foods, Inc., Simmons Poultry Farms, Inc., and Tyson Foods, Inc., each of which is engaged in the broiler business. The suit alleges the plaintiffs have suffered medical problems resulting from living near land upon which "litter" from the defendant's flocks of hens was spread as fertilizer. The suit specifically addresses conditions alleged to exist in Washington County, Arkansas, where there is a relatively high concentration of broiler farms. Cal-Maine Farms is not engaged in any broiler production and, compared to the broiler producers, only has a very small portion of the hens located in Washington County, Arkansas. The suit alleges actual damages in the amount of $55,000,000 and requests punitive damages in the amount of $100,000,000. On December 31, 2002, an Amended Complaint was filed, bringing the total number of plaintiffs to 93, of which 67 are alleged to be ill and 3 are deceased. The damages sought were not amended. No answer has yet been filed on behalf of Cal-Maine Farms and no discovery has taken place. At this stage, it is impossible to evaluate the potential exposure, if any, of Cal-Maine Farms to damages in this suit. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 99.1 Written Statement of The Chief Executive Officer 99.2 Written Statement of The Chief Financial Officer b. Reports on Form 8-K No Current Report on Form 8-K was filed by the Company covering an event during the second quarter of fiscal 2003. 13
SIGNATURES 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. CAL-MAINE FOODS, INC. (Registrant) Date: January 13, 2003 /s/ Bobby J. Raines --------------------------------------------- Bobby J. Raines Vice President/Treasurer (Principal Financial Officer) Date: January 13, 2003 /s/ Charles F. Collins --------------------------------------------- Charles F. Collins Vice President/Controller (Principal Accounting Officer) 14
CERTIFICATION I, Fred R. Adams, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cal-Maine Foods, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Fred R. Adams, Jr. - ---------------------------------------------- Fred R. Adams, Jr. Chairman of the Board and Chief Executive Officer Date : January 13, 2003 15
CERTIFICATION I, Bobby J. Raines, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cal-Maine Foods, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Bobby J. Raines - ---------------------------------------------- Bobby J. Raines Vice President, Chief Financial Officer, Treasurer and Secretary Date: January 13, 2003 16