We are controlled by a principal stockholder.

 Fred R. Adams, Jr., our Chairman of the Board and Chief Executive Officer, and his spouse own 36.1% of the outstanding shares of our Common Stock, which has one vote per share, and Mr. Adams owns 90.1% and his son-in-law, Adolphus B. Baker, our president, chief operating officer and one of our directors, owns 9.9% of the outstanding shares of Class A Common Stock, which has ten votes per share. Mr. Baker and his spouse also own 1.6% of the outstanding shares of our Common Stock. As a result, currently Mr. Adams and his spouse possess 64.8%, and Messrs. Adams and Baker and their spouses possess 70.8% of the total voting power represented by the outstanding shares of our Common Stock and Class A Common Stock. These stockholdings include shares of our Common Stock accumulated under our employee stock ownership plan for the respective accounts of Messrs. Adams and Baker.

The Adams family intends to retain ownership of a sufficient amount of Common Stock and Class A Common Stock to assure its continued ownership of over 50% of the combined voting power of our outstanding shares of capital stock. Such ownership will make an unsolicited acquisition of us more difficult and discourage certain types of transactions involving a change of control of our company, including transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current market prices. In addition, certain provisions of our Certificate of Incorporation require that our Class A Common Stock be issued only to Fred R. Adams, Jr. and members of his immediate family, and that if shares of the Class A Common Stock, by operation of law or otherwise, are deemed not to be owned by Mr. Adams or a member of his immediate family, the voting power of any such shares shall be automatically reduced to one vote per share. The Adams family controlling ownership of our capital stock may adversely affect the market price of our Common Stock.

Based on Mr. Adams' beneficial ownership of our outstanding capital stock, we are a "controlled company," as defined in Rule 4350(c) (5) of the listing standards of the NASDAQ National Market on which our shares of Common Stock are quoted. Accordingly, we are exempt from certain requirements of NASDAQ's corporate governance listing standards, including the requirement to maintain a majority of independent directors on our board of directors and the requirements regarding the determination of compensation of executive officers and the nomination of directors by independent directors.

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 ITEM 1B. UNRESOLVED STAFF COMMENTS

 Not applicable

 

 ITEM 2. PROPERTIES

We operate farms, processing plants, hatcheries, feed mills, warehouses, offices and other properties located in Alabama, Arkansas, Florida, Georgia, Kansas, Kentucky, Louisiana, Mississippi, New Mexico, North Carolina, Ohio, South Carolina, Tennessee, Texas and Utah. The facilities currently include two breeding facilities, two hatcheries, four wholesale distribution centers, 16 feed mills, 29 shell egg production facilities, 19 pullet growing facilities, and 28 processing and packing facilities. We also own interests in two egg products facilities and one spent hen processing facility, which are consolidated in our financial statements. Most of our operations are conducted from properties we own.

 

Presently, we own approximately 17,000 acres of land in various locations throughout our geographic market area. We have the ability to hatch 15.5 million pullet chicks annually, grow 13 million pullets annually, house 24 million laying hens and control the production of an aggregate total of 26 million layers. We also own or control mills that can produce 570 tons per hour of feed, and processing facilities capable of processing 8,800 cases of shell eggs per hour (with each case containing 30 dozen shell eggs). Our facilities are well-maintained and operate at a high level of efficiency. Typically, we insure our facilities for replacement value.

Over the past five fiscal years, our capital expenditures, excluding acquisitions of shell egg production and processing facilities from others, have totaled an aggregate amount of approximately $67.6 million. The Company’s facilities currently are maintained in good operable condition and are insured to an extent the Company deems adequate.

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 ITEM 3. LEGAL PROCEEDINGS

 

Chicken Litter Litigation

Cal-Maine Farms, Inc.(“Cal-Maine Farms”), one of our subsidiaries, is presently a defendant in two personal injury cases in the Circuit Court of Washington County, Arkansas. Those cases are styled, McWhorter vs. Alpharma, Inc., et al. (“McWhorter”), and Carroll, et al. vs. Alpharma, Inc., et al. (“Carroll”). Cal-Maine Farms was named as a defendant in the McWhorter case on February 3, 2004, and as a defendant in the Carroll case on May 2, 2005. Co-defendants in both cases include other integrated poultry companies such as Tyson Foods, Inc., Cargill, Incorporated, George’s Farms, Inc., Peterson Farms, Inc., Simmons Foods, Inc., and Simmons Poultry Farms, Inc. Alpharma, Inc. and Alpharma Animal Health, Co., manufacturers of an additive for broiler feed also are included as defendants.

 

Both cases allege that the plaintiffs have suffered medical problems resulting from living near land upon which “litter” from the defendants’ flocks was spread as fertilizer. The McWhorter case focuses on mold and fungi allegedly created by the application of litter. The Carroll case also alleges injury from mold and fungi, but focuses primarily on the broiler feed ingredient as the cause of the alleged medical injuries.

Several other separate, but related, cases were prosecuted in the same venue by the same attorneys. The same theories of liability were prosecuted in all of the cases. Neither the Company, nor any of its affiliates, was named as a defendant in any of those other cases. The plaintiffs selected one of those cases, Green, et al. vs. Alpharma, Inc., et al., as a bellwether case to go to trial first. All of the poultry defendants were granted summary judgment in the Green case on August 2, 2006. The case against the Alpharma defendants resulted in a verdict for the defendants on September 25, 2006. The result in the Green case is not dispositive of the issues raised in McWhorter and Carroll, but it colors the plaintiffs’ prospects for success.

The plaintiffs’ attorneys have not yet indicated their intentions regarding the remaining cases. It is possible that the McWhorter and Carroll plaintiffs can present fundamentally different proof than was presented in the Green case, but that does not appear likely at present. While the potential exposure, if any, in the McWhorter and Carroll cases appears to be diminished as a result of the outcome in the Green case, at this point it is still not possible to evaluate any potential exposure with certainty.

State of Oklahoma Watershed Pollution Litigation

On June 18, 2005, the State of Oklahoma filed suit in the U.S. District Court for the Northern District of Oklahoma against a number of companies including us and Cal-Maine Farms. An Answer on behalf of us and Cal-Maine Farms was filed on October 3, 2005. The State of Oklahoma claims that through the disposal of chicken litter the defendants have polluted the Illinois River Watershed. This watershed provides water to eastern Oklahoma. The Complaint seeks injunctive relief and monetary damages. We do not anticipate that we will be materially affected by any injunctive relief granted or monetary damages awarded.

The Court has under advisement motions to dismiss filed by all defendants. Merit discovery is underway. We presently are not able to provide an opinion regarding the ultimate resolution of this action.

 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year.

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PART II.

 ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND

 ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the NASDAQ National Market under the symbol “CALM”. The last reported sale price for our Common Stock on August 10, 2007 was $15.69 per share. The following table sets forth the high and low daily sale prices and dividends per share for four quarters of fiscal 2006 and fiscal 2007. 

 

		Sales Price		Dividends
Fiscal Year Ended	Fiscal Quarter	High	Low
June 3, 2006	First Quarter	$ 6.90	$ 5.55	$0.0125
	Second Quarter	7.01	5.75	$0.0125
	Third Quarter	7.44	6.08	$0.0125
	Fourth Quarter	7.90	6.03	$0.0125
June 2, 2007	First Quarter	$ 7.58	$ 6.29	$0.0125
	Second Quarter	8.45	6.14	$0.0125
	Third Quarter	14.49	7.91	$0.0125
	Fourth Quarter	14.07	11.33	$0.0125

 

There is no public trading market for the Class A Common Stock all the outstanding shares of which are owned by Fred R. Adams, Jr., Chairman of the Board of Directors and Chief Executive Officer of the Company (90.1%) and his son-in-law Adolphus Baker, President, Chief Operating Officer and Director of the Company (9.9%).

STOCKHOLDERS

At August 6, 2007, there were approximately 276 record holders of our Common Stock and approximately 6,050 beneficial owners whose shares were held by nominees or broker dealers.

DIVIDENDS

We have paid cash dividends on our Common Stock since 1998. The annual dividend rate of $0.05 per share of Common Stock, or $0.0125 per quarter, was paid in each of the full quarters shown in the table above. We expect to pay cash dividends on our Common Stock at the same annual rate of $0.05 per share. Since 1998, we have also paid cash dividends on our Class A Common Stock at a rate equal to 95% of the annual rate on our Common Stock. Our Board of Directors will continue to consider the declaration of cash dividends in the future in light of our results of operations, financial condition, capital requirements for possible acquisitions and new construction, and other relevant economic factors. In addition, under the terms of agreements with our principal lenders, we are subject to various financial covenants, including a limitation on our ability to pay cash dividends in an aggregate amount not to exceed $500,000 per quarter.

RECENT SALES OF UNREGISTERED SECURITIES

No sales of securities without registration under the Securities Act of 1933 occurred during our fiscal year ended June 2, 2007.

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EQUITY COMPENSATION PLAN INFORMATION

 

On July 28, 2005, our Board of Directors approved the Cal-Maine Foods, Inc. 2005 Incentive Stock Option Plan (the “ISO Plan”) and reserved 500,000 shares of Common Stock for issuance upon exercise of options granted under the ISO Plan. Options issued pursuant to the ISO Plan may be granted to any of our employees.

On July 28, 2005, our Board of Directors also approved the Cal-Maine Foods, Inc. Stock Appreciation Rights Plan (the “Rights Plan”). The Rights Plan covers 1,000,000 shares of Common Stock of the Company. Stock Appreciation Rights (“SARs”) may be granted under the Rights Plan to any employee or member of the Board of Directors.

On August 24, 2006, in accordance with provisions of the Rights Plan, our Board of Directors approved an amendment to the Rights Plan providing that exercises of SARs under the Rights Plan be settled in cash and not with shares of our Common Stock.

 

The following table contains information, as of June 2, 2007, about our equity compensation plans, all of which were approved by our shareholders.

 

						Number of Shares of Common
						Stock Remaining Available for
		Number of Shares of Common		Weighted Average		Future Issuance Under
		Stock To Be Issued upon Exercise of		Exercise Price of		Equity Compensation Plans
		Outstanding Options		Outstanding Options		(Excluding Shares
						Reflected in Column (A))
Plan Category		(A)		(B)		(C)
1993 and 1999 Stock Option Plan		47,600		$2.07		8,000
2005 Incentive Stock Option Plan.		336,000		$5.93		140,000
2005 Stock Appreciation Rights Plan		(1)		$5.95		385,000(2)

 

⁽¹⁾      Settled in cash, effective August 24, 2006, as noted in discussion preceding table.

 

⁽²⁾      Shares are not actually issued, but are credited solely for purposes of determining the amount of cash settlement measure against the closing price of our Common Stock on an exercise date

 

See Note 9 “Stock Option Plan” in our Consolidated Financial Statements for the fiscal year ended June 2, 2007.

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 ITEM 6. SELECTED FINANCIAL DATA

The per share data shown in the following table has been adjusted to reflect the 2-for-1 split of our Common Stock effective April 14, 2004, as if the split had occurred at the beginning of fiscal year 2003.

 

			Fiscal Years Ended
			June 2			June 3			May 28			May 29			May 31
			2007			2006			2005			2004			2003
			52 wks			53 wks			52 wks			52 wks			52 wks
			(Amounts in thousands, except per share and operating data)
Statement of Operations Data:
Net sales		$	598,128		$	477,555		$	375,266		$	572,331		$	387,462
Cost of sales			479,504			415,338			339,833			396,704			315,169
Gross profit			118,624			62,217			35,433			175,627			72,293
Selling, general and administrative			60,394			57,702			47,758			69,305			46,029
Operating income (loss)			58,230			4,515			(12,325	)		106,322			26,264
Other income (expense):
Interest expense (net of non cash interest expense & interest income)			(4,993	)		(5,582	)		(4,222	)		(6,527	)		(8,096	)
Interest expense - non cash			(882	)		(1,284	)		-			-			-
Equity in income (loss) of affiliates			1,699			(757	)		(88	)		5,923			442
Non-controlling interest			286			165			-			-			-
Other (net)			1,921			1,465			1,227			524			527
			(1,969	)		(5,993	)		(3,083	)		(80	)		(7,127	)
Income (loss) before income tax			56,261			(1,478	)		(15,408	)		106,242			19,137
Income tax expense (benefit)			19,605			(465	)		(5,050	)		39,800			6,925
Net income (loss)		$	36,656		$	(1,013	)	$	(10,358	)	$	66,442		$	12,212
Net income (loss) per common share:
Basic		$	1.56		$	(0.04	)	$	(0.43	)	$	2.78		$	0.52
Diluted		$	1.55		$	(0.04	)	$	(0.43	)	$	2.73		$	0.52
Cash dividends declared per share *		$	0.05		$	0.05		$	0.05		$	0.05		$	0.05
Weighted average shares outstanding:
Basic			23,526			23,496			23,834			23,874			23,528
Diluted			23,599			23,496			23,834			24,342			23,724
Balance Sheet Data:
Working capital		$	80,552		$	60,800		$	73,587		$	92,949		$	27,749
Total assets			364,568			317,118			269,534			301,559			235,392
Total debt (including current maturities)			112,852			103,912			82,994			90,031			108,244
Total stockholders’ equity			155,739			119,775			121,855			140,165			66,085
Operating Data:
Total number of layers at period ended (thousands)			23,181			23,276			18,164			20,318			19,877
Total shell eggs sold (millions of dozens)			685.4			683.1			575.4			605.2			570.7

*Class A shares paid at 95% of the common stock dividend rate.

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 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Risk Factors; Forward-Looking Statements

For information relating to important risks and uncertainties that could materially adversely affect our business, securities, financial condition or operating results, reference is made to the disclosure set forth under Item 1A above under the caption "Risk Factors." In addition, because the following discussion includes numerous forward-looking statements relating to us, our results of operations and financial condition and business, reference is made to the information set forth above in Item 1 under the caption "Important Factors Relating to Forward-Looking Statements."

OVERVIEW

We are primarily engaged in the production, grading, packing, and sale of fresh shell eggs. Our fiscal year end is the Saturday nearest to May 31 which was June 2, 2007 (52 weeks), June 3, 2006 (53 weeks), and May 28, 2005 (52 weeks) for the most recent three fiscal years.

Our operations are fully integrated. At our facilities we hatch chicks, grow pullets, manufacture feed, and produce, process, and distribute shell eggs. We currently are the largest producer and distributor of fresh shell eggs in the United States. Shell eggs accounted for approximately 96% of our net sales in fiscal 2007 and 94% in fiscal 2006. Egg products accounted for approximately 2% of our net sales in fiscal 2007 and 2% in fiscal 2006. We primarily market our shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. Shell eggs are sold directly by us primarily to national and regional supermarket chains.

We currently use contract producers for approximately 10% of our total egg production. Contract producers operate under agreements with us for the use of their facilities in the production of shell eggs by layers owned by us. We also own the eggs produced. Also, shell eggs are purchased, as needed, for resale by us from outside producers.

Our operating income or loss is significantly affected by wholesale shell egg market prices, which can fluctuate widely and are outside of our 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.

Our cost of production is materially affected by feed costs, which average about 55% of our total farm egg production cost. Changes in feed costs result in changes in our 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 we have little or no control.

The purchase of Hillandale, LLC, AEP and Hillandale Farms, LLC described above in Part 1, Item 1, is collectively referred to below as the “Hillandale Purchase".

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RESULTS OF OPERATIONS

The following table sets forth, for the years indicated, certain items from our consolidated statements of operations expressed as a percentage of net sales.

 

		Percentage of Net Sales Fiscal Years Ended
		June 2, 2007			June 3, 2006			May 28, 2005
Net sales			100.00	%		100.00	%		100.00	%
Cost of sales			80.2			87.0			90.6
Gross profit			19.8			13.0			9.4
Selling, general & administrative expenses			10.1			12.1			12.7
Operating income (loss)			9.7			0 .9			(3.3	)
Other income (expense)			(0.3	)		(1.2	)		(0.8	)
Income (loss) before taxes			9.4			(0.3	)		(4.1	)
Income tax expense (benefit)			3.3			(0.1	)		(1.3	)
Net income (loss)			6.1	%		(0.2	)%		(2.8	)%

 

Fiscal Year Ended June 2, 2007 Compared to Fiscal Year Ended June 3, 2006

Net Sales. In fiscal 2007, approximately 96% of our net sales consisted of shell egg sales and approximately 2% was for incidental feed sales to outside egg producers, with the 2% balance consisting of sales of egg products. Net sales for the fiscal year ended June 2, 2007 were $598.1 million, an increase of $120.5 million, or 25.2%, from net sales of $477.6 million for fiscal 2006. Total dozens of eggs sold and egg selling prices increased as compared to fiscal 2006. In fiscal 2007 total dozens of shell eggs sold were 685.4 million, an increase of 2.3 million dozen, or .3%, compared to 683.1 million sold in fiscal 2006. Our average selling price of shell eggs increased from $.672 per dozen for fiscal 2006 to $.832 per dozen for fiscal 2007, an increase of $.160 per dozen, or 23.8%. Our operating results are significantly affected by wholesale shell egg market prices, which are outside of our control. Small changes in production or demand levels can have a large effect on shell egg prices. During fiscal 2004, consumer demand increased, partially due to the popularity of high protein diets. Egg producers increased egg supply to meet consumer demand. During our second fiscal 2005 quarter, consumer demand decreased to normal levels. At the same time, egg supply continued at the higher levels and resulted in a drop in egg selling prices for the remainder of fiscal 2005. During fiscal 2006, consumer demand improved slightly, but egg supply continued at higher levels. During fiscal 2007, consumer demand remained steady, but egg supply was lower, which resulted in stronger egg prices.

Cost of Sales. Cost of sales consists of costs directly related to production and processing of shell eggs, including feed costs, and purchases of shell eggs from outside egg producers. Cost of sales for the fiscal year ended June 2, 2007 was $479.5 million, an increase of $64.2 million, or 15.5%, as compared to cost of sales of $415.3 million for fiscal 2006. On a comparable basis, dozens produced decreased, dozens purchased from outside shell egg producers increased and cost of feed ingredients increased in fiscal 2007. The cost of the shell eggs purchased from outside producers increased due to improved egg market selling prices. Feed cost for fiscal 2007 was $.252 per dozen, compared to $.206 per dozen for the prior fiscal year, an increase of 22.3%. Higher than average egg selling prices, more than offset the increase in feed ingredient costs and higher costs of purchases from outside egg producers, resulting in an increase in gross profit from 13% of net sales for fiscal 2006 to 19.8% of net sales for fiscal 2007.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include costs of marketing, distribution, accounting and corporate overhead. Selling, general and administrative expense was $60.4 million in fiscal 2007, an increase of $2.7 million as compared to $57.7 million for fiscal 2006. The increase in selling, general, and administrative expenses is primarily attributable to an increase of $1.8 million in franchise fees for specialty egg sales, and an increase of $2.2 million in our equity compensation plan expense, with an overall decrease in delivery costs. The cost of the stock based compensation plans is dependent on the price of the Company's common stock, which increased from $7.19 at June 3, 2006 to $13.46 at June 2, 2007. Overall, delivery costs have decreased, due to a reduction in the number of Company long haul trucks, increased back haul loads and the increased use of contract trucking. Selling, general and administrative expense was $.088 per dozen sold for fiscal 2007 as compared to $0.084 for fiscal 2006. As a percent of net sales, selling, general and administrative expense decreased from 12.1% for fiscal 2006 to 10.1% for fiscal 2007

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Operating Income (Loss). As a result of the above, our operating income was $58.2 million for fiscal 2007, as compared to operating income of $4.5 million for fiscal 2006. The operating income as a percent of sales for fiscal 2007 was 9.7%, as compared to operating income of .9% for fiscal 2006.  

Other Income (Expense). Other income or expense consists of income or costs not directly charged or related to operations such as equity in income of affiliates and interest expense. Other expense for fiscal 2007 was $2.0 million as compared to other expense of $6.0 million for fiscal 2006, a decrease of $4.0 million. Net interest expense for fiscal 2007 decreased by $1.0 million, due to lower average long-term debt balances. In fiscal 2007, we reduced interest expense by capitalizing $566,000 of interest in connection with the construction of egg products and spent hen processing facilities in Waelder, TX. The non-cash interest expense, as explained below, decreased by $402,000. The reduction of other expense is attributable primarily to the increase in net income of affiliates. The non-cash expense is imputed on our non-interest bearing obligation to acquire the remaining membership units of Hillandale, LLC’s over the remaining acquisition period culminating with us having a 100% interest in Hillandale, LLC. As a percent of net sales, other expense was .3% for fiscal 2007, as compared to 1.2% for fiscal 2006.

Income Taxes. For the fiscal year ended, June 2, 2007, our pre-tax income was $56.3 million, as compared to a pre-tax loss of $1.5 million for fiscal 2006. Income tax expense of $19.6 million was recorded for fiscal 2007 with an effective income tax rate of 34.8%, as compared to an income tax benefit of $465,000 for fiscal 2006 with an effective income tax rate of 31.5%. Our effective tax rate differs from the federal statutory income tax rate of 35% due to state income taxes and certain items included in income for financial reporting purposes that are not included in taxable income or loss for income tax purposes, including tax exempt interest income, certain employee stock option expense and the minority ownership in the profits and losses held in consolidated entities such as Hillandale, LLC.

Net Income. As a result of the above, net income for fiscal 2007 was $36.7 million, or $1.56 per basic share and $1.55 per diluted share, compared to net loss of $1.0 million, or $0.04 per basic and diluted share for fiscal 2006.

Fiscal Year Ended June 3, 2006 Compared to Fiscal Year Ended May 28, 2005

Net Sales. In fiscal 2006, approximately 94% of our net sales consisted of shell egg sales and approximately 4% was for incidental feed sales to outside egg producers, with the 2% balance consisting of sales of egg products. Net sales for the fiscal year ended June 3, 2006 were $477.6 million, an increase of $102.3 million, or 27.2%, from net sales of $375.3 million for fiscal 2005. The Hillandale Purchase accounted for $82.0 million of the increase. Excluding the Hillandale Purchase, on a comparable basis, net sales increased $20.3 million, or 5.4%. Total dozens of eggs sold and egg selling prices increased as compared to fiscal 2005. In fiscal 2006, total dozens of shell eggs sold were 683.1 million, including 118.6 million dozen sold by entities consolidated in the Hillandale Purchase, an increase of 107.7 million dozen, or 18.7%, compared to 575.4 million dozen sold in fiscal 2005. On a comparable basis, excluding the Hillandale Purchase, dozens sold decreased 10.9 million dozen. Our average selling price of shell eggs increased from $.625 per dozen for fiscal 2005 to $.672 per dozen for fiscal 2006, an increase of $.047 per dozen, or 7.5%. Our operating results are significantly affected by wholesale shell egg market prices, which are outside of our control. Small changes in production or demand levels can have a large effect on shell egg prices. During fiscal 2004, consumer demand increased, partially due to the popularity of high protein diets. Egg producers increased egg supply to meet consumer demand. During our second fiscal 2005 quarter, consumer demand decreased to normal levels. At the same time, egg supply continued at the higher levels and resulted in a drop in egg selling prices for the remainder of fiscal 2005. During fiscal 2006, consumer demand improved slightly, but egg supply continued at higher levels.

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Cost of Sales. Cost of sales consists of costs directly related to production and processing of shell eggs, including feed costs, and purchases of shell eggs from outside egg producers. Cost of sales for the fiscal year ended June 3, 2006 was $415.3 million, an increase of $75.5 million, or 22.2%, as compared to cost of sales of $339.8 million for fiscal 2005. The cost of sales for entities consolidated with the Hillandale Purchase accounted for $76.6 million of the increase. Excluding the Hillandale Purchase, on a comparable basis, cost of sales decreased $1.1 million. On a comparable basis, dozens produced, dozens purchased from outside shell egg producers and cost of feed ingredients decreased in fiscal 2006. The cost of the shell eggs purchased from outside producers increased slightly due to improved egg market selling prices. Feed cost for fiscal 2006 was $.206 per dozen, compared to $.225 per dozen for the prior fiscal year, a decrease of 8.4%. An increase in egg selling prices, a decrease in feed ingredient costs, offset by a higher cost of purchases from outside egg producers, resulted in an increase in gross profit from 9.4% of net sales for fiscal 2005 to 13.0% of net sales for fiscal 2006.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include costs of marketing, distribution, accounting and corporate overhead. Selling, general and administrative expense was $57.7 million in fiscal 2006, an increase of $9.9 million as compared to $47.8 million for fiscal 2005. Selling, general and administrative expense consolidated with the Hillandale Purchase accounted for $9.5 million of the increase. Excluding the Hillandale Purchase, selling, general and administrative expense increased $400,000. Total insurance costs decreased $2.7 million and bad debt expense resulted in a net recovery of $500,000. These cost reductions were offset by an increase of $2.2 million in franchise fees for specialty egg sales and an increase in our equity compensation plan expense. In fiscal 2005, we recorded a benefit of $1.3 million, applicable to stock options and Tandem Stock Appreciation Rights accounted for under the variable plan accounting requirements of APB Opinion No.25, “Accounting for Stock Issued to Employees”. The market price of our outstanding common stock ranged from $13.80 at May 29, 2004 to $6.76 at May 28, 2005 and $7.19 at June 3, 2006. Delivery costs, including fuel costs, have also increased. Selling, general and administrative expense was $0.084 per dozen sold for fiscal 2006 as compared to $0.083 for fiscal 2005. As a percent of net sales, selling, general and administrative expense decreased from 12.7% for fiscal 2005 to 12.1% for fiscal 2006.

Operating Income (Loss). As a result of the above, our operating income was $4.5 million for fiscal 2006, as compared to operating loss of $12.3 million for fiscal 2005. As a percent of net sales, the operating income for fiscal 2006 was 0.9%, as compared to operating loss of 3.3% for fiscal 2005.

Other Income (Expense). Other income or expense consists of costs or income not directly charged to, or related to, operations such as equity in income of affiliates and interest expense. Other expense for fiscal 2006 was $6.0 million as compared to other expense of $3.1 million 2005, an increase of $2.9 million. For fiscal 2006, net interest expense increased $2.6 million, the net result of a $1.6 million increase in interest expense, a $1.3 million increase in non-cash interest expense and a $600,000 decrease in interest income. Interest expense increased due to higher long-term debt balances and less interest income was received due to lower cash equivalent investments. The non-cash expense is imputed on our non-interest bearing obligation to acquire 49% of Hillandale, LLC’s membership units over a four year period. Other income for fiscal 2006 decreased due to net losses of affiliates. As a percent of net sales, other expense was 1.2% for fiscal 2006, as compared to 0.8% for fiscal 2005.

Income Taxes. For the fiscal year ended June 3, 2006, our pre-tax loss was $1.5 million, as compared to pre-tax loss of $15.4 million for fiscal 2005. For fiscal 2006, an income tax benefit of $465,000 was recorded with an effective tax rate of 31.5%, as compared to an income tax benefit of $5.0 million with an effective tax rate of 32.8% for fiscal 2005. Our effective tax rate differs from the federal statutory income tax rate of 35% due to state income taxes and certain items included in income for financial reporting purposes that are not included in taxable income or loss for income tax purposes, including tax exempt interest income, certain employee stock option expense and 49% of Hillandale, LLC’s profits and losses held by its minority owners.

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Net Income. As a result of the above, net loss for fiscal 2006 was $1.0 million, or $0.04 per basic and diluted share, compared to net loss of $10.4 million, or $0.43 per basic and diluted share, for fiscal 2005.

Capital Resources and Liquidity. Our working capital at June 2, 2007 was $80.6 million compared to $60.8 million at June 3, 2006. Our current ratio was 2.06 at June 2, 2007 as compared with 1.94 at June 3, 2006. Our need for working capital generally is highest in the first and second fiscal quarters ending in August and November. During the first quarter shell egg prices are normally at seasonal lows. In the second quarter, we usually build inventory balances in anticipation of the holiday season. Seasonal borrowing needs frequently are higher during these periods than during other fiscal periods. We have a $40 million line of credit with three banks, $2.7 million of which was utilized as a standby letter of credit at June 2, 2007. Our long-term debt at that date, including current maturities, totaled $112.9 million, as compared to $103.9 million at June 3, 2006.

For the fiscal year ended June 2, 2007, $59.7 million in net cash was provided by operating activities. This compares to $20.9 million of net cash provided for the fiscal year ended June 3, 2006. In fiscal 2007, $12.1 million was used for acquisition of businesses; $23.5 was used for purchases of property, plant and equipment. Net cash of $14.5 million was used for investments and $251,000 received on notes receivable. In fiscal 2007, we received $503,000 from the disposal of property, plant and equipment. As part of our stock option plan, approximately $262,000 was received for sales of common stock from the treasury, and $1.2 million was used for payments of dividends on our common stock. Proceeds from long-term borrowings of $29.5 million were received and payments of $31.2 million were made on long-term debt. In accord with the Hillandale, LLC purchase agreement, we made a payment of $6.1 million on our long term purchase obligation. The net result was an increase in cash and cash equivalents of approximately $1.7 million.

For the fiscal year ended June 3, 2006, $20.9 million in net cash was provided by operating activities. This compares to $9.6 million of net cash provided for fiscal year ended May 28, 2005. In fiscal 2006, $23.7 million was used for acquisitions of businesses, $12.3 million was used for purchases of property, plant and equipment, and $2.6 million was received from sales of property, plant and equipment. Net cash of $10.4 million was provided by investments and $200,000 received on notes receivable. As part of our stock option plan, approximately $100,000 was received for sales of common stock from the treasury, and $1.2 million was used for payments of dividends on our common stock. Proceeds from long-term borrowings of $28.0 million were received in additional long-term debt and payments of $31.9 million were made on long-term debt. The net result was a decrease in cash and cash equivalents of approximately $6.9 million.

 

Substantially all trade receivables and inventories collateralize our revolving line of credit and property, plant and equipment collateralize our long-term debt under our loan agreements with our lenders. Unless otherwise approved by our lenders, we are required by provisions of these loan agreements to (1) maintain minimum levels of working capital (ratio of not less than 1.25 to 1) and net worth (minimum of $90.0 million tangible net worth adjusted for earnings); (2) limit dividends to an aggregate amount not to exceed $500,000 per quarter (allowed if no default), capital expenditures less exclusions (not to exceed 125% of depreciation for the same four fiscal quarters), lease obligations and additional long-term borrowings (total funded debt to total capitalization not to exceed 55%); and (3) maintain various cash-flow coverage ratios (1.25 to 1), among other restrictions. At June 2, 2007, we were in compliance with the provisions of all loan agreements. Under certain of the loan agreements, the lenders have the option to require the prepayment of any outstanding borrowings in the event we undergo a change in control.

Under the terms of our Agreement with Hillandale and the Hillandale shareholders, a new Florida limited liability company named Hillandale, LLC was formed. In fiscal 2006, we purchased 51% of the Units of Membership in Hillandale, LLC, with the remaining Units to be acquired in essentially equal annual installments over a four-year period. The purchase price of the Units is equal to their book value as calculated in accordance with the terms of the Agreement. In fiscal 2007, we purchased, pursuant to the Agreement, an additional 13% of the Units of Membership for $6.1 million from our cash balances. We have recorded the obligation to acquire the remaining 36% at its present value of $15.3 million. The actual remaining purchase price may be higher or lower when the Hillandale Purchase is completed. Future funding is expected to be provided by our cash balances and borrowings under our revolving credit agreement.

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Capital expenditure requirements are expected to be for the normal repair and replacement of our facilities. In addition, we have plans to construct a new integrated layer production complex in West Texas to replace our Albuquerque, New Mexico complex, which has ceased egg production. The expected cost is approximately $30.0 million.

Looking forward, we believe that our current cash balances, borrowing capacity, utilization of our revolving line of credit, and cash flows from operations are sufficient to fund our current and projected capital needs.

We currently have a $1.8 million deferred tax liability due to a subsidiary's change from a cash basis to an accrual basis taxpayer on May 29, 1988. The Taxpayer Relief Act of 1997 provides that this liability is payable ratably over the 20 years beginning in fiscal 1999. However, such taxes will be due in their entirety in the first fiscal year in which there is a change in ownership control so that we no longer qualify as a family farming corporation. We are currently making annual payments of approximately $150,000 related to this liability. However, while these current payments reduce cash balances, payment of the $1.8 million deferred tax liability would not impact our consolidated statement of operations or stockholders' equity, as these taxes have been accrued and are reflected on our consolidated balance sheet. See Note 10 of Notes to Consolidated Financial Statements.

We believe that our existing cash and investments, as well as our unused lines of credit, if needed, will satisfy our foreseeable working capital requirements for at least the next twelve months.

Off-Balance Sheet Arrangements

We have no existing off-balance sheet arrangements as defined under Securities and Exchange Commission regulations.

Contractual Obligations

The following table summarizes future estimated cash payments, in thousands, to be made under existing contractual obligations. Further information on debt obligations is contained in Note 7, and on lease obligations in Note 6, of Notes to Consolidated Financial Statements. The table does not reflect the obligations incurred by us for the Hillandale acquisition, the exact amounts of which are to be determined under the terms of the Agreement. At the closing of the Hillandale transaction on October 12, 2005, we purchased 51% of the Units of Membership in Hillandale, LLC.

In August 2006, in accordance with the Agreement, we purchased, for $6.1 million, an additional 13% of the Units of Hillandale, LLC based on their book value as of July 29, 2006. Our ownership of Hillandale, LLC currently is 64%. We will incur costs for our purchase of the remaining 36% of the Units of Membership over the remaining three years, which will culminate with us having a 100% equity interest in Hillandale, LLC. Our obligation to acquire the remaining 36% of Hillandale, LLC is recorded at its present value of $15.3 million as of June 2, 2007 of which $5.4 million is included in current liabilities and $9.9 million is included in other non-current liabilities in the accompanying consolidated balance sheet.

 

	Total	2008	2009	2010	2011	2012	Over 5 years
Long-term debt	$112,852	$13,442	$11,770	$12,000	$9,817	$8,154	$57,669
Operating leases	12,106	4,510	2,506	2,094	1,310	780	906
Total	$124,958	$17,952	$14,276	$14,094	$11,127	$8,934	$58,575

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Impact of Recently Issued Accounting Standards.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Statement No. 123 (revised 2004) (“SFAS No.123(R)”), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123(R) supersedes Accounting Principles Board (“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 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. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. In the first quarter of fiscal 2007, The Company adopted SFAS No. 123(R) using the modified prospective method. Under the modified prospective method, compensation costs are recognized for all share-based payments granted after the adoption of SFAS No. 123(R) and for all awards granted to employees prior to the adoption date of SFAS No. 123(R) that remain unvested on the adoption date. Accordingly, no restatements were made to prior periods. The Company recognized stock based compensation expense of $218 for equity awards and $1,650 for liability awards in fiscal 2007.

  

Prior to adoption of SFAS No. 123(R), the Company applied Accounting Principles Board (“APB”) No. 25 in accounting for employee stock compensation plans and generally recognized no compensation expense for employee stock options. Under the provisions of APB No. 25, the Company recognized a liability for Stock Appreciation Rights (“SARS”) and Tandem Stock Appreciation Rights (“TSARS”) (collectively, “Rights”) based upon the intrinsic value of vested SARS and TSARS at each period end. Under SFAS No. 123(R), the Company is required to recognize a liability for vested SARS and TSARS based upon their fair value at each period end using a Black-Scholes option pricing model and to record a cumulative effect adjustment for the change in method of accounting for such liability awards. The cumulative effect resulting from the adoption of SFAS No. 123(R) was insignificant and is included in stock based compensation expense for the current fiscal year.

  On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for "Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109". Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with Statement 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, Interpretation 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. We are currently evaluating whether the adoption of Interpretation 48 will have a material effect on our consolidated financial position, results of operations or cash flows.

  In September 2006, the 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 us on June 1, 2008 and will be applied prospectively. The provisions of FAS 157 are not expected to have a material impact on the Company's consolidated financial statements.

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. 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.

 

Critical Accounting Policies. The preparation of financial statements in accordance with U.S. generally accepted accounting standards 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.

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Management suggests that our Summary of Significant Accounting Policies, as described in Note 1 of the Notes to Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe the critical accounting policies that most impact our consolidated financial statements are described below.

Allowance for Doubtful Accounts. In the normal course of business, we extend credit to our customers on a short-term basis. Although credit risks associated with our customers are considered minimal, we routinely review our accounts receivable balances and make provisions for probable doubtful accounts. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations to us (e.g. bankruptcy filings), a specific reserve is recorded to reduce the receivable to the amount expected to be collected. For all other customers, we recognize 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, we 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 22 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 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. When property and equipment are retired, sold, or otherwise disposed of, the asset's carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss in included in operations. We continually reevaluate the carrying value of our long-lived assets, for events or changes in circumstances, which indicate that the carrying value may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) are 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. We have invested in other companies engaged in the production, processing and distribution of shell eggs and egg products. Our 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 our financial statements. Changes in the ownership percentages of these investments might alter the accounting methods currently used. Our investment in these companies amounted to $6.4 million at June 2, 2007. The combined total assets and total liabilities of these companies were approximately $24 million and $11 million, respectively, at June 2, 2007. We are a guarantor of approximately $4.8 million of long-term debt of one of the affiliates.

Goodwill. At June 2, 2007, our goodwill balance represented 1.2% of total assets and 2.7% of stockholders’ equity. Goodwill relates to the fiscal 1999 acquisition of Hudson Brothers, Inc., the fiscal 2006 acquisition of Hillandale Farms, LLC, and the fiscal 2007 acquisition of Green Forest Foods, LLC. We adopted, as of June 3, 2001, Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). Under SFAS 142, 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. We have only one operating segment, which is our 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.

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Income Taxes. We determine our effective tax rate by estimating our permanent differences resulting from differing treatment of items for tax and accounting purposes. We are periodically audited by taxing authorities. Any audit adjustments affecting permanent differences could have an impact on our effective tax rate.

Forward Looking Statements. The foregoing statements contain forward-looking statements which involve risks and uncertainties and our 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 our 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. We assume no obligation to update forward-looking statements.

Factors Affecting Future Performance. Our future operating results may be affected by various trends and factors which are beyond our 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, our prior performance should not be presumed to be an accurate indication of future performance.

 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Our interest expense is sensitive to changes in the general level of U.S. interest rates. We maintain certain of our debt as fixed rate in nature to mitigate the impact of fluctuations in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes. A 1% adverse move (decrease) in interest rates would adversely affect the net fair value of our debt by $3.9 million at June 2, 2007. We are a party to no other market risk sensitive instruments requiring disclosure.

 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Report on Internal Control Over Financial Reporting

The following sets forth, in accordance with Section 404(a) of the Sarbanes-Oxley Act of 2002 and Item 308 of the Securities and Exchange Commission’s Regulation S-K, the report of management on our internal control over financial reporting.

1. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. “Internal control over financial reporting” is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, together with other financial officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

·

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

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2. Our management, in accordance with Rule 13a-15(c) under the Securities Exchange Act of 1934 and with the participation of our Chief Executive Officer and Chief Financial Officer, together with other financial officers, evaluated the effectiveness of our internal control over financial reporting as of June 2, 2007. The framework on which management’s evaluation of our internal control over financial reporting is based is the “Internal Control - Integrated Framework” published in 1992 by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission.

3. We maintain documentation providing reasonable support for management’s assessment of the effectiveness of our internal control over financial reporting. Management’s documentation includes:

·

The design of controls over all relevant assertions related to all significant accounts and disclosures in the financial statements;

 

·

Information about how significant transactions are initiated, authorized, recorded, processed and reported;

 

·

Sufficient information about the flow of transactions to identify the points at which material misstatements due to error or fraud could occur;

 

·

Controls designed to prevent or detect fraud, including who performs the controls and the related segregation of duties;

 

·

Controls over the period-end financial reporting process;

 

·

Controls over safeguarding of assets; and

 

·

The results of management’s testing and evaluation.

 

4. Management has determined that our internal control over financial reporting as of June 2, 2007 is effective and that there is no material weakness in our internal control over financial reporting as of that date. In that connection, a “material weakness,” is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. A “significant deficiency” is a control deficiency or a combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of our financial statements that is more than inconsequential will not be prevented or detected. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. It is noted that internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives, but rather reasonable assurance of achieving such objectives.

5. The attestation report of Moore Stephens Frost on management’s assessment of our internal control over financial reporting, which includes that firm’s opinion on management’s assessment of the effectiveness of internal control over financial reporting and opinion on the effectiveness of internal control over financial reporting, is set forth below.

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 Report of Independent Registered Public Accounting Firm

on Internal Control Over Financial Reporting

 

Board of Directors and Stockholders

Cal-Maine Foods, Inc. and Subsidiaries

Jackson, Mississippi

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control, that Cal-Maine Foods, Inc. and Subsidiaries maintained effective internal control over financial reporting as of June 2, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cal-Maine Foods, Inc. and Subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the company maintained effective internal control over financial reporting as of June 2, 2007, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, the company maintained, in all material respects, effective internal control over financial reporting as of June 2, 2007, based on the COSO criteria.

 

/s/ Moore Stephens Frost

Little Rock, Arkansas

August 13, 2007

 

 

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Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Cal-Maine Foods, Inc. and Subsidiaries

Jackson, Mississippi

We have audited the accompanying consolidated balance sheets of Cal-Maine Foods, Inc. and Subsidiaries as of June 2, 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(c). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Cal-Maine Foods, Inc. and Subsidiaries as of June 3, 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for the two years ended June 3, 2006 and May 28, 2005, were audited by other auditors whose report dated August 11, 2006, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cal-Maine Foods, Inc. and Subsidiaries as of June 2, 2007, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cal-Maine Foods, Inc. and Subsidiaries internal control over financial reporting as of June 2, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 13, 2007, expressed an unqualified opinion thereon.

/s/ Moore Stephens Frost

Little Rock, Arkansas

August 13, 2007

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Cal-Maine Foods, Inc.

We have audited the accompanying consolidated balance sheet of Cal-Maine Foods, Inc. and subsidiaries as of June 3, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the two years ended June 3, 2006 and May 28, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(c). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cal-Maine Foods, Inc. and subsidiaries at June 3, 2006, and the consolidated results of their operations and their cash flows for each of the years ended June 3, 2006 and May 28, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cal-Maine Foods Inc.’s internal control over financial reporting as of June 3, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 11, 2006 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

 

New Orleans, Louisiana

August 11, 2006

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Cal-Maine Foods, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except for par value amounts)

		June 2			June 3
		2007			2006
Assets
Current assets:
Cash and cash equivalents		$	15,032		$	13,295
Investments			39,500			25,000
Receivables:
Trade receivables, less allowance for doubtful
accounts of $150 in 2007 and $346 in 2006			37,096			23,804
Other			1,084			1,151
			38,180			24,955
Recoverable federal and state income taxes			0			1,177
Inventories			62,208			57,843
Prepaid expenses and other current assets			1,390			3,408
Total current assets			156,310			125,678
Other assets:
Notes receivable and investments			7,913			8,316
Goodwill			4,195			4,016
Other			2,560			2,833
			14,668			15,165
Property, plant and equipment, less accumulated
depreciation			193,590			176,275
Total assets		$	364,568		$	317,118
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable		$	27,978		$	24,190
Accrued wages and benefits			7,273			6,262
Accrued expenses and other liabilities			9,800			4,190
Current maturities of purchase obligation			5,435			6,884
Current maturities of long-term debt			13,442			11,902
Deferred income taxes			11,830			11,450
Total current liabilities			75,758			64,878
Long-term debt, less current maturities			99,410			92,010
Non-controlling interests in consolidated entities			1,894			919
Purchase obligation, less current maturities			9,867			16,751
Other noncurrent liabilities			2,150			3,860
Deferred income taxes			19,750			18,925
Total liabilities			208,829			197,343
Stockholders' equity:
Common stock, $.01 par value
Authorized shares - 60,000 in 2007 and 2006
Issued 35,130 shares and 21,193 shares outstanding in 2007 and 21,103 shares in 2006			351			351
Class A common stock, $.01 par value
Authorized shares - 2,400 in 2007 and 2006
Issued and outstanding shares - 2,400 in 2007 and 2006			24			24
Paid-in capital			29,043			28,700
Retained earnings			147,667			112,183
Common stock in treasury-13,937 shares in 2007
and 14,039 in 2006			(21,346	)		(21,483	)
Total stockholders' equity			155,739			119,775
Total liabilities and stockholders' equity		$	364,568		$	317,118

See accompanying notes.

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Cal-Maine Foods, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

		Fiscal years ended
		June 2			June 3			May 28
		2007			2006			2005
Net sales		$	598,128		$	477,555		$	375,266
Cost of sales			479,504			415,338			339,833
Gross profit			118,624			62,217			35,433
Selling, general and administrative			60,394			57,702			47,758
Operating income (loss)			58,230			4,515			(12,325	)
Other income (expense):
Interest expense			(6,987	)		(7,949	)		(5,906	)
Interest income			1,112			1,083			1,684
Equity in income (loss) of affiliates			1,699			(757	)		(88	)
Non-controlling interest			286			165			-
Other, net			1,921			1,465			1,227
			(1,969	)		(5,993	)		(3,083	)
Income (loss) before income taxes			56,261			(1,478	)		(15,408	)
Income tax expense (benefit)			19,605			(465	)		(5,050	)
Net income (loss)		$	36,656		$	(1,013	)	$	(10,358	)
Net income (loss) per share:
Basic		$	1.56		$	(0.04	)	$	(0.43	)
Diluted		$	1.55		$	(0.04	)	$	(0.43	)
Weighted average shares outstanding:
Basic			23,526			23,496			23,834
Diluted			23,599			23,496			23,834

See accompanying notes.

35

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Cal-Maine Foods, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(in thousands)

 

		Common Stock
								Class A			Class A			Treasury			Treasury			Paid-in			Retained
		Shares			Amount			Shares			Amount			Shares			Amount			Capital			Earnings			Total
Balance at May 29, 2004			35,130		$	351			2,400		$	24			13,307		$	(12,426	)	$	26,308		$	125,908		$	140,165
Purchase of treasury stock			-			-			-			-			943			(9,344	)		-			-			(9,344	)
Cash dividends paid ($.05
per common share) *			-			-			-			-			-			-			-			(1,184	)		(1,184	)
Issuance of common
stock from treasury			-			-			-			-			(207	)		263			2,313			-			2,576
Net loss for fiscal 2005			-			-			-			-			-			-			-			(10,358	)		(10,358	)
Balance at May 28, 2005			35,130			351			2,400			24			14,043			(21,507	)		28,621			114,366			121,855
Cash dividends paid ($.05
per common share) *			-			-			-			-			-			-			-			(1,170	)		(1,170	)
Issuance of common
stock from treasury			-			-			-			-			(4	)		24			79			-			103
Net loss for fiscal 2006			-			-			-			-			-			-			-			(1,013	)		(1,013	)
Balance at June 3, 2006			35,130			351			2,400			24			14,039			(21,483	)		28,700			112,183			119,775
Cash dividends paid ($.05
per common share) *			-			-			-			-			-			-			-			(1,172	)		(1,172	)
Issuance of common
stock from treasury			-			-			-			-			(102	)		137			125			-			262
Vesting of stock based compensation			-			-			-			-			-			-			218			-			218
Net income for fiscal 2007			-			-			-			-			-			-			-			36,656			36,656
Balance at June 2, 2007			35,130		$	351			2,400		$	24			13,937		$	(21,346	)	$	29,043		$	147,667		$	155,739

*Class A shares paid at 95% of the common stock dividend rate.

See accompanying notes.

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Cal-Maine Foods, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

		Fiscal year ended
		June 2			June 3			May 28
		2007			2006			2005
Cash flows from operating activities
Net income (loss)		$	36,656		$	(1,013	)	$	(10,358	)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization			21,476			20,569			16,441
Deferred income taxes			1,205			985			(710	)
Equity in (income) loss of affiliates			(1,699	)		757			88
Gain (loss) on disposal of property, plant and
equipment			38			(1,108	)		(599	)
Interest on purchase obligation			882			1,284			-
Net change in Non-controlling interest in consolidated entities			975			(165	)		-
Change in operating assets and liabilities, net
of effects from acquisitions
Receivables and other assets			(8,097	)		3,244			4,835
Inventories			47			2,136			3,624
Accounts payable, accrued expenses
and other liabilities			8,241			(5,758	)		(3,707	)
Net cash provided by operating activities			59,724			20,931			9,614
Cash flows from investing activities
Purchases of investments			(43,250	)		(60,823	)		(89,499	)
Sales of investments			28,750			71,207			75,581
Acquisition of businesses, net of cash acquired			(12,053	)		(23,756	)		-
Payments received on notes receivable and
from investments			1,453			2,288			2,170
Purchases of property, plant and equipment			(23,472	)		(12,372	)		(11,977	)
Increase in notes receivable and investments			(1,202	)		(2,048	)		(811	)
Net proceeds from disposal of property,
plant and equipment			503			2,638			879
Net cash used in investing activities			(49,271	)		(22,866	)		(23,657	)
Cash flows from financing activities
Long-term borrowings			29,500			28,000			2,500
Principal payments on long-term debt			(31,204	)		(31,924	)		(9,537	)
Payment of purchase obligation			(6,102	)		-			-
Proceeds from issuance of common stock from
treasury			262			103			314
Purchases of common stock for treasury			-			-			(9,344	)
Payments of dividends			(1,172	)		(1,170	)		(1,184	)
Net cash used in financing activities			(8,716	)		(4,991	)		(17,251	)
Increase (decrease) in cash and cash equivalents			1,737			(6,926	)		(31,294	)
Cash and cash equivalents at beginning of year			13,295			20,221			51,515
Cash and cash equivalents at end of year		$	15,032		$	13,295		$	20,221

See accompanying notes.

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Cal-Maine Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except share and per share amounts)

June 2, 2007

 

1. Significant Accounting Policies

Business

The Company is engaged in the production, processing and distribution of shell eggs. The Company's operations are significantly affected by the market price fluctuation of its principal products sold, shell eggs, and the costs of its principal feed ingredients, corn and other grains.

Primarily all of the Company's sales are to wholesale egg buyers in the southeastern, southwestern, mid-western and mid-Atlantic regions of the United States. Credit is extended based upon an evaluation of each customer's financial condition and credit history and generally collateral is not required. Credit losses have consistently been within management's expectations. One customer accounted for 36.9%, 36.6% and 30.9% of the Company's net sales in fiscal 2007, 2006 and 2005, respectively. Another customer accounted for 9.8%, 9.9% and 12.1% of the Company's net sales in fiscal 2007, 2006 and 2005, respectively.

Principles of Consolidation

The consolidated financial statements include the accounts of Cal-Maine Foods, Inc. and its subsidiaries (the "Company") and variable interest entities in which the Company is the primary beneficiary. All significant intercompany transactions and accounts have been eliminated in consolidation.

 

Variable Interest Entities

 

Financial Accounting Standards Board Interpretation No. 46 (revised), Consolidation of Variable Interest Entities, ("FIN 46") requires variable interest entities ("VIEs”) to be consolidated if a party with ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE's activities, is entitled to receive a majority of the VIE's residual returns (if no party absorbs a majority of the VIE's losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary.

Beginning in the fourth quarter of fiscal 2007, Company has variable interests in three entities in which it is the primary beneficiary and accordingly consolidates the statements of financial position, results of operations and cash flows of these entities pursuant to FIN 46.    The Company has a 37% ownership interest in Texas Egg Products, LLC and leases to Texas Egg Products, LLC its operating facility.  Texas Egg Products, LLC processes shell eggs into liquid and frozen egg products that are sold primarily to food manufacturers and to the food service industry. 

The Company has a 43% ownership interest in Texas Egg, LLC and leases to Texas Egg, LLC its operating facility.  Texas Egg, LLC has 50% ownership interest in South Texas Protein, LLC and subleases the facility to South Texas Protein, LLC.  South Texas Protein, LLC is a spent hen processing facility in the start-up phase of its operations. 

Total assets of the three VIEs for which the Company is the primary beneficiary totaled $1,209 net of elimination of intercompany balances.  

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Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amount reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Investments

Investments consist of auction rate securities. We have designated these investments as available-for-sale securities and have accounted for them in accordance with the standards of Statement of Financial Accounting Standards SFAS No.115, "Accounting For Certain Investments: Debt and Equity Securities." Due to the nature of the investments, the cost at June 2, 2007 and June 3, 2006 approximates fair value; therefore, accumulated other comprehensive income (loss) has not been recognized as a separate component of stockholders' equity.

Trade Receivables

Trade receivables are comprised primarily of amounts owed to the Company from customers, which amounted to $37,096 at June 2, 2007 and $23,804 at June 3, 2006. Trade receivables are presented net of allowance for doubtful accounts of $150 at June 2, 2007 and $346 at June 3, 2006.

Allowance for Doubtful Accounts

In the normal course of business, we extend credit to our customers on a short-term basis. Although credit risks associated with our customers are considered minimal, we routinely review our accounts receivable balances and make provisions for probable doubtful accounts. In circumstances where management is aware of a specific customer's inability to meet its financial obligations to us (e.g. bankruptcy filings), a specific reserve is recorded to reduce the receivable to the amount expected to be collected. For all other customers, we recognize 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.

The cost associated with flocks, consisting principally of chick purchases, feed, labor, contractor payments and overhead costs, are accumulated during a growing period of approximately 22 weeks. Flock costs are amortized over the productive lives of the flocks, generally one to two years.

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Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided by the straight-line method over the estimated useful lives, which are 15 to 25 years for buildings and improvements and 3 to 12 years for machinery and equipment. Repairs and maintenance are expensed as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

Impairment of Long-Lived Assets

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where expected future cash flows (undiscounted and without interest charges) are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.

Intangible Assets

Included in other assets are loan acquisition costs which are amortized over the life of the related loan and franchise fees which are amortized over ten years.

Goodwill

Goodwill represents the excess of cost of business acquisitions over the fair value of the net identifiable assets acquired. Goodwill is reviewed for impairment annually or more frequently if impairment indicators arise.

Revenue Recognition and Delivery Costs

The Company recognizes revenue only when all of the following criteria have been met:

·

Persuasive evidence of an arrangement exists;

·

Delivery has occurred;

·

The fee for the arrangement is determinable; and

·

Collectibility is reasonably assured.

Costs to deliver product to customers are included in selling, general and administrative expenses in the accompanying consolidated statements of operations and totaled $21,105, $24,560, and $18, 311, in fiscal 2007, 2006 and 2005, respectively.

Advertising Costs

The Company expenses advertising costs as incurred. Total advertising costs were $745 in fiscal 2007, $875 in fiscal 2006, and $821 in fiscal 2005.

Income Taxes

Income taxes have been provided using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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Stock Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Statement No. 123 (revised 2004)(“SFAS No.123(R)”), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123(R) supersedes Accounting Principles Board (“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 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. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. In the first quarter of fiscal 2007, The Company adopted SFAS No. 123(R) using the modified prospective method. Under the modified prospective method, compensation costs are recognized for all share-based payments granted after the adoption of SFAS No. 123(R) and for all awards granted to employees prior to the adoption date of SFAS No. 123(R) that remain unvested on the adoption date. Accordingly, no restatements were made to prior periods. The Company recognized stock based compensation expense of $218 for equity awards and $1,650 for liability awards in fiscal 2007.

Prior to adoption of SFAS No. 123(R), the Company applied Accounting Principles Board(“APB”) No. 25 in accounting for employee stock compensation plans and generally recognized no compensation expense for employee stock options. Under the provisions of APB No. 25, the Company recognized a liability for Stock Appreciation Rights (“SARS”) and Tandem Stock Appreciation Rights (“TSARS”) (collectively, “Rights”) based upon the intrinsic value of vested SARS and TSARS at each period end. Under SFAS No. 123(R), the Company is required to recognize a liability for vested SARS and TSARS based upon their fair value at each period end using a Black-Scholes option pricing model and to record a cumulative effect adjustment for the change in method of accounting for such liability awards. The cumulative effect resulting from the adoption of SFAS No. 123(R) was insignificant and is included in stock based compensation expense for the current fiscal year.

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," in the years presented. .

 

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		Fiscal year ended
		June 3			May 28
		2006			2005
Net loss		$	(1,013	)	$	(10,358	)
Add: Stock-based employee compensation
expense income included in reported
net loss			256			(798	)
Deduct: Total stock-based employee
compensation (expense) income determined
under fair value based method for all awards			(201	)		400
Pro forma net loss		$	(958	)	$	(10,756	)
Net loss per share:
Basic — as reported		$	(0.04	)	$	(0.43	)
Basic — pro forma		$	(0.04	)	$	(0.45	)
Diluted — as reported		$	(0.04	)	$	(0.43	)
Diluted — pro forma		$	(0.04	)	$	(0.45	)

Net Income (Loss) per Common Share

Basic net income (loss) per share is based on the weighted average common shares outstanding. Diluted net income (loss) per share includes any dilutive effects of options and warrants outstanding. Stock options representing approximately 85,000 and 185,000 common shares were excluded from the calculation of dilutive net loss per share for the years ended June 3, 2006 and May 28, 2005, respectively, because the effect was anti-dilutive.

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Impact of Recently Issued Accounting Standards

On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for "Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" (“Interpretation 48”). Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with Statement No.109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, Interpretation 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is required to adopt the provisions of Interpretation 48 in the first quarter of fiscal 2008. The Company is currently evaluating whether the adoption of Interpretation 48 will have a material effect on our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No.157, "Fair Value Measurements". SFAS 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. SFAS 157 is effective for us on June 1, 2008 and will be applied prospectively. The provisions of SFAS 157 are not expected to have a material impact on the Company's consolidated financial statements.

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. 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.

Fiscal Year

The Company's fiscal year-end is on the Saturday nearest May 31, which was June 2, 2007 (52 weeks), June 3, 2006 (53 weeks) and May 28, 2005 (52 weeks), for the most recent three fiscal years.

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2. Acquisitions

The Company entered into an Agreement to Form a Limited Liability Company, Transfer Assets Thereto, and Purchase Units of Membership Therein, dated July 28, 2005, with Hillandale Farms, Inc. and Hillandale Farms of Florida, Inc. (together, "Hillandale"), and the Hillandale shareholders (the "Agreement"). Under the terms of the Agreement, we acquired 51% of the units of membership in Hillandale, LLC for cash of approximately $27,000 October 12, 2005. The remaining 49% of the units of membership in Hillandale, LLC will be acquired in essentially equal annual installments over a four-year period, with the purchase price of the units equal to their book value at the time of purchases as calculated in accordance with the terms of the Agreement. The total preliminary purchase price is estimated to be as follows :

Cash consideration paid to seller for 51% of Hillandale, LLC's membership units		$	27,006
Obligation to acquire 49% of Hillandale, LLC's membership units			25,947
			52,953
Less discount of preliminary purchase price to the present value as of July 28, 2005			(3,556	)
Total preliminary purchase price		$	49,397

The preliminary purchase price was allocated based upon the fair value of the assets acquired and liabilities assumed as follows:

 

Assets acquired:
Cash and cash equivalents		$	3,918
Receivables			7,181
Inventories			11,330
Prepaid and other assets			2,798
Property, plant and equipment			49,531
Total assets acquired			74,758
Liabilities assumed:
Accounts payable and accrued expenses			3,567
Notes payable and long-term debt			21,794
Total liabilities assumed			25,361
Net assets acquired		$	49,397

In October 2005, the Company paid substantially all of Hillandale, LLC’s notes payable and long-term debt and obtained a new $28,000 term loan from an insurance company secured by substantially all of the property, plant and equipment of Hillandale, LLC, and requires monthly principal payments of $150 plus interest beginning in January 2007 through November 2020. The obligation to acquire 49% of Hillandale, LLC was recorded at its then present value of $23,600 million as of June 3, 2006, of which $6,900 million was included in current liabilities and $16,700 million was included in non-current liabilities in the accompanying consolidated balance sheet.

In August 2006, in accordance with the Agreement, The Company purchased, for $6.1 million, an additional 13% of the units of membership of Hillandale, LLC based on the book value as of July 29, 2006. The Company’s obligation to acquire the remaining 36% of Hillandale, LLC is recorded at its present value of $15.3 million as of June 2, 2007 of which $5.4 million is included in current liabilities and $9.9 million is included in other non-current liabilities in the accompanying consolidated balance sheet. The actual remaining purchase price may be higher or lower when the Hillandale Purchase is completed. The Company will purchase an additional 12% of Hillandale LLC based on the book value of the units of membership as of July 29, 2007. 

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The Company gained effective control of the Hillandale operations upon signing of the Agreement. Accordingly, the acquisition date for accounting purposes is July 28, 2005. The operations of Hillandale, LLC were consolidated with our operations as of July 29, 2005.

Prior to the acquisition, the Company had a 44% membership interest in American Egg Products, LLC ("AEP") and Hillandale, LLC had a 27.5% membership interest in AEP. Prior to the acquisition of Hillandale, LLC, the Company's membership in AEP was accounted for by the equity method. Effective with our acquisition of Hillandale, LLC, we own a majority of the membership interest in AEP. Accordingly, the financial statements of AEP have been consolidated with our financial statements beginning July 29, 2005. AEP, located in Georgia, processes shell eggs into liquid and frozen egg products that are sold primarily to food manufacturers and to the food service industry. AEP has contract shell egg production for approximately 50% of its shell egg requirements and purchases the balance from regional egg markets.

Hillandale, LLC's production facilities are principally located in Florida. Hillandale, LLC is a fully integrated shell egg producer with its own feed mills, hatchery, production, processing and distribution facilities. The Hillandale acquisition increased our egg production capacity by approximately 30%.

As of July 28, 2005, Hillandale, LLC owned a 50% ownership interest in Hillandale Farms, LLC that was accounted for by the equity method. On October 5, 2005, Hillandale, LLC acquired the other 50% interest in Hillandale Farms, LLC for $1,000. The purchase price was allocated to the assets acquired and liabilities assumed and resulted in approximately $900 of goodwill. Hillandale Farms, LLC is engaged in the production, processing and distribution of shell eggs.

The unaudited financial information in the table below summarizes the combined results of our operations and Hillandale, LLC, on a pro forma basis, as though we had been combined as of the beginning of the earliest period presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented.

 

		Fiscal Year Ended
		June 3 2006			May 28 2005
Net sales		$	490,529		$	456,018
Net loss		$	(5,169	)	$	(29,326	)
Basic net loss per share		$	(0.22	)	$	(1.25	)
Diluted net loss per share		$	(0.22	)	$	(1.25	)

Green Forest Foods, LLC Acquisition

As of June 3, 2006, the Company owned 50 percent of Green Forest Foods, LLC, which was accounted for under the equity method of accounting. On January 24, 2007, we purchased the remaining 50 percent interest in Green Forest Foods, LLC for $2 million in cash. We allocated the purchase price to the net assets acquired consisting principally of flock inventories and facilities leased under a capital lease. Effective with the purchase, the results of operations of Green Forest Foods, LLC are consolidated in the Company’s financial statements. Green Forest Foods, LLC located in Green Forest, Arkansas, had been jointly owned and operated by Pier 44 Properties, LLC, an unaffiliated entity, and Cal-Maine Foods, Inc. since January 2006. Subsequent to the acquisition, the Company paid the capital lease obligation of approximately $10.5 million in full. Green Forest Foods, LLC produces, processes, and markets eggs from approximately one million laying hens, along with pullet growing for replacements.

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Benton County Foods, LLC Acquisition

On April 20, 2007, through our 90% owned subsidiary, Benton County Foods, LLC, we acquired the assets and business of the shell egg division of George’s, Inc., an unaffiliated entity, located near Siloam Springs, Arkansas. Benton County Foods, LLC is a newly formed company jointly owned by the Company and PW3 Holdings, LLC, an unaffiliated entity. The purchase price totaled $10.9 million in cash. The assets acquired include approximately one million laying hens, and a feed mill in Watts, Oklahoma. As part of this acquisition, Benton County Foods, LLC will lease growing facilities from George's Inc. for replacement pullets. CCF Brands (an affiliate of PW3 Holdings, LLC) has a supply agreement in place for approximately 50 percent of the eggs produced by the Benton County Foods, LLC. Eggs will be marketed to retail food businesses and food service distributors in the south central region of the United States. The results of operations of the shell egg business acquired are included in the Company’s consolidated financial statements subsequent to the acquisition date.

Pro forma information and the allocation of the purchase price to the net assets acquired with respect to the acquisitions of Green Forest Foods, LLC and Benton County Foods, LLC is not significant to the Company’s consolidated financial statements and accordingly has not been presented.

3. Investment in Affiliates

The Company owns 50% each of Specialty Eggs LLC and Delta Egg Farm, LLC ("Delta Egg") as of June 2, 2007. Investment in affiliates, recorded using the equity method of accounting, totaled $6,428 and $6,763 at June 2, 2007 and at June 3, 2006, respectively. Equity in income or (loss) of $1,699, ($757), and ($88) from these entities have been included in the consolidated statements of operations for fiscal 2007, 2006 and 2005, respectively.

The Company is a guarantor of 50% of Delta Egg's long-term debt, which totaled approximately $9,544 at June 2, 2007. Delta Egg's long-term debt is secured by substantially all fixed assets of Delta Egg and is due in monthly installments through fiscal 2009. Delta Egg is engaged in the production, processing and distribution of shell eggs. The other 50% owner also guarantees 50% of the debt. The guarantee arose when Delta Egg borrowed funds to construct its production and processing facility in 1999. The guarantee would be required if Delta Egg is not able to pay the debt. Management of the Company believes this possibility is unlikely because Delta Egg is now well capitalized.

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At June 2, 2007, and June 3, 2006, "Notes receivable and investments" as shown on the Company's consolidated balance sheet includes the cost of an investment in Egg-Land's Best, Inc., in which the Company has a 25.9% equity interest as of June 2, 2007 and had a 25.7% equity interest as of June 3, 2006. The Company can not exert significant influence over Egg-Land's Best, Inc.'s operating and financial activities; therefore, the Company accounts for this investment using the cost method. The carrying value of this investment at June 2, 2007, and June 3, 2006, was $440.

4. Inventories

Inventories consisted of the following:

		June 2			June 3
		2007			2006
Flocks		$	40,773		$	39,092
Eggs			4,704			3,820
Feed and supplies			16,731			14,931
		$	62,208		$	57,843

5. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

		June 2			June 3
		2007			2006
Land and improvements		$	43,222		$	40,741
Buildings and improvements