Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****                  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended****June 27, 2009****or**

 

**o****                    ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to            **

 

**COMMISSION FILE NUMBER: 1-7138**

 

**CAGLE’S, INC.**

(ExactName Of Registrant As Specified In Its Charter)

 

| **GEORGIA**                              | ** ** | **58-0625713**                       |
|------------------------------------------|------------|--------------------------------------|
| (State Of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **1385 COLLIER ROAD NW, ATLANTA, GA**    | ** ** | **30318**                            |
| (Address of Principal Executive Offices) |       | (Zip Code)                           |

 

Registrant’s telephonenumber, including area code: **(404) 355-2820**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act ofl934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. xYes o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulations S-T (section229.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). x Yes o No

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 

| Large accelerated  filer o |   | Accelerated filer   o   |   |
|----------------------------|--------|------------------------------|--------|
|                       |   |                         |   |
| Non-accelerated filer o    |   | Smaller reporting  company x |   |

 

Indicateby check mark if the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). o Yes x No

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.

 
| Class A Common Stock at $1.00 par value |   | 4,615,233 shares as of August 3, 2009. |
|----------------------------------------------|--------|---------------------------------------------|

 

 

 

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Table ofContents

 

**FORM 10-Q**

 

**Cagle’s, Inc.**

**June 27, 2009**

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                  | **Page**   |
|-------------------|---------------------------------------------------------------------------------------------|------------|
| ** **        | **PART I  FINANCIAL INFORMATION**                                                 |       |
| ** **        | ** **                                                                                  |       |
| Item 1.           | Financial Statements                                                                        | 3          |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 13         |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                 | 18         |
| Item 4.           | Controls and  Procedures                                                                    | 20         |
|              |                                                                                        |       |
| ** **        | **PART II  OTHER INFORMATION**                                                    | ** ** |
|              |                                                                                        |       |
| Item 1.           | Legal Proceedings                                                                           | 21         |
| Item 1.A.         | Risk Factors                                                                                | 21         |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 23         |
| Item 3.           | Defaults upon  Senior Securities                                                            | 23         |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                        | 24         |
| Item 5.           | Other Information                                                                           | 25         |
| Item 6.           | Exhibits                                                                                    | 25         |
|              |                                                                                        |       |
| Signatures        |                                                                                        |       |
|              |                                                                                        |       |
| Exhibit 31.1 |                                                                                        |       |
| Exhibit 31.2 |                                                                                        |       |
| Exhibit 32.1 |                                                                                        |       |
| Exhibit 32.2 |                                                                                        |       |

 

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Table of Contents

 

**CAGLE’S,INC. AND SUBSIDIARY**

**Condensed Consolidated Balance Sheets**

**(In Thousands, Except Par Values)**

 

**Part I. FINANCIALINFORMATION**

**Item 1. FinancialStatements**

 
| ** **                                                                                                                                                                       | ** ** | **June 27,  2009** | ** ** | ** **               | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **(Unaudited)**         | ** ** | **March 28,  2009** | ** ** |
| Assets                                                                                                                                                                           |       |                    |       |                     |       |
| Current  assets                                                                                                                                                                  |       |                    |       |                     |       |
| Cash  and cash equivalents                                                                                                                                                       |       | $                       | 1,464      |                     | $          | 1,246 |   |
| Trade  accounts receivable, less allowance for doubtful accounts of $186 and $186 at  June 2009 and March 2009                                                         |       | 15,916                  |       | 14,170                   |       |
| Inventories                                                                                                                                                                      |       | 27,617                  |       | 27,181                   |       |
| Other  current assets                                                                                                                                                            |       | 471                     |       | 201                      |       |
| Total  current assets                                                                                                                                                            |       | 45,468                  |       | 42,798                   |       |
| Property,  plant and equipment, at cost                                                                                                                                          |       |                    |       |                     |       |
| Land                                                                                                                                                                             |       | 1,976                   |       | 1,976                    |       |
| Buildings  and improvements                                                                                                                                                      |       | 59,686                  |       | 59,686                   |       |
| Machinery,  furniture and equipment                                                                                                                                              |       | 41,034                  |       | 41,034                   |       |
| Vehicles                                                                                                                                                                         |       | 4,859                   |       | 4,691                    |       |
| Construction  in progress                                                                                                                                                        |       | 782                     |       | 645                      |       |
|                                                                                                                                                                             |       | 108,337                 |       | 108,032                  |       |
| Less  accumulated depreciation                                                                                                                                                   |       | 72,279                  |       | 71,249                   |       |
| Property,  plant and equipment, net                                                                                                                                              |       | 36,058                  |       | 36,783                   |       |
| Other  assets                                                                                                                                                                    |       |                    |       |                     |       |
| Deferred  financing costs, net                                                                                                                                                   |       | 81                      |       | 103                      |       |
| Deferred  income taxes                                                                                                                                                           |       | 8,892                   |       | 9,775                    |       |
| Other  assets                                                                                                                                                                    |       | 1,497                   |       | 1,693                    |       |
| Total  other assets                                                                                                                                                              |       | 10,470                  |       | 11,571                   |       |
| Total  assets                                                                                                                                                                    |       | $                       | 91,996     |                     | $          | 91,152 |   |
|                                                                                                                                                                             |       |                    |       |                     |       |
| Liabilities and Stockholders’ Equity                                                                                                                                        |       |                    |       |                     |       |
| Current  liabilities                                                                                                                                                             |       |                    |       |                     |       |
| Current  maturities of long-term debt                                                                                                                                            |       | $                       | 2,531      |                     | $          | 2,488 |   |
| Accounts  payable                                                                                                                                                                |       | 20,782                  |       | 19,989                   |       |
| Accrued  expenses                                                                                                                                                                |       | 4,696                   |       | 4,462                    |       |
| Deferred  income taxes                                                                                                                                                           |       | 3,180                   |       | 3,180                    |       |
| Total  current liabilities                                                                                                                                                       |       | 31,189                  |       | 30,119                   |       |
| Long-term  debt, less current maturities                                                                                                                                         |       | 27,301                  |       | 29,049                   |       |
| Stockholders’  equity                                                                                                                                                       |       |                    |       |                     |       |
| Preferred  stock, $1 par value; 1,000 shares authorized, none issued                                                                                                             |       | —                  |       | —                   |       |
| Common  stock, $1 par value; 9,000 shares authorized, 4,616 and 4,638 shares issued and  4,615 and 4,637 shares outstanding at June 2009 and March 2008,  respectively |       | 4,615                   |       | 4,637                    |       |
| Treasury  stock, at cost                                                                                                                                                         |       | (80                     | )          | (80                      | )          |
| Additional  paid-in capital                                                                                                                                                      |       | 3,601                   |       | 3,627                    |       |
| Retained  earnings                                                                                                                                                               |       | 25,945                  |       | 24,662                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                   |       | (575                    | )          | (862                     | )          |
| Total  stockholders’ equity                                                                                                                                                 |       | 33,506                  |       | 31,984                   |       |
| Total  liabilities and stockholders’ equity                                                                                                                                 |       | $                       | 91,996     |                     | $          | 91,152 |   |

 

Theaccompanying notes are an integral part of these condensed consolidated financialstatements.

 

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**CAGLE’S,INC. AND SUBSIDIARY**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

**(In Thousands, Except Per Share Data)**

 
| ** **                                  | ** ** | **13  Weeks Ended**     | ** ** | **13  Weeks Ended**     | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **June 27,  2009** | ** ** | **June 28,  2008** | ** ** |
|                                        |       |                    |       |                    |       |
| Net  sales                                  |       | $                       | 78,015     |                    | $          | 76,921 |   |
|                                        |       |                    |       |                    |       |
| Costs  and expenses                         |       |                    |       |                    |       |
| Cost  of sales                              |       | 71,708                  |       | 77,577                  |       |
| Selling  and delivery                       |       | 2,197                   |       | 2,332                   |       |
| General  and administrative                 |       | 1,665                   |       | 1,192                   |       |
| Total  costs and expenses                   |       | 75,570                  |       | 81,101                  |       |
|                                        |       |                    |       |                    |       |
| Operating  income (loss)                    |       | 2,445                   |       | (4,180                  | )          |
|                                        |       |                    |       |                    |       |
| Other  income (expense)                     |       |                    |       |                    |       |
| Interest  expense                           |       | (442                    | )          | (489                    | )          |
| Other  income (expense), net                |       | 2                       |       | (12                     | )          |
| Total  other income (expense), net          |       | (440                    | )          | (501                    | )          |
|                                        |       |                    |       |                    |       |
| Income  (loss) before income taxes          |       | 2,005                   |       | (4,681                  | )          |
|                                        |       |                    |       |                    |       |
| Income  tax expense (benefit)               |       | 722                     |       | (1,685                  | )          |
|                                        |       |                    |       |                    |       |
| Net  income (loss)                          |       | $                       | 1,283      |                    | $          | (2,996 | ) |
|                                        |       |                    |       |                    |       |
| Weighted-average  common shares outstanding |       |                    |       |                    |       |
| Basic                                       |       | 4,619                   |       | 4,664                   |       |
| Diluted                                     |       | 4,619                   |       | 4,664                   |       |
|                                        |       |                    |       |                    |       |
| Per  common share                           |       |                    |       |                    |       |
| Net  income (loss)                          |       |                    |       |                    |       |
| Basic                                       |       | $                       | 0.28       |                    | $          | (0.64 | ) |
| Diluted                                     |       | $                       | 0.28       |                    | $          | (0.64 | ) |
| Dividends  per common share                 |       | $                       | —     |                    | $          | — |   |

 

Theaccompanying notes are an integral part of these condensed consolidated financialstatements.

 

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**CAGLE’S,INC. AND SUBSIDIARY**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

**(In Thousands)**

 
| ** **                                                                                         | ** ** | **13  Weeks Ended**     | ** ** | **13  Weeks Ended**     | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                         | ** ** | **June 27,  2009** | ** ** | **June 28,  2008** | ** ** |
| Cash flows from  operating activities                                                              |       |                    |       |                    |       |
| Net income (loss)                                                                                  |       | $                       | 1,283      |                    | $          | (2,996 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating activities |       |                    |       |                    |       |
| Depreciation                                                                                       |       | 1,030                   |       | 976                     |       |
| Amortization                                                                                       |       | 22                      |       | 13                      |       |
| (Gain) loss on sale of  property, plant and equipment                                              |       | (2                      | )          | —                  |       |
| Deferred income tax  expense (benefit)                                                             |       | 722                     |       | (871                    | )          |
| Changes in operating  assets and liabilities                                                       |       |                    |       |                    |       |
| Trade accounts receivable,  net                                                                    |       | (1,746                  | )          | (3,031                  | )          |
| Inventories                                                                                        |       | (436                    | )          | 481                     |       |
| Refundable income taxes                                                                            |       | —                  |       | (740                    | )          |
| Other current assets                                                                               |       | (270                    | )          | 1,740                   |       |
| Accounts payable                                                                                   |       | 157                     |       | 2,810                   |       |
| Accrued expenses                                                                                   |       | 682                     |       | (37                     | )          |
| Net cash provided by  (used in) operating activities                                               |       | 1,442                   |       | (1,655                  | )          |
| Cash flows from  investing activities                                                              |       |                    |       |                    |       |
| Purchases of property,  plant and equipment                                                        |       | (305                    | )          | (554                    | )          |
| Proceeds from sale of  property, plant and equipment                                               |       | 2                       |       | —                  |       |
| Proceeds from  redemption of life insurance                                                        |       | 180                     |       | —                  |       |
| (Increase) decrease in  other assets                                                               |       | 16                      |       | (239                    | )          |
| Net cash provided by  (used in) investing activities                                               |       | (107                    | )          | (793                    | )          |
| Cash flows from  financing activities                                                              |       |                    |       |                    |       |
| Proceeds on revolving  line of credit                                                              |       | 23,350                  |       | 20,250                  |       |
| Payments on revolving  line of credit                                                              |       | (24,450                 | )          | (17,550                 | )          |
| Payments of long-term  debt                                                                        |       | (605                    | )          | (561                    | )          |
| Increase in negative  book cash balances                                                           |       | 636                     |       | 89                      |       |
| Repurchase of stock                                                                                |       | (48                     | )          | —                  |       |
| Net cash provided by  (used in) financing activities                                               |       | (1,117                  | )          | 2,228                   |       |
| Net increase (decrease)  in cash and cash equivalents                                              |       | 218                     |       | (220                    | )          |
| Cash and cash  equivalents - beginning of period                                                   |       | 1,246                   |       | 1,279                   |       |
| Cash and cash  equivalents - end of period                                                         |       | $                       | 1,464      |                    | $          | 1,059 |   |
| Supplementary  disclosures of cash flow information                                                |       |                    |       |                    |       |
| Cash paid (received)  during the period for:                                                       |       |                    |       |                    |       |
| Interest                                                                                           |       | $                       | 429        |                    | $          | 469 |   |
| Income taxes, net                                                                                  |       | —                  |       | (108                    | )          |
| Supplementary  disclosures of noncash transactions                                                 |       |                    |       |                    |       |
| Net unrealized gain on  hedging activities                                                         |       | $                       | 287        |                    | $          | 1,447 |   |
| Assets acquired  pursuant to capital lease obligations                                             |       | —                  |       | 74                      |       |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**June 27, 2009**

**(In Thousands)**

**(Unaudited)**

 

1.     **Basisof Presentation**

 

In the opinion of management, the accompanying unaudited consolidatedfinancial statements contain all adjustments which are of a normal andrecurring nature necessary to present fairly the consolidated financialposition of Cagle’s, Inc. and its wholly owned subsidiary Cagle Farms, Inc.(collectively, the “Company”) as of June 27, 2009 and the results of theiroperations for the 13 weeks ended June 27, 2009 and the 13 weeks ended June 28,2008.  The accompanying unauditedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Regulation S-X.  Results of operations for the 13 weeks ended June 27,2009 are not necessarily indicative of results to be expected for the fullfiscal year ending April 3, 2010.

 

The consolidated balance sheet at March 28, 2009 has been derivedfrom the audited consolidated financial statements at that date but does notinclude all of the information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. For furtherinformation, reference is made to the consolidated financial statements andnotes thereto included in the Company’s annual report on Form 10-K for theyear ended March 28, 2009.

 

2.**    ****Significant Accounting Policies**

 

Refer to the Company’s 2009 annual report on Form 10-K, Note 1 toConsolidated Financial Statements, for a description of significant accountingpolicies.  There have been no material changesto these accounting policies.

 

3.     **Cashand Cash Equivalents**

** **

The Company considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents.  The Company’s cash management system allowsthe Company to fund outstanding checks when presented to the financialinstitution for payment resulting in book overdrafts.  Book overdrafts are recorded in accountspayable in the consolidated balance sheets and changes are reflected as afinancing activity in the consolidated statements of cash flows.  As of June 27, 2009 and March 28,2009, the Company had book overdrafts of $5,598 and $4,962, respectively.

 

4.     **Inventories**

 

Inventories consist of the following at June 27, 2009 and March 28, 2009:

 
| ** **                    | ** ** | **June 2009** | ** ** | **March 2009** | ** ** |
|-------------------------------|------------|--------------------|------------|---------------------|------------|
|                          |       |               |       |                |       |
| Finished  products            |       | $                  | 3,447      |                | $          | 5,692 |   |
| Field  inventory and breeders |       | 16,569             |       | 15,509              |       |
| Feed,  eggs and medication    |       | 6,200              |       | 4,659               |       |
| Supplies                      |       | 1,401              |       | 1,321               |       |
|                          |       |               |       |                |       |
|                          |       | $                  | 27,617     |                | $          | 27,181 |   |

 

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**Table of Contents**

** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**June 27, 2009**

**(In Thousands)**

**(Unaudited)**

 

5.     **Long-TermDebt**

 

Long-term debt consists of the following at June 27, 2009 and March 28, 2009:

 
| ** **                                                                                                                                                                                                                                  | ** ** | **June 2009** | ** ** | **March 2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| Long-term  revolving line of credit, maturing March 31, 2011, interest payable  monthly, variable interest rate of LIBOR plus 3.50%; secured by accounts  receivable, inventories and the Atlanta and Pine Mountain Valley facilities. |       | $                  | 16,200     |                | $          | 17,300 |   |
|                                                                                                                                                                                                                                        |       |               |       |                |       |
| Term  note payable; fixed interest rate of 7.86%, principal and interest payable  monthly of $290, through maturity on April 1, 2011; secured by the Collinsville  plant, Dalton hatchery and Rockmart feedmill.                       |       | 13,603             |       | 14,199              |       |
|                                                                                                                                                                                                                                        |       |               |       |                |       |
| Capital  lease payable, fixed interest at 6.86%, principal and interest payable  monthly of $3, through maturity on March 14, 2010; secured by certain  equipment.                                                                     |       | 29                 |       | 38                  |       |
|                                                                                                                                                                                                                                        |       | 29,832             |       | 31,537              |       |
| Less  current maturities                                                                                                                                                                                                                    |       | 2,531              |       | 2,488               |       |
|                                                                                                                                                                                                                                        |       |               |       |                |       |
| Long-term  debt, less current maturities                                                                                                                                                                                                    |       | $                  | 27,301     |                | $          | 29,049 |   |

 

On April 30, 2008, the Company amended its long-term revolvingline of credit agreement.  The amendedagreement increased the facility to $17,500 and the interest rate to a variablerate equal to 3.50% over the 90-day London InterBank Offered Rate (“LIBOR”).  The collateral for the facility now includesthe Company’s real estate located in Atlanta, Georgia.  In addition, the maturity date of the agreementis now March 31, 2011.

 

The Company completed a newlong-term revolving line of credit agreement on September 5, 2008.  There were three primary changes to theprevious agreement:  (1) An increasein the capacity of the revolving credit facility to $21 million.  (2) The covenant concerning theborrowers’ minimum tangible net worth was reduced from $40 million to $35million.  (3) The advance rate withrespect to eligible receivables was increased from 60% to 70%.  The maturity date of the new agreementremained March 31, 2011.

 

On November 3, 2008, theCompany entered into an amended long-term revolving line of credit agreementretroactive to September 27, 2008, which temporarily lowered the tangiblenet worth requirement from $35 million to $30 million through the first quarterof fiscal 2010 (quarter ending June 27, 2009).  This was extended on June 5, 2009,through January 2, 2010.

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**June 27, 2009**

**(In Thousands)**

**(Unaudited)**

 

5.     **Long-Term Debt****(cont.)**

 

On January 29, 2009, theCompany entered into an amended long-term revolving line of credit agreement,effective as of that date.  There areeight primary changes to the existing Agreement between the parties:  (1) An increase in the capacity of therevolving credit facility to $25,150.  (2) Thecreation of a supplemental revolving master note in the principal amount of$4,150 and maturing on October 31, 2009. (3) The addition of the right to obtain letters of credit issued bylender in favor of third persons in face principal amounts not exceeding $1,000at any time outstanding.  (4) Thelimiting of borrowers’ rights to obtain letters of credit issued by lender onlypursuant to such supplemental revolving master note and only when borrowershave available revolving credit (which will be determined by including in thedefinition thereof both the unpaid principal amount of all unpaid revolvingloans and also the aggregate face principal amount of all outstanding lettersof credit).  (5) Additions of thelimitations of the borrowers’ rights to obtain revolving loans pursuant to thesupplemental revolving master note only when lender has fully advanced theentire $21,000 principal amount of the primary revolving master note andborrowers also still have available revolving credit.  (6) The addition of the collateralconsisting of Cagle’s processing plant located in Pine Mountain Valley,Georgia.  (7) The advance rate withrespect to eligible inventories is being increased from 40% to 60% and theadvance rate with respect to eligible receivables is being increased from 70%to 80%.  (8) The interest rates weremodified by the following provisions: (a) Interest will accrue on theunpaid principal balance of the revolving loans, from time to time outstanding,evidenced by the primary revolving master note at the LIBOR variable rate plus3.50% (350 basis points), (b) Interest will accrue on the unpaid principalbalance of the revolving loans, from time to time outstanding, evidenced by thesupplemental revolving master note at the LIBOR variable rate plus 5.00% (500basis points).  As of June 27, 2009,the Company is in compliance with the revolving line of credit agreement’scovenants.

 

In addition to the covenantsdescribed above, the Company must also comply with certain restrictivecovenants associated with the term note payable.  These covenants require the Company tomaintain (1) a maximum leverage ratio (2) minimum fixed chargecoverage ratio (3) minimum adjusted earnings before interest,taxes, depreciation and amortization (“EBITDA”)and (4) capital expenditures not to exceed certain limits.  The Company is not in compliance with theterm note payable debt covenants, but has waivers through April 5, 2010.

 

The Company has available borrowings of $8,450 on the long-termrevolving line of credit as of June 27, 2009.

 

Aggregate maturities of long-term debt during the remaining current andsubsequent fiscal years are as follows:

 

| 2010   |   | $      | 1,887  |   |
|--------|--------|--------|--------|--------|
| 2011   |   | 27,945 |   |
|   |   |   |   |
|   |   | $      | 29,832 |   |

 

As of June 27, 2009,and in accordance with the amended revolving line of credit agreement, thelender has issued a $500 letter of credit in favor of a third party related tothe Company’s self-insurance workers’ compensation liabilities.

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**June 27, 2009**

**(In Thousands)**

**(Unaudited)**

 

6.     **Stockholders’Equity**

 

Beginning in 1990, the Board of Directors (the “Board”) authorized thepurchase of up to $2,500 of the Company’s stock on the open market.  In February 2000, the Board increasedthe authorized amount to $15,000.  TheCompany purchased 22 shares for $48 during the 13 weeks ended June 27,2009.  Through June 27, 2009, 819shares had been repurchased by the Company at a total cost of $10,207.  The Company has accounted for these sharesusing the retirement method.

 

7.     **FinancialInstruments**

** **

The Company is a purchaser of certain commodities, such as corn andsoybean meal in the course of normal operations.  The Company has used derivative financialinstruments to reduce its exposure to various market risks.  Generally, contract terms of a hedgeinstrument closely mirror those of the hedged item, providing a high degree ofrisk reduction and correlation.  Contractsthat are designated and highly effective at meeting the risk reduction andcorrelation criteria are recorded using hedge accounting, as defined by SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” asamended.  If a derivative instrument is ahedge, as defined by SFAS No. 133, depending on the nature of the hedge,changes in the fair value of the instrument will either be offset against thechange in fair value of the hedged assets, liabilities or firm commitmentsthrough earnings, or recognized in other comprehensive income (loss) until thehedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will beimmediately recognized in earnings as a component of cost of sales.  Instruments the Company holds as part of itsrisk management activities that do not meet the criteria for hedge accounting,as defined by SFAS No. 133, as amended, are marked to fair value withunrealized gains or losses reported currently in earnings.

 

8.     **ComprehensiveIncome**

 

Comprehensive income includes net earnings and all other changes inequity during a period except those resulting from investments by ordistributions to stockholders.  Othercomprehensive income for all periods presented consists of fair valueadjustments associated with cash flow hedges pursuant to SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”

 
| ** **                         | ** ** | **13  Weeks Ended**     | ** ** | **13  Weeks Ended**     | ** ** |
|------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **June 27,  2009** | ** ** | **June 28,  2008** | ** ** |
|                               |       |                    |       |                    |       |
| Net  income (loss)                 |       | $                       | 1,283      |                    | $          | (2,996 | ) |
| Cash  flow hedges                  |       | —                  |       | 1,831                   |       |
| Reclassification  to net earnings  |       | 448                     |       | 430                     |       |
| Tax  (expense) benefit             |       | (161                    | )          | (814                    | )          |
|                               |       |                    |       |                    |       |
| Total  comprehensive income (loss) |       | $                       | 1,570      |                    | $          | (1,549 | ) |

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**June 27, 2009**

**(In Thousands)**

**(Unaudited)**

 

8.     **Comprehensive Income****(cont.)**

 

Prior to the end of the second quarter of the fiscal year ended March 28,2009, the Company held commodity futures contracts which were designated as acash flow hedges, whereby the contracts were recorded at fair value on theconsolidated balance sheets as either an asset or liability with any changes infair value recorded in accumulated other comprehensive income (loss).  In a cash flow hedge, a futures contractwould exactly match the pricing date of the relevant anticipated inventorypurchases.  Through the end of the secondquarter of the fiscal year ended March 28, 2009, the Company continued tobe able to match the futures contract with the anticipated inventory purchases,therefore, entering into an effective hedge transaction.  However, due to the volatility of the grainmarkets, the Company concluded it was no longer practical to keep the futures.

 

As a result, the Company voluntarily discontinued hedge accounting inthe second quarter of the fiscal year ended March 28, 2009 byde-designating the previously defined hedge relationship.  The de-designation of the cash flow hedge wasdone in accordance with Derivatives Implementation Group (“DIG”) Issue Nos. G3,G17, G18 and G20, which generally require that the net derivative gain or lossrelated to the discontinued cash flow hedge should continue to be reported inaccumulated other comprehensive income (loss), unless it is probable that theforecasted transaction will not occur by the end of the originally specifiedtime period or within an additional two-month period of time thereafter.  As such the Company continues to holdinventory purchase agreements in excess of futures contracts and have noindication that the futures commitment on the hedged inventory purchases is injeopardy of discontinuing.  Therefore,the deferred losses related to the derivative that were de-designated were notrecognized immediately and are expected to be reclassified into earnings duringthe contractual terms of the inventory purchases.  The Company expects pretax losses totaling$1,347, recorded as accumulated other comprehensive income (loss) as of thefiscal year ended March 28, 2009 related to cash flow hedges, will berecognized prorata through the third quarter ended January 2, 2010.  The Company generally has no hedge cash flowsrelated to commodities beyond 12 months.

 

9.     **Reclassifications**

 

Certain reclassifications have been made to the June 28, 2008Consolidated Statements of Cash Flows in order for it to conform to the currentpresentation.

 

10.   **NewAccounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157provides guidance for using fair value to measure assets and liabilities.  This standard also responds to investors’requests for expanded information about the extent to which companies measureassets and liabilities at fair value, the information used to measure fairvalue and the effect of fair value measurements on earnings.  SFAS No. 157 applies whenever otherstandards require (or permit) assets or liabilities to be measured at fairvalue.  Beginning September 28,2008, the Company partially applied SFAS No. 157 as allowed by FASB StaffPosition (“FSP”) SFAS No. 

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**June 27, 2009**

**(In Thousands)**

**(Unaudited)**

 

10.   **New Accounting Pronouncements****(cont.)**

 

157-2, which delayed the effective date ofSFAS No. 157 for nonfinancial assets and liabilities.  As of September 28, 2008, the Companyapplied the provisions of SFAS No. 157 to the financial instruments andthe impact was not material.

 

In December 2007, the FASB issued SFAS No. 141R, “BusinessCombinations.”  SFAS No. 141Restablishes principles and requirements for how an acquirer in a businesscombination: 1) recognizes and measures in its financial statementsidentifiable assets acquired, liabilities assumed, and any noncontrollinginterest in the acquiree; 2) recognizes and measures goodwill acquired in abusiness combination or a gain from a bargain purchase; and 3) determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of a business combination.  SFAS No. 141R is effective for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008;therefore, the Company has adopted SFAS No. 141R for any businesscombinations entered into in fiscal 2010.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements” — an amendment of AccountingResearch Bulletin (“ARB”) No. 51. This statement amends ARB No. 51 to establish accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  Itclarifies that a noncontrolling interest in a subsidiary is an ownershipinterest in the consolidated entity that should be reported as equity in theconsolidated financial statements. Before this statement was issued, limited guidance existed for reportingnoncontrolling interests.  As a result,considerable diversity in practice existed. So-called minority interests were reported in the consolidated statementof financial position as liabilities or in the mezzanine section betweenliabilities and equity.  This statementimproves comparability by eliminating that diversity.  This statement is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December 15,2008 (that is, January 1, 2009, for entities with calendar yearends).  The Company adopted thispronouncement effective March 29, 2009, and it did not have any impact tothe consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities” — an amendment of SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  SFAS No. 161 is intended to improvefinancial reporting transparency regarding derivative instruments and hedgingactivities by providing investors with a better understanding of their effectson financial position, financial performance and cash flows.  SFAS No. 161 applies to all entities andis effective for consolidated financial statements issued for fiscal years andinterim periods beginning after November 15, 2008 with early adoptionencouraged.

 

In April 2008, the FASB issued FSP SFAS No. 142-3, “Determinationof the Useful Life of Intangible Assets.” FSP SFAS No. 142-3 requires companies estimating the useful life ofa recognized intangible asset to consider their historical experience inrenewing or extending similar arrangements or, in the absence of historicalexperience, to consider assumptions that market participants would use aboutrenewal or extension as adjusted for SFAS No. 142, “Goodwill and OtherIntangible Assets,” entity-specific factors. FSP SFAS No. 142-3 is effective for fiscal years beginning after December 15,2008 (fiscal 2010 for the Company).

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**June 27, 2009**

**(In Thousands)**

**(Unaudited)**

 

10.   **New Accounting Pronouncements (cont.)**

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples.”  SFAS No. 162identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (the “GAAP hierarchy”).  SFAS No. 162 will become effective 60days following the Securities and Exchange Commission’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, TheMeaning of “Present Fairly in Conformity With Generally Accepted AccountingPrinciples.”  The Company does not expectthe adoption of SFAS No. 162 to have a material effect on its results ofoperations and financial position.

 

In April 2009, the FASB issued FSP FAS 107-1and Accounting Principles Board (“APB”) 28-1, Interim Disclosures about FairValue of Financial Instruments (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB28-1 amend SFAS No. 107, Disclosures about Fair Value of FinancialInstruments, to require disclosures about fair value of financial instrumentsfor interim reporting periods of publicly traded companies as well as in annualfinancial statements. FSP 107-1 and APB 28-1 also amend APB Opinion No. 28,Interim Financial Reporting, to require those disclosures in summarizedfinancial information at interim reporting periods. FSP 107-1 and APB 28-1 areeffective for interim and annual reporting periods ending after June 15, 2009.The adoption of FSP No. SFAS 107-1 and APB 28-1 did not have an effect onthe Company’s consolidated financial statements.

 

In May 2009, the FASB issued SFAS No. 165,Subsequent Events (“SFAS 165”), whichthe Company adopted in the second quarter of 2009. SFAS 165 establishesthe accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are issued or are available to be issued.It requires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date, that is, whether that daterepresents the date the financial statements were issued or were available tobe issued. The adoption of SFAS 165 did not have an effect on the Company’sconsolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 168,The FASB Accounting StandardsCodificationTM and the Hierarchy of the Generally AcceptedAccounting Principles—a replacement of FASB Statement No. 162 (“SFAS 168”),to become the source of authoritative U.S. GAAP recognized by the FASBto be applied by nongovernmental entities. SFAS 168 is effective for financialstatements issued for interim and annual periods ending after September 15,2009. Management does not believe the adoption of SFAS 168 will have a materialimpact on its consolidated financial statements.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The disclosures in this quarterly report arecomplementary to those made in the Company’s 2009 annual report on Form 10-K.

 

Cagle’s, Inc. (the “Company”), which beganbusiness in 1945 and was first incorporated in Georgia in 1953, and its whollyowned subsidiary (Cagle’s Farms, Inc., formerly Strain Poultry Farms, Inc.)produce, market, and distribute a variety of fresh and frozen poultryproducts.  The vertically integratedoperations of the Company consist of breeding, hatching, and growing ofchickens; feed milling; processing; further processing; and marketingoperations.  The Company’s products aresold to national and regional independent and chain supermarkets, fooddistributors, food processing companies, national fast-food chains, andinstitutional users, such as restaurants, schools, and distributors, by theCompany’s sales staff located in Georgia, Alabama, New York, Arizona andthrough brokers selected by the Company.

 

All of the Company’s business activities areconducted on a vertically integrated basis within one industry segment, poultryproducts.  The Company’s various poultryproducts are closely related, have similar purposes and uses, and are similarin terms of profitability and types and degrees of risks.  In addition, the production processes aresimilar to the extent that (a) production facilities are shared or areinterchangeable and (b) the same types of raw materials, labor, andcapital are used.  Markets and marketingmethods are comparable for all products to the extent that they are generallysold to the same types of customers by a common sales force and are sensitiveto changes in economic conditions to the same degree.

 

Results ofOperations

 

*Net Sales*

 

Revenues for the first quarter were $78.0million, up 1.4% reflecting a decrease in pounds sold of 4.4% and an increaseinrevenue per pound of poultry sold of $0.049 as compared for the same period offiscal 2009.

 

Quotedmarket prices for products for the first quarter of fiscal 2010 versus the sameperiod last quarter and last year as follows:

 
| ** **                 | ** ** | **% Change**       | ** ** | **% Change**       | ** ** |
|----------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                 | ** ** | **1st qtr. 10 vs** | ** ** | **1st qtr. 10 vs** | ** ** |
| ** **                 | ** ** | **4th qtr. 09**    | ** ** | **1st qtr. 09**    | ** ** |
|                       |       |               |       |               |       |
| Tenders                    |       | -4.1%              |       | 10.8%              |       |
| Wings                      |       | -5.0%              |       | 39.1%              |       |
| Drums                      |       | -0.2%              |       | -7.8%              |       |
| Boneless Breast            |       | 10.7%              |       | 0.9%               |       |
| Boneless Thigh             |       | 6.5%               |       | -2.7%              |       |
| Leg Quarters               |       | 31.0%              |       | -4.3%              |       |
| Whole Bird without Giblets |       | 20.8%              |       | 0.3%               |       |

 

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*Cost of sales*

 

Cost ofsales for the first quarter of fiscal 2010 decreased 7.6% as compared with thesame period last year, from $77.6 million to $71.7 million. Feed ingredientprices for broilers processed in the first quarter of 2010, which represented 30%of the total cost of sales, decreased 28% as compared to the first quarter of2009.

 

USDAreported corn acres planted as the second largest since 1946 and soybean acresplanted as a record high. Good crop weather patterns as well as reductions inlive poultry, cattle and hog inventories, which have traditionally accountedfor 33%, 26% and 26% of total feed use, respectively, have resulted in declinesin feed ingredient prices.

 

*Selling and Delivery*

 

Theseexpenses decreased $135 thousand, or 5.8%, for the 13 weeks ended June 27,2009 versus the 13 weeks ended June 28, 2008.

 

*General andAdministrative*

 

Theseexpenses increased $473 thousand, or 39.7%, for the 13 weeks ended June 27,2009 versus the 13 weeks ended June 28, 2008.  $416 thousand of this increase is due to aperiod ended June 28, 2008 recovery of a prior year bad debt reserve.  Excluding this period ended June 28,2008 event, general and administrative expenses increased $57 thousand, or3.5%, for the 13 weeks ended June 27, 2009 versus the 13 weeks ended June 28,2008.

 

*Interest Expense*

 

Interestexpense decreased $47 thousand, or 9.6%, for the 13 weeks ended June 27,2009 versus the 13 weeks ended June 28, 2008 despite average long-termdebt increasing from $24.3 million to $30.7 million in the two periods.  This reflects the favorable changes in thevariable interest rate component on the Company’s long-term revolving line ofcredit agreement.

 

*Other Income(Expense)*

 

Other income(expense) was $2 thousand income for the 13 weeks ended June 27, 2009versus $(12) thousand (expense) for the 13 weeks ended June 28, 2008.

 

*Income Taxes*

 

Incometax expense was $722 thousand, or 36.0% of pre-tax income of $2.0 million forthe 13 weeks ended June 27, 2009. The income tax (benefit) was $(1.7) million, or 36.0% of pre-tax (loss)of $(4.7) million for the 13 weeks ended June 28, 2008.  The entire $722 thousand of income taxexpense was charged against deferred tax assets, as none is currently payabledue to the Company’s federal and state net operating loss carryforwards.  The Company has federal andstate net operating loss carryforwards of $24.4 million and $21.7 million,respectively, as of the fiscal year ended March 28, 2009.  The Company also has federal and state taxcredit carryforwards of $10.7 million as of the fiscal year ended March 28,2009.  The net operating loss and taxcredit carryforwards are available to reduce income taxes through 2028.  Realization of these future tax benefits isdependent on the Company’s ability to generate sufficient taxable income withinthe carryforward period.  Due to thesignificant amount of income that would be needed to fully utilize the creditsavailable, the Company has recorded a valuation allowance for a significantportion of the deferred tax asset associated with the tax creditcarryforwards.  The Company expects tofully utilize the federal and state net operating loss carryforwards and,accordingly, there is no valuation allowance associated with the net operatingloss carryforwards.

 

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The Company adopted FASB Interpretation No. 48(“FIN 48”), “Accounting for Uncertainty in Income Taxes,” effective April 1,2007.  FIN 48 clarifies the accountingfor income taxes by prescribing the minimum recognition threshold a taxposition is required to meet before being recognized in the consolidatedfinancial statements.  FIN 48 alsoprovides guidance on derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  The Company had no significant unrecognizedtax benefits at the date of adoption or at June 27, 2009.  Accordingly, theCompany does not have any interest or penalties related to uncertain taxpositions.  However, if interest orpenalties were to be incurred related to uncertain tax positions, such amountswould be recognized in income tax expense. Tax periods for all years after 2005 remain open to examination by thefederal and state taxing jurisdictions to which it is subject.

 

*Financial Conditionand Liquidity*

 

As of June 27, 2009, theCompany’s working capital was $14.3 million and its current ratio was1.46.  The Company’s working capital at June 28,2008 was $20.5 million and its current ratio was 1.72.  The Company has decreased long-term debt by$1.7 million during the 13 weeks ended June 27, 2009.  The Company has spent $0.3 million on capitalprojects in the first three months of fiscal 2010. The Company has remainingavailability of $8.45 million on its revolving credit facility, as of June 27,2009.

 

The Company completed a newlong-term revolving line of credit agreement on September 5, 2008.  There were three primary changes to theprevious agreement:  (1) An increasein the capacity of the revolving credit facility to $21 million.  (2) The covenant concerning theborrowers’ minimum tangible net worth was reduced from $40 million to $35million.  (3) The advance rate withrespect to eligible receivables was increased from 60% to 70%.  The maturity date of the new agreementremained March 31, 2011.

 

On November 3, 2008, theCompany entered into an amended long-term revolving line of credit agreementretroactive to September 27, 2008, which temporarily lowered the tangiblenet worth requirement from $35 million to $30 million through the first quarterof fiscal 2010 (quarter ending June 27, 2009).  This was extended on June 5, 2009,through January 2, 2010.

 

On January 29, 2009, theCompany entered into an amended long-term revolving line of credit agreement,effective as of that date.  There areeight primary changes to the existing Agreement between the parties:  (1) An increase in the capacity of therevolving credit facility to $25.15 million. (2) The creation of a supplemental revolving master note in theprincipal amount of $4.15 million and maturing on October 31, 2009.  (3) The addition of the right to obtainletters of credit issued by lender in favor of third persons in face principalamounts not exceeding $1.0 million at any time outstanding.  (4) The limiting of borrowers’ rights toobtain letters of credit issued by lender only pursuant to such supplementalrevolving master note and only when borrowers have available revolving credit(which will be determined by including in the definition thereof both theunpaid principal amount of all unpaid revolving loans and also the aggregateface principal amount of all outstanding letters of credit).  (5) Additions of the limitations of theborrowers’ rights to obtain revolving loans pursuant to the supplementalrevolving master note only when lender has fully advanced the entire $21.0million principal amount of the primary revolving master note and borrowersalso still have available revolving credit. (6) The addition of the collateral consisting of Cagle’s processingplant located in Pine Mountain Valley, Georgia. (7) The advance rate with respect to eligible inventories is beingincreased from 40% to 60% and the advance rate with respect to eligible 

 

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receivablesis being increased from 70% to 80%.  (8) Theinterest rates were modified by the following provisions: (a) Interestwill accrue on the unpaid principal balance of the revolving loans, from timeto time outstanding, evidenced by the primary revolving master note at theLIBOR variable rate plus 3.50% (350 basis points), (b) Interest will accrueon the unpaid principal balance of the revolving loans, from time to timeoutstanding, evidenced by the supplemental revolving master note at the LIBORvariable rate plus 5.00% (500 basis points). As of June 27, 2009, the Company is in compliance with therevolving line of credit agreement’s covenants.

 

Inaddition to the covenants described above, the Company must also comply withcertain restrictive covenants associated with the term note payable.  These covenants require the Company tomaintain (1) a maximum leverage ratio (2) minimum fixed chargecoverage ratio (3) minimum adjusted earnings before interest,taxes, depreciation and amortization (“EBITDA”)and (4) capital expenditures not to exceed certain limits.  The Company is not in compliance with theterm note payable debt covenants, but has waivers through April 5, 2010.

 

The Company has available borrowings of $8.45million on the long-term revolving line of credit as of June 27, 2009.

 

We expectthat cash flow from operations and cash on hand should be sufficient to fundoperations, to make all payments of principal and interest when due, and tofund capital expenditures for at least the next twelve months.  We may elect to finance certain capitalexpenditure requirements through borrowings under our credit facilities oroperating leases.

 

*Critical Accounting Policies and Estimates*

 

The preparation of consolidated financialstatements and related disclosures in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, and the disclosure of contingent assets and liabilities at thedate of the consolidated financial statements and revenues and expenses duringthe periods reported.  The followingaccounting policies involve “critical accounting estimates” because they areparticularly dependent on estimates and assumptions made by management aboutmatters that are highly uncertain at the time the accounting estimates aremade.  In addition, while we have usedour best estimates based on facts and circumstances available to us at thetime, different estimates reasonably could have been used in the currentperiod, or changes in the accounting estimates we used are reasonably likely tooccur from period to period which may have a material impact on thepresentation of our financial condition and results of operations.  We review these estimates and assumptionsperiodically and reflect the effects of revisions in the period that they aredetermined to be necessary.  We havedisclosed our critical accounting policies in our Annual Report on Form 10-Kfor the year ended March 28, 2009, and that disclosure should be read inconjunction with this Quarterly Report on Form 10-Q.

 

Cautionary Statements Relevant ToForward-Looking Information For The Purpose Of “Safe Harbor” Provisions Of ThePrivate Securities Litigation Reform Act Of 1995

 

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The Company and its representatives may fromtime to time make written or oral forward-looking statements, includingforward-looking statements made in this report, with respect to their currentviews and estimates of future economic circumstances, industry conditions,Company performance and financial results. These forward-looking statements are subject to a number of factors anduncertainties which could cause the Company’s actual results and experiences todiffer materially from the anticipated results and expectations, expressed insuch forward-looking statements.  TheCompany wishes to caution readers not to place undue reliance on anyforward-looking statements, which speak only as of the date made.  Among the factors that may affect theoperating results of the Company are the following: (1) fluctuations inthe cost and availability of raw materials, such as feed grain costs; (2) changesin the availability and relative costs of labor and contract growers; (3) operatingefficiencies of facilities; (4) market conditions for finished products,including the supply and pricing of alternative proteins; (5) effectivenessof marketing programs and advertising; (6) risks associated with leverage,including cost increases due to rising interest rates; (7) risksassociated with effectively evaluating derivatives and hedging activities; (8) changesin regulations and laws, including changes in accounting standards,environmental laws and occupational, health and safety laws; (9) issuesrelated to food safety, including costs resulting from product recalls,regulatory compliance, and any related claims or litigation; (10) adverseresults from on-going litigation; (11) access to foreign markets together withforeign economic conditions, including currency fluctuations and import/exportrestrictions; (12) the effect of, or changes in, general economic conditions;and (13) financial risk management.  Weundertake no obligation to revise or update any forward-looking statements forany reason.

 

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**Item 3: Quantitative andQualitative Disclosures about Market Risk**

 

*Risk Factors*

 

Industry cyclicality can affect our earnings,especially due to fluctuations in the commodity prices of feed ingredients andchicken.

 

Profitability in the chicken industry ismaterially affected by the commodity prices of chicken and feed ingredients,which are determined by supply and demand factors, which result in cyclicalearnings fluctuations.  The production offeed ingredients is positively or negatively affected primarily by weatherpatterns throughout the world, the global level of supply inventories anddemand for feed ingredients, and the agricultural policies of the United Statesand foreign governments.  In particular,weather patterns often change agricultural conditions in an unpredictablemanner.  A sudden and significant changein weather patterns could affect supplies of feed ingredients, as well as boththe industry’s and our ability to obtain feed ingredients, grow chickens, anddeliver products.  High feed ingredientprices have had a material adverse effect on our operating results in the past.We periodically seek, to the extent available, to enter into advance purchasecommitments for the purchase of feed ingredients in an effort to manage ourfeed ingredient costs.  The use of suchinstruments may not be successful.

 

*Raw Materials*

 

The primary raw materials used by the Companyare corn, soybean meal, and other ingredients; packaging materials; cryogenicmaterials; and breeder chicks.  TheCompany believes the sources of supply for these materials are adequate anddoes not expect significant difficulty in acquiring required supplies.  The major source of supply is the midwesterngrain belt of the United States, although local supplies are utilized whenavailable.  Prices for the feedingredients are sensitive to supply fluctuations worldwide, and weatherconditions, especially drought, can cause significant price volatility.  Since feed is the most significant factor inthe cost of producing a broiler chicken, those fluctuations can havesignificant effects on margins.  TheCompany also purchases product outside for further processing requirements.

 

The Company may choose to utilize derivatives asoffered on the Chicago Board of Trade for the purpose of protecting the feedcost for fixed price sales commitments negotiated with our customers.  The Company’s two primary feed ingredientsare corn and soybean meal.  A $0.10 perbushel price change in corn or a $10 per ton price change in soybean mealimpacts our cost of sales $0.75 million dollars per year.

 

*Interest Rates*

 

Wecurrently have a term note payable with no exposure to interest ratefluctuations, as our existing indebtedness carries a fixed interest rate.  We have a revolving credit facility whichcarries a variable interest rate equal to the 90-day LIBOR rate published bythe Wall Street Journal, plus 3.5%.

 

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The Company had variable interest rate exposureon the revolving credit facility at June 27, 2009.  The Company’s theoretical interest rateexposure on variable rate borrowings at June 27, 2009, would be, with aone percentage point increase in average interest rates on the Company’sborrowings would increase future interest expense by $13.5 thousand per monthand a two percentage point increase would increase future interest expense by$27.0 thousand per month.  The Companydetermined these amounts based on $16.2 million of variable rate borrowings at June 27,2009, multiplied by 1.0% and 2.0%, respectively, and divided by twelve.  The Company is currently not using anyinterest rate collars, hedges, or other derivative financial instruments tomanage or reduce interest rate risk.  Asa result, any increase in interest rates on the Company’s variable rateborrowings would increase interest expense and reduce net income.

 

*Concentration of Credit Risk*

 

The Company deposits its cash with financialinstitutions which have Federal Deposit Insurance Corporation (FDIC) depositoryinsurance, which insures bank balances up to $250 thousand per bank.  At June 27, 2009, the Company’s cashbalances in FDIC insured bank accounts totaled approximately $1.5 million whichexceeds the Federal Deposit Insurance Corporation limit of $250 thousand.

 

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**Item 4.  Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*

 

The term “disclosure controls and procedures”(defined in SEC Rule 13a-15(e)) refers to the controls and other proceduresof a company that are designed to ensure that information required to bedisclosed by a company in the reports that it files under the SecuritiesExchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarizedand reported within required time periods. The Company’s management, with theparticipation of the Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the Company’s disclosure controls and proceduresas of the end of the period covered by this quarterly report (the “EvaluationDate”).   Based on that evaluation,management, including the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded that, as of the Evaluation Date, such controls andprocedures were effective.

 

*Changes in internal controls*

 

The term “internal control over financialreporting” (defined in SEC Rule 13a-15(f)) refers to the process of acompany that is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  The Company’s management,with the participation of the Chief Executive Officer and Chief FinancialOfficer, have evaluated any changes in the Company’s internal control overfinancial reporting that occurred during the period covered by this quarterlyreport, and they have concluded that there was no change to the Company’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**Part II.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

The Company is routinely involved in variouslawsuits and legal matters on an ongoing basis as a result of day to dayoperations; however, the Company does not believe that the ultimate resolutionof these matters will have a material adverse effect on the Company or itsbusiness.

 

**Item1.A.  Risk Factors**

 

*Leverage*

 

Our indebtedness could adversely affect ourfinancial condition.  We presently have,and expect to continue to have, an amount of indebtedness.  Our indebtedness could have importantconsequences to stockholders.  Forexample, it could: increase our vulnerability to general adverse economicconditions; require us to dedicate a substantial portion of our cash flow fromoperations to payments on our indebtedness, thereby reducing the availabilityof our cash flow to fund working capital, capital expenditures and for othergeneral corporate purposes; limit our flexibility in planning for, or reactingto, changes in our business and the industry in which we operate; place us at acompetitive disadvantage compared to our competitors that have less debt;limit, along with the financial and other restrictive covenants in ourindebtedness, our ability to borrow additional funds, and failing to comply withthose covenants could result in an event of default or require redemption ofindebtedness.  Either of these eventscould have a material adverse effect on us. Our ability to make payments on and to refinance our indebtedness willdepend on our ability to generate cash in the future, which is dependent onvarious factors.  These factors includethe commodity prices of feed ingredients and chicken and general economic,financial, competitive, legislative, regulatory, and other factors that arebeyond our control.

 

*Additional Borrowings Available*

 

Despite our indebtedness, we are not prohibitedfrom incurring additional indebtedness in the future.

 

*Contamination of Products*

 

If our products become contaminated, we may besubject to product liability claims and product recalls.

 

*Livestock and Poultry Disease*

 

Outbreaks of livestock diseases, in general, andpoultry disease, in particular, can significantly restrict our ability toconduct our operations.  We take allreasonable precautions to ensure that our flocks are healthy and that ourprocessing plants and other facilities operate in a sanitary andenvironmentally sound manner.  However,events beyond our control, such as the outbreak of disease, could significantlyrestrict our ability to conduct our operations. Furthermore, an outbreak of disease could result in governmentalrestrictions on the import and export of our fresh chicken, to or from oursuppliers, facilities, or customers, or require us to destroy one or more ofour flocks.  This could result in thecancellation of orders by our customers and create adverse publicity that mayhave a material adverse effect on our ability to market our productssuccessfully and on our business, reputation, and prospects.

 

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*Insurance*

 

We are exposed to risks relating to productliability, product recall, property damage, and injuries to persons for whichinsurance coverage is expensive, limited, and potentially inadequate.

 

*Significant Competition*

 

Competition in the chicken industry with othervertically integrated poultry companies could adversely affect our business.

 

*Government Regulation*

 

Regulation, present and future, is a constantfactor affecting our business.  Thechicken industry is subject to federal, state, and local governmentalregulation, including health and environmental areas.  We anticipate increased regulation by variousagencies concerning food safety, the use of medication in feed formulations,and the disposal of poultry by-products and wastewater discharges. Unknownmatters, new laws and regulations, or stricter interpretations of existing lawsor regulations may materially affect our business or operations in the future.

 

*Deterioration of Economic Conditions*

 

Our business may be adversely affected by changes in national or globaleconomic conditions, including inflation, interest rates, availability ofcapital markets, consumer spending rates, energy availability and costs(including fuel surcharges) and the effects of governmental initiatives tomanage economic conditions.  Any suchchanges could adversely affect the demand for our poultry products, or the costand availability of our needed raw materials and packaging materials, therebynegatively affecting our financial results.

 

The recent disruptions in credit and other financial markets anddeterioration of national and global economic conditions, could, among otherthings:

 

·      make it more difficult or costly for us toobtain financing for our operations or investments or to refinance our debt inthe future;

·      cause our lenders to depart from priorcredit industry practice and make more difficult or expensive the granting ofany technical or other waivers under our credit agreements to the extent we mayseek them in the future;

·      impair the financial condition of some ofour customers and suppliers thereby increasing customer bad debts ornon-performance by suppliers;

·      negatively impact demand for proteinproducts, which could result in a reduction of sales, operating income and cashflows.

 

*Changes in Consumer Preference*

 

The food industry in general is subject to changing consumer trends,demands, and preferences.  Trends withinthe food industry change often, and failure to identify and react to changes inthese trends could lead to, among other things, reduced demand and pricereductions for our products, and could have an adverse effect on our financialresults.

 

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*The Loss of One or More of Our Largest Customers*

 

Our business could suffer significant set backs in sales and operatingincome if our customers’ plans and/or markets should change significantly, orif we lost one or more of our largest customers.   Many of our agreements with our customersare generally short-term, primarily due to the nature of our products, industrypractice, and the fluctuation in demand and price for our products.

 

*Members of the Cagle’s Family can ExerciseSignificant Control*

 

Members of the Cagle’s family beneficially own, in the aggregate,64.56% of our outstanding common stock, giving them control of approximately65% of the total voting power of our outstanding voting stock.  In addition, three members of the Cagle’sfamily serve on our Board of Directors. As a result, members of the Cagle’s family have the ability to exertsubstantial influence or actual control over our management and affairs andover substantially all matters requiring action by our stockholders, includingamendments to our certificate of incorporation and by-laws, the election andremoval of directors, any proposed merger, consolidation or sale of all orsubstantially all of our assets, and other corporate transactions.  This concentration of ownership may alsodelay or prevent a change in control otherwise favored by our otherstockholders and could depress our stock price.

 

**Item****2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

The table belowprovides information regarding our purchases of common stock during the periodsindicated.  Amounts in thousands exceptAverage Price Paid Per Share.

 
| ** **                                 | ** ** | ** **        | ** ** | ** **      | ** ** | **Approximate**      | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                 | ** ** | ** **        | ** ** | ** **      | ** ** | **Dollar  Value**    | ** ** |
| ** **                                 | ** ** | **Total  Number** | ** ** | **Average**     | ** ** | **of  Shares that**  | ** ** |
| ** **                                 | ** ** | **of  Shares**    | ** ** | **Price  Paid** | ** ** | **May Yet  Be** | ** ** |
| ** **                                 | ** ** | **Purchased**     | ** ** | **Per  Share**  | ** ** | **Purchased  (1)**   | ** ** |
|                                       |       |              |       |            |       |                 |       |
| March 29,  2009 - June 27, 2009  |       | 22                |       | $               | 2.20       |                 | $          | 4,793 |   |
| March 30,  2008 - March 28, 2009 |       | 27                |       | 2.13            |       | 4,841                |       |
| April 1,  2007 - March 29, 2008  |       | 79                |       | 7.74            |       | 4,898                |       |
| April 2,  2006 - March 31, 2007  |       | 55                |       | 7.92            |       | 5,508                |       |
|                                            |            |                   |            |                 |            |                      |            |  |  |

 

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(1)                      In 1990, the Board of Directors authorized thepurchase of up to $2.5 million which was subsequently increased to $15.0million in February 2000.

 

**Item****3. Defaults upon Senior Securities**

 

None

 

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**Item****4. Submission of Matters to a Vote of Security Holders**

 

OnJuly 17, 2009, the Company held its Annual Meeting of Shareholders. The following items (3) were submitted to a vote of shareholders throughthe solicitation of proxies:

 

(1)          To fix the number of membersof the Board of Directors at eight (8), and to elect the members thereof

 

Election of Directors

 

Thefollowing persons were elected to serve as directors on the Company’s Board ofDirectors until the 2010 Annual Meeting of Shareholders or until theirsuccessors have been duly elected and qualified or until the earlier of theirresignation or removal.  Voting results were as follows:

 
| ** **           | ** ** | **For**   | ** ** | **Against (a)** | ** ** |
|----------------------|------------|-----------|------------|-----------------|------------|
|                 |       |      |       |            |       |
| J. DOUGLAS CAGLE     |       | 3,686,591 |       | 757,159         |       |
| PANOS KANES          |       | 4,369,700 |       | 74,050          |       |
| G. BLAND BYRNE III   |       | 3,674,097 |       | 769,653         |       |
| CANDACE CHAPMAN      |       | 4,369,700 |       | 74,050          |       |
| EDWARD J. RUTKOWSKI  |       | 4,369,700 |       | 74,050          |       |
| MARK M. HAM IV       |       | 3,669,267 |       | 774,483         |       |
| GEORGE DOUGLAS CAGLE |       | 3,670,691 |       | 773,059         |       |
| JAMES DAVID CAGLE    |       | 3,670,691 |       | 773,059         |       |

 

(2)          To ratify the appointment ofFrost, PLLC as the independent registered public accounting firm for the fiscalyear ending April 3, 2010.

 
| ** ** | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Non-Votes** | ** ** |
|------------|------------|-----------|------------|-------------|------------|-----------------|------------|---------------|------------|
|       |       |      |       |        |       |            |       |          |       |
|       |       | 4,381,836 |       | 61,914      |       | 0               |       | 0             |       |

 

(3)          Shareholder proposalregarding greenhouse-gas emissions.

 
| ** ** | ** ** | **For** | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Non-Votes** | ** ** |
|------------|------------|---------|------------|-------------|------------|-----------------|------------|---------------|------------|
|       |       |    |       |        |       |            |       |          |       |
|       |       | 29,642  |       | 3,775,999   |       | 482             |       | 637,627       |       |

 

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(a)          In determining the resultsof voting, abstentions or authorizations withheld and broker non-votes have thesame effect as a vote against.

 

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**Item 5.  Other Information**

 

None

 

**Item 6.  Exhibits**

 
| 3.1  |   | Articles  of Incorporation of the Registrant. (2)                                                       |
|------|--------|---------------------------------------------------------------------------------------------------------|
| 3.2  |   | Bylaws  of the Registrant. (3)                                                                          |
| 14.1 |   | Code  of Ethics. (4)                                                                                    |
| 31.1 |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) and  15d-14(a). (1) |
| 31.2 |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) and  15d-14(a). (1) |
| 32.1 |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. (1)                  |
| 32.2 |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. (1)                  |

 

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(1) Filedherewith.

(2) Previouslyfiled and incorporated by reference herein from the Registrant’s Form 10-Kfor the year ended April 2, 2005.

(3) Previouslyfiled and incorporated by reference herein from the Registrant’s Form 10-Qfor the quarter ended October 2, 2004.

(4) Previouslyfiled and incorporated by reference herein from the Registrant’s Form 10-Kfor the year ended April 3, 2004.

 

**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| Cagle’s, Inc.  (Registrant) |                                                  |   |
|---------------------------------------|-------------------------------------------------------|--------|
|                                  |                                                  |   |
| BY:                                   | /s/  J. Douglas Cagle                                 |   |   |
|                                  | Chairman,  Chief Executive Officer and President      |   |   |
|                                  | August 10,  2009                                 |   |   |
|                                  |                                                  |   |
| BY:                                   | /s/  Mark M. Ham IV                                   |   |   |
|                                  | Executive  Vice President and Chief Financial Officer |   |   |
|                                  | August 10,  2009                                 |   |   |

 

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