** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

| **x**** **                                        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                     |
| **For the  quarterly period ended May 31, 2008;** |
|                                                   |                                                                                                     |
| **OR**                                                 |
|                                                   |                                                                                                     |
| **o**** **                                        | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**for thetransition period from          TO         **

 

**Golden Oval Eggs, LLC**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                     | ** ** | **20-0422519**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |       | (I.R.S. employer  identification number) |
|                                                             |       |                                     |
| **1800 Park  Avenue East**                                       |       |                                     |
| **Renville,  MN**                                                | ** ** | **56284**                                |
| (Address of principal  executive offices)                        |       | (Zip code)                               |

 

**Telephone:****(320) 329-8182**

(Registrant’s telephone number, includingarea code)

 

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 of1934 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.

Yesx No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.)

Yeso No x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.

Yeso No x

 

Asof May 31, 2008, there were 5,442,543 of the Company’s Class A Unitsissued and outstanding

 

 

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**TABLE OFCONTENTS**

 

Golden Oval Eggs, LLC

Form 10-Q

May 31, 2008

 
| **Description**  | ** **                                                                                  | **Page** |
|------------------|---------------------------------------------------------------------------------------------|----------|
| **Part I**  | **Financial  Information**                                                                  |     |
| Item 1.          | Consolidated Condensed  Financial Statements                                                | 1        |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 8        |
| Item 3.          | Quantitative  and Qualitative Disclosures about Market Risk                                 | 13       |
| Item 4.          | Controls and  Procedures                                                                    | 13       |
|             |                                                                                        |     |
| **Part II** | **Other Information**                                                                       |     |
| Item 1.          | Legal Proceedings                                                                           | 14       |
| Item 1A.         | Risk Factors                                                                                | 14       |
| Item 2.          | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 14       |
| Item 3.          | Defaults Upon  Senior Securities                                                            | 14       |
| Item 4.          | Submission of  Matters to a Vote of Security Holders                                        | 14       |
| Item 5.          | Other Information                                                                           | 14       |
| Item 6.          | Exhibits                                                                                    | 15       |
|             |                                                                                        |     |
| **Signatures**   |                                                                                        | 16       |

 

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**PART I.    FINANCIAL INFORMATION**

 

**Item 1. Consolidated FinancialStatements**

 

**GOLDEN OVALEGGS, LLC**

 

**ConsolidatedCondensed Balance Sheets**

**May 31,2008 and August 31, 2007**

 

**(InThousands)**

**(unaudited)**

 
| ** **                               | ** ** | **May 31,  2008** | ** ** | **August 31,  2007** | ** ** |
|------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Assets                                   |       |                   |       |                      |       |
| Current assets                           |       |                   |       |                      |       |
| Cash and cash equivalents                |       | $                      | 706        |                      | $          | — |   |
| Accounts receivable                      |       | 16,029                 |       | 18,502                    |       |
| Inventories                              |       | 20,421                 |       | 18,352                    |       |
| Restricted cash                          |       | 1,449                  |       | 783                       |       |
| Other current assets                     |       | 1,252                  |       | 1,047                     |       |
| Total current assets                     |       | 39,857                 |       | 38,684                    |       |
|                                     |       |                   |       |                      |       |
| Property, plant and equipment            |       |                   |       |                      |       |
| Land and land improvements               |       | 11,649                 |       | 11,649                    |       |
| Buildings                                |       | 40,222                 |       | 40,684                    |       |
| Leasehold improvements                   |       | 922                    |       | 896                       |       |
| Equipment                                |       | 72,275                 |       | 71,906                    |       |
| Construction in progress                 |       | 44                     |       | 173                       |       |
|                                     |       | 125,112                |       | 125,308                   |       |
| Accumulated depreciation                 |       | (65,120                | )          | (57,103                   | )          |
| Total property, plant and equipment, net |       | 59,992                 |       | 68,205                    |       |
|                                     |       |                   |       |                      |       |
| Other assets                             |       |                   |       |                      |       |
| Investments                              |       | 1,720                  |       | 1,670                     |       |
| Intangible assets, net                   |       | 14,336                 |       | 18,826                    |       |
| Goodwill                                 |       | 22,858                 |       | 22,858                    |       |
| Note receivable                          |       | 297                    |       | 135                       |       |
| Total other assets                       |       | 39,211                 |       | 43,489                    |       |
|                                     |       |                   |       |                      |       |
| Total assets                             |       | $                      | 139,060    |                      | $          | 150,378 |   |

 

 See accompanying notes to consolidated condensed financialstatements

 

1

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| ** **                                         | ** ** | **May 31,  2008** | ** ** | **August 31,  2007** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Liabilities  and Members’ Equity              |       |                   |       |                      |       |
| Current liabilities                                |       |                   |       |                      |       |
| Revolving line of credit                           |       | $                      | 13,508     |                      | $          | 11,884 |   |
| Accounts payable                                   |       | 7,867                  |       | 14,221                    |       |
| Accrued interest                                   |       | 788                    |       | 2,988                     |       |
| Accrued compensation                               |       | 2,606                  |       | 1,824                     |       |
| Other current liabilities                          |       | 3,254                  |       | 2,595                     |       |
| Current maturities of long-term debt               |       | 9,522                  |       | 9,522                     |       |
| Total current liabilities                          |       | 37,545                 |       | 43,034                    |       |
|                                               |       |                   |       |                      |       |
| Long-term debt, less current maturities            |       | 66,210                 |       | 84,727                    |       |
|                                               |       |                   |       |                      |       |
| Members’ equity                               |       |                   |       |                      |       |
| Members’ equity                               |       | 34,129                 |       | 21,612                    |       |
| Non-controlling interest in consolidated  entities |       | 1,176                  |       | 1,005                     |       |
| Total members’ equity                         |       | 35,305                 |       | 22,617                    |       |
| Total liabilities and members’ equity         |       | $                      | 139,060    |                      | $          | 150,378 |   |

 

Seeaccompanying notes to consolidated condensed financial statements.

 

2

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**GOLDEN OVALEGGS, LLC**

 

**ConsolidatedCondensed Statements of Operations**

 

**For thePeriods Ended May 31, 2008 and 2007**

 

**(InThousands, Except Per Unit Data)**

**(Unaudited)**

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **May 31,**                 | ** ** | **May 31,**                | ** ** | **May 31,** | ** ** | **May 31,** | ** ** |
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                                           |       | $                                | 56,649     |                            | $          | 53,035 |   | $ | 165,187 |   | $ | 147,098 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Cost of goods sold                                                  |       | 47,427                           |       | 47,025                          |       | 148,494 |   | 134,001 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                        |       | 9,222                            |       | 6,010                           |       | 16,693 |   | 13,097 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Operating expenses                                                  |       | 4,785                            |       | 4,750                           |       | 18,104 |   | 15,822 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Income (loss) from operations                                       |       | 4,437                            |       | 1,260                           |       | (1,411 | ) | (2,725 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Other income (expense)                                              |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                    |       | (1,901                           | )          | (2,513                          | )          | (7,110 | ) | (7,477 | ) |
| Non-controlling interest in income (loss)  of consolidated entities |       | 1                                |       | (22                             | )          | (103 | ) | (84 | ) |
| Other income                                                        |       | 214                              |       | 255                             |       | 908 |   | 853 |   |
| Forgiveness of debt                                                 |       | —                           |       | —                          |       | 17,000 |   | — |   |
| Total other income (expense)                                        |       | (1,686                           | )          | (2,280                          | )          | 10,695 |   | (6,708 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                   |       | $                                | 2,751      |                            | $          | (1,020 | ) | $ | 9,284 |   | $ | (9,433 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Weighted average Members’ units outstanding                    |       | 5,431                            |       | 5,420                           |       | 5,431 |   | 5,420 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) per Members’ unit, basic                     |       | $                                | 0.51       |                            | $          | (0.19 | ) | $ | 1.71 |   | $ | (1.74 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net income per Members’ unit, diluted                          |       | 0.44                             |       | (0.19                           | )          | 1.61 |   | $ | (1.74 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Distributions per unit                                              |       | $                                | —     |                            | $          | — |   | $ | — |   | $ | — |   |

 

See accompanying notes toconsolidated condensed financial statements.

 

3

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**GOLDEN OVALEGGS, LLC**

 

**ConsolidatedCondensed Statements of Cash Flows****For the Periods Ended May 31, 2008 and2007**

**(In Thousands)(Unaudited)**

 
| ** **                                                                                                          | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                          | ** ** | **May 31,**                | ** ** | **May 31,** | ** ** |
| ** **                                                                                                          | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Cash flows from operating activities                                                                                |       |                            |       |   |   |
| Net income (loss)                                                                                                   |       | $                               | 9,284      |   | $ | (9,433 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities                            |       |                            |       |   |   |
| Depreciation                                                                                                        |       | 8,013                           |       | 8,704 |   |
| Amortization                                                                                                        |       | 1,327                           |       | 1,424 |   |
| Gain on sale of property, plant &  equipment                                                               |       | 2                               |       | 2 |   |
| Asset impairment                                                                                                    |       | 3,531                           |       | — |   |
| Gain on debt forgiveness                                                                                            |       | (17,000                         | )          | — |   |
| Stock vesting unit compensation for vesting  awards                                                                 |       | (9                              | )          | — |   |
| Changes in operating assets and liabilities                                                                         |       |                            |       |   |   |
| Accounts receivable                                                                                                 |       | 2,473                           |       | (3,625 | ) |
| Inventories                                                                                                         |       | (2,069                          | )          | (2,184 | ) |
| Other current assets                                                                                                |       | (205                            | )          | 565 |   |
| Accounts payable                                                                                                    |       | (6,354                          | )          | 3,711 |   |
| Accruals and other current liabilities                                                                              |       | 2,483                           |       | 1,738 |   |
| Minority interest                                                                                                   |       | 171                             |       | 108 |   |
| Net cash provided by operating activities                                                                           |       | 1,647                           |       | 1,010 |   |
|                                                                                                                |       |                            |       |   |   |
| Cash flows from investing activities                                                                                |       |                            |       |   |   |
| Purchases of property, plant and equipment                                                                          |       | (178                            | )          | (958 | ) |
| Proceeds from sale of property, plant and  equipment                                                                |       | 8                               |       | 5 |   |
| Advance of note receivable                                                                                          |       | (162                            | )          | (59 | ) |
| Purchases of investment in other  cooperatives                                                                      |       | (50                             | )          | (102 | ) |
| Retirement of investment in other  cooperatives                                                                     |       | —                          |       | 9 |   |
| Net cash used by investing activities                                                                               |       | (382                            | )          | (1,105 | ) |
|                                                                                                                |       |                            |       |   |   |
| Cash flows from financing activities                                                                                |       |                            |       |   |   |
| Net increase (decrease) in revolving line  of credit                                                                |       | 1,624                           |       | 7,281 |   |
| Payments of long-term debt                                                                                          |       | (1,517                          | )          | (6,359 | ) |
| Decrease (increase) in restricted cash                                                                              |       | (666                            | )          | (697 | ) |
| Net cash provided (used) by financing  activities                                                                   |       | (559                            | )          | 225 |   |
|                                                                                                                |       |                            |       |   |   |
| Net increase in cash and cash equivalents                                                                           |       | 706                             |       | 130 |   |
|                                                                                                                |       |                            |       |   |   |
| Cash and cash equivalents - beginning of period                                                                     |       | —                          |       | 222 |   |
|                                                                                                                |       |                            |       |   |   |
| Cash and cash equivalents - end of period                                                                           |       | $                               | 706        |   | $ | 352 |   |
|                                                                                                                |       |                            |       |   |   |   |   |
| Supplementary  disclosures of cash flow information                                                                 |       |                            |       |   |   |
| Cash  paid during the period for:                                                                                   |       |                            |       |   |   |
| Interest,  net of capitalized interest of $161 and $129 during 2008 and 2007,  respectively                         |       | $                               | 6,455      |   | $ | 7,682 |   |
| Supplementary  disclosures of non-cash transactions                                                                 |       |                            |       |   |   |
| Debt  forgiveness                                                                                                   |       | $                               | 17,000     |   | $ | — |   |
| Warrant  issued for 880,492 Class A Convertible Preferred Units. Warrant issued  for accrued interest payable. |       | 3,242                           |       | — |   |
| Members  units issued to directors and officers (Note 5)                                                            |       | 22                              |       | 177 |   |

 

Seeaccompanying notes to consolidated condensed financial statements.

 

4

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** **

**GOLDEN OVALEGGS, LLC**

 

**Notes toConsolidated Condensed Financial Statements**

 

**May 31,2008 and August 31, 2007**

 

**(InThousands Except Per Unit Data)**

 

**(unaudited)**

 

1.            Organization   Golden Oval Eggs, LLC (the “Company”)was organized as a Delaware limited liability company to effect thereorganization of Midwest Investors of Renville, Inc. (the “Cooperative”)effective August 31, 2004.  The Cooperative was incorporated as acooperative under the laws of the state of Minnesota in March 1994. The Companyoperates as the Cooperative’s successor and its operations are a continuance ofthe operations of the Cooperative. The accompanying consolidated condensedfinancial statements for all periods presented are those of the Company.

 

2.            Basis of Presentation   The accompanying consolidatedcondensed balance sheet as of August 31, 2007, which has been derived fromaudited consolidated financial statements, and the unaudited interimconsolidated condensed financial statements at May 31, 2008 and for thethree-month and nine month periods ended May 31, 2008 and 2007 of theCompany have been prepared in accordance with generally accepted accountingprinciples for interim financial reporting and Securities and ExchangeCommission rules and regulations.  Certain information normallyincluded in financial statements and related footnotes prepared in accordancewith generally accepted accounting principles has been condensed or omittedpursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated condensed financial statements reflect all adjustments(consisting only of normal recurring adjustments) which are, in the opinion ofmanagement, necessary for a fair presentation of the financial position andoperating results for the interim periods presented. These consolidatedcondensed financial statements should be read in conjunction with Management’sDiscussion and Analysis of Financial Condition and the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended August 31, 2007. The results of operations for theperiods ended May 31, 2008 are not necessarily indicative of results to beexpected for any other interim period or for the entire year.

 

3.            Inventories  Pullet and layer hen inventories arestated at the cost of production, which includes the costs of the chicks, feed,overhead and labor. Layer hen flock costs are capitalized to the point at whichthe pullet goes into production and are amortized over the productive lives ofthe flocks, generally 18 to 24 months. Feed, supplies and liquid egg and eggproducts inventories are stated at the lower of cost (first-in, first-out) ormarket. Inventories consisted of the following:

 
| ** **               | ** ** | **May 31,  2008** | ** ** | **August 31,  2007** | ** ** |
|--------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **               | ** ** | ** **             | ** ** | ** **                | ** ** |
| Hens and pullets         |       | $                      | 13,182     |                      | $          | 10,766 |   |
| Eggs and egg products    |       | 4,227                  |       | 4,046                     |       |
| Feed, supplies and other |       | 3,012                  |       | 3,540                     |       |
| Total inventories        |       | $                      | 20,421     |                      | $          | 18,352 |   |

 

4.Financing Agreements   Golden Oval Eggs, LLC, Midwest Investorsof Iowa and GOECA, LP are parties to a Credit Agreement that was originallyentered into on September 13, 2004, and subsequently amended.  Withthe last amendment effective March 11, 2008, the maturity date of $2,500of a short term revolving note and all other revolving notes was extended from March 1,2008 to July 31, 2008 and the commencement date of certain financialcovenants was also extended to July 31, 2008.  We have historicallyfinanced our working capital needs through the Credit Agreement and, to theextent of our cash flow, from operations.  The Credit Agreement, asamended, requires the Company, among other things, to

 

5

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generatemonthly EBITDA of at least $1,000 for the term of the Credit Agreement.Principal payments for Tranche A and Tranche B loans continue to be deferreduntil July 31, 2008.  To the extent that monthly EBITDA exceeds$1,000, up to $200 per month will be transferred into an interest bearingescrow account to provide funds for the upgrade of the Thompson, Iowawastewater facility. As has been reported in previous filings and disclosed inthe Risk Factors discussion of the Company’s report on Form 10-K for thefiscal year ended August 31, 2007, the Company is continuing to seekalternative sources of capital to strengthen its balance sheet.  TheCompany was in compliance with all covenants under the Credit Agreement foreach month in the quarter ended May 31, 2008 and as of May 31, 2008.

 

OnFebruary 15, 2008, the Company and Land O’ Lakes executed an agreementwhereby the purchase price of the Egg Products Division of MoArk was reduced by$17,000 and an equal amount of the subordinated note used to finance theacquisition was reduced.  Additionally, the Company issued a Warrant forthe purchase of up to 880,492 newly authorized convertible preferred units inexchange for the forgiveness of accrued interest on the subordinated note. The697,350 Class B units held by Land O’ Lakes were converted to Class Aunits per the agreement.

 

Thesubordinated note to Land O’Lakes of $17,000 was treated as debt forgivenessand was classified as income in the other income (expense) section of theStatement of Operations.  In exchange for the accrued interest of $3,242on the $17,000 note that was forgiven, the Company issued Land O’Lakes aWarrant valued at $3,242.

 

5.Stock Based Compensation   The Company has bonus and compensationplans in place for management.  Under these agreements management mayreceive up to 50% of certain performance bonuses in the form of Class AUnits.  The Company accrues for management bonuses during the year basedupon the estimated amount that will be earned by year end.  Upon approvalby the Board of Managers, the bonuses are paid to management.  The numberof units to be issued is based upon the higher of the book or market value ofthe Class A Units at the time the bonus is awarded.  For the threemonths ended May 31, 2007 and May 31, 2008, no Class A Unitswere issued to management.

 

TheClass A Units are nontransferable and subject to forfeiture ratably overthe following three years.  The employee must be employed on theanniversary date of issuance to avoid forfeiture.  In the event thattermination of the employee occurs, the Company will record any forfeiture ofunits as a reduction to compensation expense in the period in which theforfeiture occurs.  There were no forfeitures for the three months ended May 31,2008 nor for the quarter ended May 31, 2007.

 

Themembers of the Board of Managers are granted 2,000 Class A Units for eachyear served on the board following each year of service.  The Companyrecognizes compensation expense for these awards based upon the fair value onthe last three recorded trade prices prior to the issuance of the members’units. The unit value was calculated at $1.87 per unit and 11,666 units wereissued on May 29, 2008 for a total expense of $21,815.

 

6

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6.Earnings per Unit   Basic net income (loss) per unit wascalculated by dividing net income (loss) by the weighted average number of Class Acommon units outstanding during the period. Diluted net income (loss) perunit was calculated by dividing net income (loss) by the weighted averagenumber of Class A common units outstanding during the period plus thedilutive effects of the Warrant. Convertible Class A Preferred unitsrepresenting 340,628 units were included in the calculation of diluted netincome per members’ unit.

 
| ** **                                 | ** ** | **May 31,  2008** | ** ** | **May 31,  2007** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Numerator                                  |       |                   |       |                   |       |
| Net income (loss)                          |       | $                      | 9,284      |                   | $          | (9,433 | ) |
| Denominator                                |       |                   |       |                   |       |
| Weighted average units outstanding         |       | 5,431                  |       | 5,420                  |       |
|                                       |       |                   |       |                   |       |
| Diluted weighted average units outstanding |       | 5,772                  |       | 5,420                  |       |
|                                       |       |                   |       |                   |       |
| Basic profit (loss) per unit               |       | $                      | 1.71       |                   | $          | (1.74 | ) |
|                                       |       |                   |       |                   |       |
| Diluted profit (loss) per unit             |       | $                      | 1.61       |                   | $          | (1.74 | ) |

 

7.            Use of Estimates   The preparation of consolidatedcondensed financial statements 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 the dateof the consolidated condensed financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differmaterially from those estimates.

 

8.Capital Resources and Liquidity   The Company is a party to anAmended and Restated Credit Agreement, as amended, with Metropolitan LifeInsurance Company as lender and CoBank, ACB as lender and administrative agent(the “Credit Agreement”).  The Company has had limited access to capitalunder the Credit Agreement and the lenders under the Credit Agreement havemodified certain financial covenants in order to allow compliance with thesecovenants by the Company.  As part of its efforts to obtain a refinancingof the Credit Agreement, the Company has completed the following steps:

 

OnMarch 11, 2008, the Company entered into an extension and amendmentagreement with the lenders under the Credit Agreement that extends thetermination date of a $2,500 short-term revolving note issued under ourRestated and Amended Credit Agreement from February 29, 2008 to July 31,2008.  The commencement of the effective date of financial covenants underthe Credit Agreement has also been delayed from March 1, 2008 to July 31,2008.

 

9.Legal Proceedings   The Attorney General of Iowa has filedsuit in relation to the Thompson, Iowa wastewater facility.  Please referto Item 1. Legal Proceedings under Part II. of this filing for a moredetailed description of this and other legal matters

 

7

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**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

**Forward-Looking Statements**

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains, in addition to historical information, forward-lookingstatements that are based on current expectations, beliefs, intentions orfuture strategies of the management of Golden Oval Eggs, LLC (“we”, “us”, “our”,or the “Company”). When used in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations or elsewhere in this QuarterlyReport on Form 10-Q, the words “believe,” “expect,” “anticipate,” “will,” “estimate”and similar verbs or expressions are intended to identify such forward-lookingstatements.  If our management’s assumptions prove incorrect or shouldunanticipated circumstances arise, our actual results could differ materiallyfrom those anticipated. These differences could be caused by a number offactors or combination of factors including, but not limited to, those factorsdescribed in Part I, Item 1A. “Risk Factors” section of the Company’sAnnual Report on Form 10-K for the year ended August 31, 2007, aswell as those identified in other filings with the Securities and ExchangeCommission.  Readers are strongly urged to consider such factors whenevaluating any forward-looking statement. The Company undertakes no obligationto update any forward-looking statements to reflect future events ordevelopments.

 

Thefollowing is a discussion and analysis of our financial condition and resultsof operations as of and for the three month and nine months periods ended May 31,2008 and 2007. This section should be read in conjunction with the condensedfinancial statements and related notes in Item 1 of this Quarterly Report andour Annual Report on Form 10-K for the year ended August 31, 2007.

 

**Summary**

 

GoldenOval Eggs, LLC is a Delaware limited liability company primarily engaged in thebusiness of producing, processing, marketing and distributing egg products. TheCompany operates seven production and/or distribution facilities in the UnitedStates.  It maintains its headquarters in Renville, Minnesota and a salesoffice in Plymouth, Minnesota.

 

TheCompany produces a wide range of egg products, from unpasteurized liquid eggs,further processed egg products for other food manufacturers, and finished goodsfor sale to retailers and food service customers.  Products are sold toother food manufacturers, restaurants, supermarkets and foodservicedistributors.

 

TheCompany produces approximately two-thirds of its annual needs from eggsproduced at layer barns at the Company’s Renville, Minnesota and Thompson, Iowafacilities.  The remainder is satisfied from purchases of eggs or liquidproduct under a variety of pricing arrangements with third parties.

 

TheCompany’s operating income or loss is materially affected by wholesale liquidegg prices, and pricing of further processed products which can fluctuatewidely and are outside of the Company’s control. Liquid eggs are a commodityproduct and prices fluctuate in response to supply/demand factors. The Companyalso sells a portion of its products under contracts at non-market prices.Depending upon market circumstances, the prices generated by the Company’snon-market volume tend to be less or more than what the prevailing open marketprices would generate.

 

TheCompany’s cost of production is materially affected by feed, purchased egg andliquid egg costs, which averaged approximately 50% of the Company’s totalproduction costs in the third quarter of fiscal 2008.

 

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**Results of Operations**

 

Resultsof Operations — Third Quarter Fiscal Year 2008 Compared to Third Quarter FiscalYear 2007

 

 *Net Sales* Net sales for the third quarterof fiscal 2008 were $56.6 million, an increase of $3.6 million, or 6.8% over thethird quarter in the prior fiscal year. Pounds sold in the third quarter were66.5 million, a decrease of 27.5 million, or 41.4%, less than the same periodyear ago.  The decrease is due to a significant reduction of theMillersburg, Ohio facility egg supply (15.9 million pounds) which resulted inan impairment charge in the fiscal year ended August 31, 2007. Additional causes of the decline include a decrease in pounds available to sellfrom production at the Renville and Thompson facilities as a result ofreductions in flock sizes associated with an increase in the amount of spaceallotted to each bird in compliance with animal care guidelines promulgated byindustry groups (2.0 million pounds), and a decrease in pounds available tosell as a result of us exiting certain low margin businesses (9.6 millionpounds).  The average selling price per pound sold increased from $0.541to $0.779, an increase of $0.238, or 44.0%, as a result of higher sellingprices executed in an environment of sharply increased liquid egg markets.

 

*Cost of goods sold.* Cost of goods sold for the third quarter of fiscal 2008 was $47.4million, an increase of $0.4 million, or 0.9%, as compared to the third quarterof fiscal 2007.  The increase is primarily a result of increases in thecost of feed, purchased eggs and purchased liquid eggs exceeding the reductionin purchased pounds needed for production.

 

*Operating expenses.* Operating expenses for the third quarter of fiscal 2008 were $4.8million, an increase of $.04 million, or .7%, as compared to the third quarterof fiscal 2007. The slight increase was due to increased discretionaryspending.

 

*Total other income(expense).* Total other income(expense) for the thirdquarter of fiscal 2008 was $(1.7) million, an improvement of $.6 million fromthe prior year period. Interest expense decreased $0.6 million primarily as aresult of the elimination of interest on the $17.0 million subordinated debtthat was forgiven in the second quarter of fiscal 2008.

 

*Income Taxes.  * As a limited liability company, the Companyexpects to be treated as a partnership for federal income tax purposes.Therefore, the Company will pay no federal income tax and instead, the Company’smembers will include their pro-rata share of the Company’s net income or lossas an item of income for the purposes of their own federal income tax returns.

 

*Net Income(Loss)*.  Operations for the third quarter ended May 31, 2008resulted in a profit of $2.8 million, or a profit of $.51 per basic members’unit and $.44 per diluted members’ unit, as compared to a loss of $(1.0)million, or $(0.19) per basic and diluted members’ unit for the quarterended May 31, 2007.

 

TheCompany’s financial performance in the current quarter may not be indicative offuture quarters due to seasonal factors and volatility in both selling pricesand cost of materials purchased, as well as industry factors in an intenselycompetitive industry.

 

Resultsof Operations — Nine Months ended May 31, 2008 Compared to Nine Monthsended May 31, 2007

 

*Net Sales.** *Net sales for the first nine months of fiscal 2007 were $165.2 million,an increase of $18.1 million, or 12.3% over the first nine months of the priorfiscal year. The average selling price per pound increased from $0.478 to$0.729, an increase of $0.251, or 52.5% over the prior year same period. Totalpounds shipped to customers for the first nine months of fiscal 2008 were 214.8million, a decrease of 77.8 million pounds or 26.6%. The increase in averageselling price was enough to offset the sales pounds decrease caused by thereduction in supply from the Millersburg facility (47.7 million pounds),compliance with animal care guidelines promulgated by industry groups (6million pounds), and a decrease in pounds 

 

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availableto sell as a result of us exiting certain low margin business lines and theseasonality of the business (24.1 million pounds).

 

*Cost of Goods Sold.*  Cost of goods soldfor the first three quarters of fiscal 2008 was $148.5 million, an increase of$14.5 million or 10.8% of the figure for same period of fiscal 2007 and lessthan the percentage increase in sales dollars, resulting in an increase of $3.6million in gross profit. Significant unfavorable cost pressures wereexperienced in the period.  Feed prices have risen substantially, drivenby higher corn and soybean meal costs, resulting in $7.6 million of additionalfeed expense at the Renville and Thompson facilities.  The cost ofpurchased liquid and eggs increased by $11.0 million, or 21.9%, driven by thesame pricing environment reflected in the increase in selling prices.  Improvements in operations resulted inreductions in direct and indirect operating costs of $4.1 million.

 

*Operating Expenses.***Operating expenses for the first threequarters of fiscal 2008 were $18.1 million, an increase of $2.3 million, or14.4%, from the same period of fiscal 2007. The increase is primarily due toimpairment of the Land O’ Lakes trademark of $3.2 million recorded in thesecond quarter of the current fiscal year with additional impairment expenseand reserves relating to the termination of the Land O’ Lakes license andwithdrawal from certain unprofitable market segments of $.5 million.   Other operating expenses, primarilymarketing, were reduced by $1.4 million.

 

*Total Other Income (Expense).***Total other income increased from $(6.7)million to $10.7 million, an increase of $17.4 million for the period. The increase is due almost exclusively to the forgiveness of the $17.0subordinated note.  Interest expensedecreased $0.4 million, primarily reflecting the elimination of interest on theforgiven note for the fiscal third quarter.

 

*Income Taxes.* As a limited liabilitycompany, the Company expects to be treated as a partnership for federal incometax purposes.  Therefore, the Company will pay no federal income tax andinstead, the Company’s members will include their pro-rata share of the Company’snet income as an item of income for the purposes of their own federal incometax returns.

 

*Net Income* (loss).  Net income for the nine months ended May 31,2008 resulted in a profit of $9.3 million, or $1.71 per weighted average unitsand diluted members’ unit of $1.61, as compared to a loss of $(9.4) million, or$(1.74)  per members’ unit weightedaverage and diluted unit for the same period a year ago.

 

**Liquidity and Capital Resources**

 

TheCompany’s working capital at May 31, 2008 was $2.3 million compared to$(4.3) million at August 31, 2007.   The Company’s current ratio was1.06 at May 31, 2008 compared to 0.90 at August 31, 2007. On March 11,2008, the Company entered into an Extension and Amendment Agreement with itslenders that extended the termination date of all revolving loans from March 1,2008 to July 31, 2008.  Additionally, the principal payments for theTranche A and Tranche B term loans were deferred for the months of March,April, May, June and July of 2008 until the maturity date of theapplicable loan.  The Company is current on all interest and principalpayments as required for the quarter ending May 31, 2008 and complied withits minimum monthly EBITDA requirement for all three months of the thirdquarter of fiscal 2008. The amended and restated credit agreement provides fora $95.5 line of credit, consisting of a $15.0 million revolving note thatterminates on March 1, 2008, a short term revolving note of $2.5 millionthat also terminates on March 1, 2008 and $78.0 million in term notes withprincipal repayment schedules resulting in retirement beginning in 2014. Certain financial benchmarks and ratios contained in the credit agreements havehad their effective dates extended until July 31, 2008.  In theinterim period, the Company must produce a minimum EBITDA of $1.0 million permonth.  To the extent that EBITDA exceeds $1.0 million in any month, up to$0.2 million is to be placed in an interest bearing escrow account to be usedfor the Thompson wastewater project.  The Company has agreed to explorestrategic alternatives on terms, conditions and time frames mutually agreedbetween the Company and its lenders.

 

TheCompany may require significant additional capital resources in order toproceed with potential future expansions or to otherwise respond to competitivepressures in the industry.   In addition, the Company may seekadditional capital from an offering of our equity securities or by incurringadditional 

 

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indebtedness,or both.  No assurance can be given that additional working capital willbe obtained in an amount that is sufficient for the Company’s needs, in atimely manner or on terms and conditions acceptable to the Companyor its members.  The Company’s financing needs are based uponmanagement estimates as to future revenue and expense. Our business plan andour financing needs are also subject to change based upon, among other factors,market and industry conditions, our ability to increase cash flowfrom operations and our ability to control costs and expenses.  Ourefforts to raise additional funds from the sale of equity may be hamperedby the fact that our securities are illiquid and are subjectto restrictions on transfer. Our efforts to raise additionalfunds from incurring additional indebtedness may be hampered by the factthat the Company has significant outstanding indebtedness and all ofthe Company’s assets are pledged to its lenders to secure existingdebt.

 

TheCompany’s long-term debt at May 31, 2008, including current maturities,was $75.7 million compared to $94.2 million at August 31, 2007.As of May 31, 2008, $13.5 million has been drawn against the $17.5revolving line of credit including the $2.5 million short term revolving note,compared to $11.9 million as of August 31, 2007. Substantially all tradereceivables and inventories collateralize the Company’s line of credit andproperty, plant and equipment collateralize the Company’s long-term debt underits credit agreement.

 

Withrespect the improvements that will be required to the Thompson, Iowa wastewatersystem (see Part II, Item 1 “Legal Proceedings”), the Company is currentlysecuring bids to establish the cost of these improvements.

 

OnFebruary 15, 2008, the Company and Land O’ Lakes executed an agreementwhereby the purchase price of the Egg Products Division of MoArk was reduced by$17.0 million and an equal amount of the subordinated note used to finance theacquisition was reduced.  Additionally, the Company issued a Warrant forthe purchase of up to 880,492 newly authorized convertible preferred units inexchange for the forgiveness of accrued interest on the subordinated note of$3.2 million. The 697,350 Class B units held by Land O’ Lakes wereconverted to Class A units per the agreement.

 

Netcash flow from operations was $1.6 million for the first three quarters offiscal 2008 compared to $1.0 million in the first three quarters of fiscal2007. Principal payments on long-term debt were $1.5 million and additions tofixed assets were $0.2 million.  There were no distributions to unitholders during the first two quarters of fiscal 2008.  An additional $0.6million was added to restricted cash to provide for the principal and interestpayments on the 1999 and 2001 bonds due in July 2008.

 

**Critical Accounting Policies and Estimates**

 

Theabove discussion and analysis of our results of operations and financialcondition are based upon our consolidated condensed financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of these financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. We base our estimates and judgments onhistorical experience and on various other assumptions that we believe arereasonable under the circumstances. However, future events may change and eventhe best estimates and judgments may require adjustment. For a completedescription of the Company’s significant accounting policies, please see Note 1to the consolidated financial statements in the Company’s Annual Report on Form 10-Kfor the year ended August 31, 2007. There have been no changes to criticalaccounting policies identified in our Annual Report on Form 10-K for theyear ended August 31, 2007.

 

TangibleAssets

 

Wecontinually evaluate the carrying value of our tangible assets for events orchanges in circumstances that indicate that the carrying value may not berecoverable. As part of this reevaluation, if impairment 

 

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indicatorsare present, we estimate the future cash flows expected to result from the useof this asset and its eventual disposal. During the third quarter of fiscalyear 2008, no triggering events were identified that would have resulted in thecarrying value of any asset to be deemed unrecoverable. As a result, noimpairment tested was initiated.

 

 Recorded impairment of tangible assets for thenine months ending May 31, 2008 is $.5 million.

 

IntangibleAssets

 

Asa result of the MoArk Acquisition that was completed June 30, 2006, weacquired intangible assets consisting of licenses to use certain brand namesand trademarks, licenses of certain product technology and certain patents andpatent applications.  We have recorded the excess of consideration paidover assets acquired.  Financial Accounting Standard No. 141 “BusinessCombinations” dictates that values be assigned to certain intangibleassets.  We have accordingly made estimates of the values to be carried onour books for intangible assets acquired, including registered and unregisteredtrade names and trademarks, licensing agreements, and patents and patentapplications.  The values of these assets are determined by forecastingfuture cash flows and assessing the risk of achieving the forecast.  Thoseintangible assets with finite lives will be amortized over a period matchingthe life of the underlying intellectual property, for example, the term of thelicense agreement or the remaining life of the patent. With thetermination of the retail test market and the cancelling of Land O’Lakeslicensing agreements (Form 8K filed 2/20/2008), impairment was recognizedfor the intangible Land O’Lakes license agreement of $3.2 million. This wasrecorded in the operations section of the Statement of Operations. For thethird quarter ending May 31, 2008, no triggering events were identifiedthat would have resulted in the carrying value of any intangible asset to bedeemed unrecoverable. As a result, no impairment testing was initiated.

 

Thoseintangibles with indefinite lives have been recorded as goodwill, and will notbe amortized over a fixed time period.  Rather, they will be tested forimpairment when impairment indicators are deemed present.  As of February 29,2008 we tested for impairment under the provisions of SFAS No. 142. Theresults of the impairment test indicated that the fair value of the singleentity reporting unit exceeded the carrying value of the reporting unit. As aresult, no provision for impairment was required for the first two quarters offiscal 2008. No impairment testing was done in the third quarter ending May 31,2008 due to no triggering events being present.

 

**Impact of Recently Issued Accounting Pronouncements**

 

Pleaserefer to Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations”, in our Annual Report form 10-K for the year ended August 31,2007 for a discussion of the impact of recently issued accountingpronouncements

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedFASB Statement No. 157, Fair Value Measurements (“FAS 157”).  FAS 157establishes a single authoritative definition of fair value, sets out aframework for measuring fair value, and expands on required disclosures aboutfair value measurement.  The effective date of FAS 157 has been deferredone year which means the company effective date will be September 1,2009.  The provisions of FAS 157 are not expected to have a materialimpact on our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “Establishing the FairValue Option for Financial Assets and Liabilities,” to permit all entities tochoose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15,2007 with early adoption permitted for an entity that has also elected to applythe provisions of SFAS No. 157, “Fair Value Measurements.”  An entityis prohibited from retrospectively applying SFAS No. 159, unless itchooses early adoption.  Management is currently evaluating the impact ofSFAS No. 159 on its consolidated financial statements.

 

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InDecember 2007, the Financial Accounting Standards Board (“FASB”) issuedFASB Statement No. 160, Noncontrolling Interests in Consolidated FinancialStatements (“FAS 160”). FAS 160 establishes accounting and reporting standardsfor the noncontrolling interest in a subsidiary and for the deconsolidation ofa subsidiary. The effective date of FAS 160 is for fiscal years beginning on orafter December 15, 2008. Golden Oval is reviewing FAS 160  todetermine what impact it may have to the consolidated financialstatements.

 

InMarch 2008, the Financial Accounting Standards Board (“FASB”) issued FASBStatement No. 161, Disclosures about Derivative Instruments and Hedging Activities,an Amendment to FASB Statement No. 133. FAS 161 establishes the disclosurerequirements for derivative instruments and hedging activities and expands thedisclosure requirements of statement 133. The effective date for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. Golden Oval is reviewing FASB 161 but anticipates very little impact tothe Company.

 

TheFASB issued two new statements in May 2008, FASB Statement No. 162,The Hierarchy of Generally Accepted Accounting Principles and FASB Statements No. 163,Accounting for Financial Guaranty Insurance Contract, an interpretation of FASB60. FASB 162 identifies sources of accounting principles and establishes ahierarchy of accounting principles to be used in preparation of financialstatements in conformity with GAAP for non governmental entities. FASB 162 iseffective 60 days following SEC approval of Public Company Accounting OversightBoard (PCAOB) amendments to AU section 411. The Company does not anticipate anyimpact with the enactment of FASB 162. FASB 163 clarifies the recognition andmeasurement of claim liabilities in an insured financial obligation byinsurance enterprises. FASB 163 is not applicable to the Company.

 

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

 

Therehave been no material changes in the market risk reported in the Company’sAnnual Report on Form 10-K for the fiscal year ended August 31, 2007.

 

**Item 4. Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

TheCompany’s Chief Executive Officer, Dana Persson, and Chief Financial Officer,Thomas A. Powell, have reviewed the Company’s disclosure controls andprocedures as of the end of the period covered by this report. Based upon thisreview, they have concluded that there is a continuing deficiency in theCompany’s disclosure controls and procedures as described in Part II, Item9A “Controls and Procedures” of the Company’s Annual Report on Form 10-Kfor the year ended August 31, 2007.  During the first quarter, theCompany secured additional personnel resources to assist with the consolidationand financial reporting process, which resulted in significant progress towardaddressing the deficiency in our disclosure controls and procedures.  TheCompany continues, however, to evaluate other possible remedial actions toimprove our disclosure controls and procedures.

 

**Changes in Internal Control over Financial Reporting**

 

Therehave been no changes in internal control over financial reporting that occurredduring the fiscal quarter covered by this report that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

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**PART II.    OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

 

OurThompson, Iowa facility has an industrial wastewater treatment facilitydesigned to treat wastewater from egg breaking.  The Thompson facilityalso has an associated National Pollution Discharge and Elimination System (“NPDES”)permit from the Iowa Department of Natural Resources (“IDNR”) that governs thequality of the wastewater influent to and effluent from the treatmentfacility.

 

OnMarch 29, 2007, the Iowa Attorney General’s office filed suit against usrequesting civil penalties for and injunctive relief against alleged NPDESpermit violations for exceeding discharge limits for biochemical oxygen demand,total suspended solids, and ammonia nitrogen.

 

Wehave been negotiating the terms of a Consent Decree with the Iowa AttorneyGeneral’s office.  We expect the terms of the Consent Decree to enjoin usfrom further violations, include an obligation by us to make improvements tothe Thompson wastewater treatment system to prevent further permit violationson an agreed-upon timeline, and make payment of a $200,000 civil penalty.

 

InFebruary 2008, we received from IDNR a permit for construction ofpermanent improvements to the Thompson wastewater treatment system, and we arein the process of preparing for construction of the improvements, which weanticipate will be completedno later than April 30, 2009.  Inaddition, operational changes have been made at the wastewater facility thathave achieved significant improvement in compliance with the NPDES permitrequirements.

 

Atthis time, the cost associated with the permanent improvement to the wastewatertreatment facility is estimated to be approximately $2.5 million. The Companyis securing bids to determine final costs for the project.

 

OnMarch 27, 2008, we received a subpoena from the U.S. Department ofJustice, through the U.S. Attorney for the Eastern District of Pennsylvania,requesting documents for the period of January 1, 2002 through March 27,2008 relating primarily to the pricing, marketing, and sales of our eggproducts. We intend to fully cooperate with the Department of Justice request.We cannot predict what, if any, impact this inquiry and any results from thisinquiry could have on our current or future operations or results of operations.

 

**Item 1A. Risk Factors**

 

Notapplicable.

 

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

 

None.

 

**Item 3. Defaults Upon SeniorSecurities**

 

None.

 

**Item 4. Submission of Matters to aVote of Security Holders**

 

None.

 

**Item 5. Other Information**

 

None.

 

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**Item 6. Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                  |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                             |
| 31.1             |       | Certification  of the Chief Executive Officer pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.             |
|             |       |                                                                                                                                             |
| 31.2             |       | Certification  of the Chief Financial Officer pursuant to pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|             |       |                                                                                                                                             |
| 32               |       | Certification  of the Chief Executive Officer and Chief Financial Officer pursuant to 18  U.S.C. Section 1350                               |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                           | GOLDEN  OVAL EGGS, LLC                 |
|--------------------------------|----------------------------------------|
|                           |                                   |
|                           |                                   |
|                           | By:                                    | /s/  Dana Persson |
|                           | President  and Chief Executive Officer |
|                           | (Principal  Executive Officer)         |
|                           |                                   |
|                           | By:                                    | /s/  Thomas A. Powell |
|                           | Vice  President and Chief Financial    |
|                           | Officer                                |
|                           | (Principal  Financial and Accounting   |
|                           | Officer)                               |
|                           |                                   |
|                           |                                   |
| Date:   July 1, 2008 |                                   |

 

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