| CAL MAINE FOODS INC Item 1A Risk Factors We are subject to numerous risks and uncertainties, including the following: Market prices of wholesale shell eggs are volatile and changes in these prices and costs can adversely impact our results of operations |
| Our operating results are significantly affected by wholesale shell egg market prices, which fluctuate widely and are outside of our control |
| Small increases in production or small decreases in demand can have a large adverse effect on shell egg prices |
| Shell egg prices have experienced an upward trend since 2002 and rose to historical highs in late 2003 and early 2004 |
| In the early fall of 2004, the demand trend related to the popular diets faded dramatically |
| During this time of increased demand, the egg industry had geared up to produce more eggs to meet the demand |
| During the past nine to twelve months, the industry has experienced an oversupply of eggs resulting in lower egg prices |
| In March 2005, the egg industry took action to reduce the size of the laying flocks |
| Current US Department of Agriculture statistics indicate a reduced flock size that is now more in line with current demand |
| There can be no assurance that shell egg prices will remain at or near current levels and that the supply of shell eggs will remain level in the future |
| 11 _________________________________________________________________ Retail sales of shell eggs are greatest during the fall and winter months and lowest during the summer months |
| Prices for shell eggs fluctuate in response to seasonal factors and a natural increase in shell egg production during the spring and early summer |
| Shell egg prices tend to increase with the start of the school year and are highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter |
| Consequently, we generally experience lower sales and net income in our first and fourth fiscal quarters ending in August and May, respectively |
| As a result of these seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons |
| Changes in consumer demand for shell eggs can negatively impact our business |
| As discussed above, demand for shell eggs has increased in recent years as a result of a number of factors |
| We believe that increased fast food restaurant consumption, favorable reports from the medical community regarding the health benefits of shell eggs, reduced shell egg cholesterol levels, high protein diet trends and industry advertising campaigns have all contributed to the increase in shell egg demand |
| However, there can be no assurance that the demand for shell eggs will not decline in the future |
| Adverse publicity relating to health concerns and changes in the perception of the nutritional value of shell eggs, as well as movement away from high protein diets, could adversely affect demand for shell eggs, which would have a material adverse effect on our future results of operations and financial condition |
| Feed costs are volatile and changes in these costs can adversely impact our results of operations |
| Feed costs represent the largest element of our shell egg production cost, ranging from 52prca to 57prca of total annual cost in each of the last five fiscal years |
| Although feed ingredients are available from a number of sources, we have little, if any, control over the prices of the ingredients that we purchase, which are affected by various demand and supply factors and have experienced significant fluctuations in the past |
| Prices for corn and soybeans, essential feed ingredients, are favorable this year compared to with last year |
| However, there are wide swings in corn and soybean prices because of dry conditions in the Midwest and widely varying forecast projections for the 2006 fall harvest season in September and October |
| Increases in feed costs which are not accompanied by increases in the selling price of shell eggs will have a material adverse effect on the results of our operations |
| Due to the cyclical nature of our business, our financial results from year to year may fluctuate |
| The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss |
| In the past, during periods of high profitability, shell egg producers have tended to increase the number of layers in production with a resulting increase in the supply of shell eggs, which generally has caused a drop in shell egg prices until supply and demand return to balance |
| As a result, our financial results from year to year may vary significantly |
| We purchase approximately 25prca of the shell eggs we sell from outside producers and our ability to obtain such eggs at prices and in quantities acceptable to us could fluctuate |
| We produce approximately 75prca of the total number of shell eggs sold by us and purchase the remaining amount from outside producers |
| There can be no assurance that we will be able to continue to acquire shell eggs from outside producers in quantities and prices that are satisfactory and our inability to do so may have a material adverse affect on our business and profitability |
| Our acquisition growth strategy subjects us to various risks |
| We plan to pursue a growth strategy which includes acquisitions of other companies engaged in the production and sale of shell eggs |
| Acquisitions can require capital resources and divert managementapstas attention from our existing business |
| Acquisitions also entail an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct prior to our acquisition of a business that were not known to us at the time of acquisition |
| We may also incur significantly greater expenditures in integrating an acquired business than we had anticipated at the time of its purchase |
| We cannot assure you that we: 12 _________________________________________________________________ - will identify suitable acquisition candidates; - can consummate acquisitions on acceptable terms; or - can successfully integrate any acquired business into our operations or successfully manage the operations of any acquired business |
| No assurance can be given that companies acquired by us in the future will contribute positively to our results of operations or financial condition |
| In addition, federal anti-trust laws require regulatory approval of acquisitions that exceed certain threshold levels of significance |
| The consideration we pay in connection with any acquisition also affects our financial results |
| If we pay cash, we could be required to use a portion of our available cash to consummate the acquisition |
| To the extent we issue shares of our Common Stock, existing stockholders may be diluted |
| In addition, acquisitions may result in the incurrence of debt |
| Our largest customers have historically accounted for a significant portion of our net sales volume |
| Accordingly, our business may be adversely affected by the loss of, or reduced purchases by, one or more of our large customers |
| For the fiscal years ended June 3, 2006, and May 28, 2005, one customer, HE Butt Grocery Co, accounted for 9dtta9prca of our net sales and 12dtta1prca of our net sales, respectively, and two affiliated customers, Wal-Mart Stores and Sam’s Clubs, on a combined basis, accounted for 36dtta6prca and 30dtta8prca of our net sales, respectively |
| Our top 10 customers accounted for 66dtta8prca and 64dtta7prca of net sales during those periods |
| Although we have established long-term relationships with many of our customers, we do not have contractual relationships with any of our major customers for the sale of our shell eggs |
| If, for any reason, one or more of our larger customers were to purchase significantly less of our shell eggs in the future or were to terminate their purchases from us, and we are not able to sell our shell eggs to new customers at comparable levels, it would have a material adverse effect on our business, financial condition and results of operations |
| Failure to comply with applicable governmental regulations, including environmental regulations, could harm our operating results, financial condition and reputation |
| We are subject to federal and state regulations relating to grading, quality control, labeling, sanitary control and waste disposal |
| As a fully-integrated shell egg producer, our shell egg facilities are subject to United States Department of Agriculture, the USDA, and Food and Drug Administration, the FDA, regulation and various state and local health and agricultural agencies |
| Our shell egg processing facilities are subject to periodic USDA inspections |
| Our feed production facilities are subject to FDA regulation and inspections |
| Our operations and facilities are also subject to various federal, state and local environmental, health and safety laws and regulations governing, among other things, the generation, storage, handling, use, transportation, disposal and remediation of hazardous materials |
| Under these laws and regulations, we are also required to obtain permits from governmental authorities, including, but not limited to wastewater discharge permits |
| If we fail to comply with any applicable law or regulation or permit, or fail to obtain any necessary permits, we could be subject to significant fines and penalties or other sanctions, our reputation could be harmed and our operating results and financial condition could be materially and adversely affected |
| In addition, because these laws and regulations are becoming increasingly more stringent, there can be no assurances that we will not be required to incur significant costs for compliance with such laws and regulations in the future |
| 13 _________________________________________________________________ Our business is highly competitive |
| The production and sale of fresh shell eggs, which have accounted for virtually all of our net sales in recent years, is intensely competitive |
| We compete with a large number of competitors that may prove to be more successful than we are in marketing and selling shell eggs |
| We cannot assure you that we will be able to compete successfully with any or all of these companies |
| In addition, increased competition could result in price reductions, greater cyclicality, reduced margins and loss of market share, which would negatively affect our business, results of operations and financial condition |
| Pressure from animal rights groups regarding the treatment of animals may subject us to additional costs to conform our practices to comply with developing standards or subject us to marketing costs to defend challenges to our current practices and protect our image with our customers |
| We and many of our customers are facing pressure from animal rights groups, such as People for the Ethical Treatment of Animals, or PETA, to require that any companies that supply food products operate their business in a manner that treats animals in conformity with certain standards developed by these animal rights groups |
| The treatment standards require, among other things, that we provide increased cage space for our hens and modify beak trimming and forced molting practices (the act of putting chickens into a regeneration cycle) |
| Changing our procedures and infrastructure to conform to these guidelines has resulted and will continue to result in additional costs to our internal production of shell eggs, including cost increases from housing and feeding the increased flock population resulting from the modification of molting practices, and the cost for us to purchase shell eggs from our outside suppliers |
| While some of these increased costs have been passed on to our customers, we cannot assure you that we can continue to pass on these costs, or any additional costs we will face, in the future |
| We are dependent on our management team, and the loss of any key member of this team may adversely affect the implementation of our business plan in a timely manner |
| Our success depends largely upon the continued services of our senior management team, including Fred R Adams, Jr, our Chairman and Chief Executive Officer |
| The loss or interruption of Mr |
| Adams &apos services or those of one or more of our other executive officers could adversely affect our ability to manage our operations effectively and/or pursue our growth strategy |
| We have not entered into any employment or non-compete agreements with any of our executive officers nor do we carry any key-man life insurance on any such persons |
| Agricultural risks could harm our business |
| Our shell egg production activities are subject to a variety of agricultural risks |
| Unusual or extreme weather conditions, disease and pests can materially and adversely affect the quality and quantity of shell eggs we produce and distribute |
| If a substantial portion of our production facilities are affected by any of these factors in any given quarter or year, our business, financial condition and results of operations could be materially and adversely affected |
| We are controlled by a principal stockholder |
| Fred R Adams, Jr, our Chairman of the Board and Chief Executive Officer, and his spouse own 37dtta4prca of the outstanding shares of our Common Stock, which has one vote per share, and Mr |
| Adams owns 90dtta2prca and his son-in-law, Adolphus B Baker, our president, chief operating officer and one of our directors, owns 9dtta8prca of the outstanding shares of Class A Common Stock, which has ten votes per share |
| Baker and his spouse also own 1dtta7prca of the outstanding shares of our Common Stock |
| Adams and his spouse possess 65dtta5prca, and Messrs |
| Adams and Baker and their spouses possess 71dtta6prca of the total voting power represented by the outstanding shares of our Common Stock and Class A Common Stock |
| These stockholdings include shares of our Common Stock accumulated under our employee stock ownership plan for the respective accounts of Messrs |
| Adams and Baker |
| The Adams family intends to retain ownership of a sufficient amount of Common Stock and Class A Common Stock to assure its continued ownership of over 50prca of the combined voting power of our outstanding shares of capital stock |
| Such ownership will make an unsolicited acquisition of us more difficult and discourage certain types of transactions involving a change of control of our company, including transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current market prices |
| In addition, certain provisions of our Certificate of Incorporation require that our Class A Common Stock be issued only to Fred R Adams, Jr |
| and members of his immediate family, and that if shares of the Class A Common Stock, by operation of law or otherwise, are deemed not to be owned by Mr |
| Adams or a member of his immediate family, the voting power of any such shares shall be automatically reduced to one vote per share |
| The Adams family controlling ownership of our capital stock may adversely affect the market price of our Common Stock |
| Adams &apos beneficial ownership of our outstanding capital stock, we are a "e controlled company, "e as defined in Rule 4350(c) (5) of the listing standards of the NASDAQ National Market on which our shares of Common Stock are quoted |
| Accordingly, we are exempt from certain requirements of NASDAQapstas corporate governance listing standards, including the requirement to maintain a majority of independent directors on our board of directors and the requirements regarding the determination of compensation of executive officers and the nomination of directors by independent directors |