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                      SECURITIES AND EXCHANGE COMMISSION

                            Washington,WASHINGTON, D.C. 20549


                             ---------------------------------------------------------
                                   FORM 10-K
                             ---------------------------------------------------------
(Mark One)

   [ X ][X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE
       SECURITIES EXCHANGE ACT OF 1934
       [FEE REQUIRED]
                  For the fiscal year ended May 3, 19982, 1999

                       or

   [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE
       SECURITIES EXCHANGE ACT OF 1934
       [NO FEE REQUIRED]
                  For the transition period from   to

                        Commission file number:COMMISSION FILE NUMBER: 0-2258


                            SMITHFIELD FOODS, INC.
            (Exact name of registrant as specified in its charter)(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


            Virginia                            52-0845861
  (State or other jurisdiction of                (I.R.S. Employer
of incorporation or organization)              Identification No.)

      200 Commerce Street
     Smithfield, Virginia                           23430

(Address of principal executive offices)         (Zip Code)
(757) 365-3000 (Registrant's telephone number, including area code) --------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None (Title of Class) Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.50 par value per share Rights to Purchase Series A Junior Participating Preferred Stock, $1.00 par value per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ][X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of Registrant's Common Stock held by non-affiliates as of July 10, 19989, 1999 was approximately $844,100,548.$1,139,970,261. This figure was calculated by multiplying (i) the $29-5/16$33.50 last sales price of Registrant's Common Stock as reported on The Nasdaq National Market on July 10, 19989, 1999 by (ii) the number of shares of Registrant's Common Stock not held by any officer or director of the Registrant or any person known to the Registrant to own more than five percent of the outstanding Common Stock of the Registrant. Such calculation does not constitute an admission or determination that any such officer, director or holder of more than five percent of the outstanding shares of Common Stock of the Registrant is in fact an affiliate of the Registrant. At July 10, 1998, 37,537,3629, 1999, 46,109,667 shares of the Registrant's Common stockStock were outstanding.outstanding (including for this purpose 1,174,219 Exchangeable Shares issued by the Registrant's subsidiary Smithfield Canada Limited). DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the Registrant's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998.September 2, 1999. - --------------------------------------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------------------------------------- TABLE OF CONTENTS ITEM NUMBER PAGE PART I 1. Business............................................................ 3 General........................................................... 3 Business Strategy................................................. 4 Revenue by Source..................................................5 Fresh Pork Products .............................................. 5 Processed Meat Products........................................... 5 Raw Materials .................................................... 6 Customers and Marketing .......................................... 6 Trademarks ........................................................7 Distribution...................................................... 7 Competition ...................................................... 7 Employees .........................................................8 Regulation ....................................................... 8 2. Properties ..........................................................10 3. Legal Proceedings .................................................. 11 4. Submission of Matters to a Vote of Security Holders ................................... 11 4A. Executive Officers of the Company ...................................12 PART II 5. Market for Company's Common Equity and Related Stockholder Matters ..................................14 6. Selected Financial Data .............................................15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................16 8. Financial Statements and Supplementary Data .........................20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........................20 PART III 10. Directors and Executive Officers of the Company .....................21 11. Executive Compensation ..............................................21 12. Security Ownership of Certain Beneficial Owners and Management ...................................................21 13. Certain Relationships and Related Transactions ......................21 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................................22 SIGNATURES ..............................................................S-1 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ..........F-1
ITEM NUMBER PAGE PART I 1. Business ......................................................... 1 General ....................................................... 1 Business Strategy ............................................. 2 Historical Expansion and Acquisitions ......................... 2 Meat Processing Group ......................................... 3 Hog Production Group .......................................... 5 Employees ..................................................... 6 Regulation .................................................... 6 2. Properties ....................................................... 7 3. Legal Proceedings ................................................ 8 4. Submission of Matters to a Vote of Security Holders ............................................. 8 4A. Executive Officers of the Company ............................... 9 PART II 5. Market for Company's Common Equity and Related Stockholder Matters ................................. 10 6. Selected Financial Data .......................................... 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 12 8. Financial Statements and Supplementary Data ...................... 17 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................... 17 PART III 10. Directors and Executive Officers of the Company ................. 18 11. Executive Compensation .......................................... 18 12. Security Ownership of Certain Beneficial Owners and Management ................................................. 18 13. Certain Relationships and Related Transactions .................. 18 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................................ 19 SIGNATURES .......................................................... 22 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ...... F-1
- 2i - PART I ITEM 1. BUSINESS GeneralGENERAL Smithfield Foods, Inc. ("Smithfield Foods" oris the "Company"), asworld's largest pork processor and hog producer. As a holding company, Smithfield Foods conducts its pork processing operationsbusiness through five principal subsidiaries: Gwaltneytwo groups, the Meat Processing Group and the Hog Production Group, each comprised of Smithfield, Ltd. ("Gwaltney") and The Smithfield Packing Company, Incorporated ("Smithfield Packing"), both based in Smithfield, Virginia; John Morrell & Co. ("John Morrell"), based in Cincinnati, Ohio; Patrick Cudahy Incorporated ("Patrick Cudahy"), based in Cudahy, Wisconsin; and Lykes Meat Group, Inc. ("Lykes"), based in Plant City, Florida. The Company also conducts hog production operations through its 86% owned subsidiary, Brown'sa number of Carolina, Inc. ("Brown's") and through a 50% interest in Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production arrangement between the Company and Carroll's Foods of Virginia, Inc., an affiliate of Carroll's Foods, Inc., one of the largest hog producers in the United States. Both Brown's and Smithfield-Carroll's produce hogs for the Company's pork processing plants in Bladen County, North Carolina and Smithfield, Virginia. The Company is also a participant in the Circle Four joint hog production arrangement ("Circle Four") with certain of the principal hog suppliers for the Company's Eastern operations, which conducts hog production operations in Milford, Utah. The hogs produced by Circle Four are sold to an unrelated party.subsidiaries. In this report, references todiscussion, the terms "Smithfield Foods" or the "Company" are to Smithfield Foods, Inc. together with all of itsand "the Company" include subsidiaries, unless the context otherwise indicates.indicated. MEAT PROCESSING GROUP The Company believes it is the largest combined pork slaughtererMeat Processing Group produces domestically and further processor of pork in the United States. Smithfield Foods producesinternationally a wide variety of fresh pork and processed meat products which itand markets domesticallythem nationwide and internationally to over 25 foreign markets, including Canada, Poland, France, Japan Russia and Mexico. Since 1975, when current management assumed controlThe Meat Processing Group consists of the Company, Smithfield Foods has expanded its production capacitysix domestic and markets through a combination of strong internal growththree international pork processing subsidiaries. All these subsidiaries are wholly-owned except as indicated below. Collectively, these subsidiaries currently operate 48 slaughtering and selective acquisitions of regional and multi-regional companies with well-recognized brand identities. The Company's brands include Smithfield Premium, Smithfield Lean Generation Pork, Gwaltney, John Morrell, Patrick Cudahy and Lykes.further processing plants.
MEAT PROCESSING GROUP - ---------------------------------------------------------------------------------------------------------- SUBSIDIARY HEADQUARTERS FISCAL 1999 SALES - ------------------------------------------------------ ---------------------------- ------------------ John Morrell & Co. ................................... Cincinnati, Ohio $1.4 billion The Smithfield Packing Company, Incorporated ......... Smithfield, Virginia $1.3 billion Schneider Corporation (63%-owned) .................... Kitchener, Ontario, Canada $550 million* Gwaltney of Smithfield, Ltd. ......................... Smithfield, Virginia $489 million Animex S.A. (80%-owned) .............................. Warsaw, Poland $350 million* Lykes Meat Group, Inc. ............................... Plant City, Florida $159 million Patrick Cudahy Incorporated .......................... Cudahy, Wisconsin $144 million Societe Bretonne de Salaisons ........................ Lampaul Guimiliau, France $100 million* North Side Foods Corp. ............................... Arnold, Pennsylvania $60 million*
- --------- * Estimated annualized sales HOG PRODUCTION GROUP To complement its hog slaughtering and further processing operations, the Company has vertically integrated into hog production through its Hog Production Group, which currently provides the Meat Processing Group with approximately 25% of its live hog requirements. The Hog Production Group operates numerous production facilities through two subsidiaries headquartered in Warsaw, North Carolina as indicated below.
HOG PRODUCTION GROUP - ---------------------------------------------------------------------------------------------------- ANNUALIZED MARKET SUBSIDIARY PRINCIPAL LOCATIONS NUMBER OF SOWS HOG PRODUCTION - ------------------------- -------------------------------- ---------------- ------------------ Carroll's Foods, Inc. (wholly-owned) ......... North Carolina and Virginia 180,000 2.9 million Brown's of Carolina, Inc. (86%-owned) ............ North Carolina, Virginia, Utah, Colorado and South Carolina 170,000* 2.7 million
- --------- * Numbers include 100% of Brown's sows and Smithfield-Carroll's. Thesemarket hogs produced, as well as the sows and market hogs produced by Circle Four Farms, LLC, a wholly-owned subsidiary of Smithfield Foods. Circle Four is managed by Brown's. The market hogs produced by Circle Four's sows are sold to an unrelated third party. The discussion below of the Company's business will first summarize the Company's strategic initiatives and its historical expansion through a combination of internal growth and acquisitions. We will next discuss the Meat Processing Group's United States processing operations and international processing operations, followed by the Hog Production Group. - 1 - BUSINESS STRATEGY The Company's business is based around four strategic initiatives: o vertical integration into hog production through Company-owned hog production operations collectively accounted for 10.8%and long-term partnerships and alliances with other large and efficient hog producers; o use of thegenetics which produce hogs the Company slaughtered in fiscal 1998. In addition, the Company obtains a substantial part of its hogs under market-indexed, multi-year agreements with several of the nation's largest suppliers of high quality hogs, strategically located in proximity to the Company's hog slaughtering and further processing operations in North Carolina and Virginia. These suppliers accounted for 42.9% of the hogs the Company slaughtered in fiscal 1998. The Company's fresh pork and processed meats are available nationwide. In a number of markets, the Company's brandsthat are among the leaders in selected product categories. In recent years, as consumers have become more health conscious,leanest commercially available to enable the Company has broadened its product line to include leaner freshmarket highly differentiated pork products as well as fat-free, lower fatproducts; o continued growth through strategic acquisitions; and lower salt processed meats. Management believes that leaner pork products combined with the pork industry's efforts to heighten public awareness of pork as an attractive protein source have led to increased consumer demand for pork products. In order to capture the growing market for lower fat products, the Company has developed, and is marketingo a heightened emphasis on a national basis, a line of extremely lean, premium fresh pork products under the Smithfield Lean Generation Pork brand to selected retail chains and institutional foodservice customers. Business Strategyexpansion into international markets. HISTORICAL EXPANSION AND ACQUISITIONS Since 1975, when current management assumed control, Smithfield Foods has expanded both its production capacity and its markets through a combination of strong internal growth and the acquisition of regional and multi-regional -3- companies with well-recognized brand identities. Beginning in fiscal 1999, the Company also expanded its operations internationally through acquisitions in France, Canada and Poland. UNITED STATES MEAT PROCESSING ACQUISITIONS In fiscal 1982, the Company acquired Gwaltney, then Smithfield Packing's principal Mid-Atlantic competitor. This acquisition doubled the Company's sales and slaughter capacity and added several popular lines of branded products along with a highly efficient hot dog and lunchluncheon meats production facility. The proximity of Gwaltney to Smithfield Packing allowed for synergies and cost savings in manufacturing, purchasing, engineering and transportation. This combination set the stage for a series of acquisitions of smaller regional processors with widely-recognized brands. In fiscal 1985, the Company acquiredwidely recognized brands, including Patrick Cudahy, which added a prominent line of dry sausage products to the Company's existing line of processed meats. In fiscal 1986, the Company acquired Esskay, Inc., a firm with a broad line of deli products having substantial brand loyalty in the Baltimore-Washington, D.C. metropolitan area. In fiscal 1991, the Company acquired the Mash's brand name and a ham processing plant in Landover, Maryland. In fiscal 1993, the Company acquired the Valleydale brand name and a bacon processing plant in Salem, Virginia.Valleydale. In December 1995, the Company acquired John Morrell, a major Midwestern pork processor with primary markets in the Midwest, Northeast and Western United States. This acquisition changed the Company's character from a large multi-regional pork processor to one with national distribution. It also doubled the Company's sales and slaughter capacity, added several popular lines of branded processed meat products along with four efficient processing facilities and more than doubled the Company's international sales. The Company believes that John Morrell's strength in smoked sausage, hot dogs, lunchluncheon meats, bacon and smoked hams complements the strong smoked meats, hot dog and bacon business of the Company's Eastern operations. The acquisition of John Morrell also presented substantial opportunities for cost savings in the areas of processing, marketing, purchasing and distribution. In November 1996, the Company acquired the assets and businesses of Lykes. Lykes is a pork processor with primary markets in the South and Southeast. Lykes produces branded processed meats, including bacon, hot dogs, and breakfast and dinner sausages under the Lykes and Sunnyland brands. In October 1998, the Company acquired all of the assets and business of North Side, a major domestic supplier of precooked sausage to McDonald's Corporation. INTERNATIONAL MEAT PROCESSING ACQUISITIONS In September 1998, the Company acquired all of the capital stock of Societe Bretonne de Salaisons, one of the largest private label manufacturer of ham, pork shoulder and bacon products in France. In November 1998, the Company acquired a 63% stake in Schneider Corporation of Canada. The Company's businessSchneiders brand is based around four strategic initiatives: (i) vertical integration intothe number one Canadian brand in hot dogs, luncheon meats and premium hams. Between September 1998 and June 1999, the Company acquired an 80% stake in Animex, the largest meat and poultry processing company in Poland. Animex produces a very broad line of fresh and processed meats and poultry. HOG PRODUCTION ACQUISITIONS In January 1999, Brown's acquired a 12,000 sow operation in Colorado to supply hogs to John Morrell. In May 1999, the Company acquired Carroll's Foods and related companies and assets, including approximately 180,000 sows. Carroll's Foods was a longtime hog production through Company-owned hog production operations and long-term partnerships and alliances with large and efficient hog producers; (ii) usepartner of genetics which produce hogs that arethe Company. Through a 49%-owned joint venture, Carroll's Foods is also among the leanest commercially available to enable the Company to market highly differentiated pork products; (iii) continued growth through strategic acquisitions; and (iv) a heightened emphasis on expansion into international markets. As a complement to the Company's hog processing operations, the Company has vertically integrated into highly efficient hog production through Brown's and Smithfield-Carroll's. In addition, the Company is supplementing the hogs it obtains from these hog production operations with market-indexed, multi-year agreements with several of the nation's largest suppliersturkey processors. - 2 - MEAT PROCESSING GROUP This discussion of high quality hogs, strategically located in proximity to the Company's hog slaughteringMeat Processing Group will first provide an overview of the Group's proportionate revenues from fresh pork, processed meats and furtherother items. Next, the discussion will describe the Meat Processing Group's United States processing operations in North Carolina and Virginia, including Carroll's Foods, Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc. In May 1991, Smithfield-Carroll's acquired from National Pig Development Company ("NPD"), a British firm, the exclusive United States franchise rights for genetic lines of specialized breeding stock. Smithfield-Carroll's has sub-licensed these franchise rights to certain of the Company's strategic partners. The hogs produced by these genetic lines are among the leanest hogs commercially available, and enable the Company to market highly differentiated pork products. Management believes that the leanness and increased meat yields of these hogs will, over time, improve the Company's profitability with respect to both fresh pork and processed meat. In fiscal 1998, the Company processed 2.5 million NPD hogs and expects to increase that number substantially in future years. Revenues by Source The Company's sales are in one industry segment, meat processing.then its international processing operations. REVENUES BY SOURCE The following table shows for the fiscal periods indicated the percentages of the Company'sMeat Processing Group revenues derived from fresh pork, processed meats, and other products. -4- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Fresh Pork................. 56% 59% 59% 51% 48% Processed Meats............ 40% 37% 37% 45% 49% Other Products............. 4% 4% 4% 4% 3% --- --- ---- ---- ---- 100% 100% 100% 100% 100% === === === === === The increase in percentage of revenues derived from fresh pork since fiscal 1994 resulted principally from an increase in the number of hogs slaughtered at its Bladen County, North Carolina plant. The meat industry is generally characterized by narrow margins; however, profit margins on processed meats are greater than profit margins on fresh pork and on other products.
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Fresh Pork ............... 49% 56% 59% 59% 51% Processed Meats .......... 46% 40% 37% 37% 45% Other Products ........... 5% 4% 4% 4% 4% -- -- -- -- -- 100% 100% 100% 100% 100% === === === === ===
The increase in percentage of revenues derived from fresh pork between fiscal years 1995 and 1996 resulted principally from an increase in the number of hogs slaughtered at the Bladen County, North Carolina plant; conversely, the increase for processed meats since fiscal 1997 reflects the impact of lower fresh pork prices combined with the Company's acquisitions of processing operations. UNITED STATES PROCESSING OPERATIONS FRESH PORK PRODUCTS. The Company is one of the largest fresh pork processorsprocessor in the United States.world, producing in fiscal 1999 approximately 2.6 billion pounds. The Company slaughtersMeat Processing Group's domestic operations slaughter hogs at five of its plants (three in the Southeast and two in the Midwest),with a current aggregate slaughter capacity of 78,300 hogs per day. The Company owns a fourth plant in the Southeast not currently in operation, which has the capacity to slaughter an additional 6,500 hogs per day. A substantial portion of the Company'sMeat Processing Group's fresh pork is sold to retail customers as unprocessed, trimmed cuts such as loins (including roasts and chops), butts, picnics and ribs. The CompanyMeat Processing Group also sells hams, bellies and trimmings to other further processors. The CompanyMeat Processing Group is putting greater emphasis on the sale of value-added, higher margin fresh pork products, such as boneless loins, hams, butts and picnics. In addition, the CompanyCompany's Hog Production Group provides its own processing operationsthe Meat Processing Group with raw material of much higher quality and freshness than that generally available through open market purchases. The Company is marketing on a national basis an extensive product line of NPD fresh pork cuts (including boneless loins, shoulder cuts, chops, ribs and processed and cubed pork) under the Smithfield Lean Generation Pork brand to selected retail chains and institutional foodservice customers. Smithfield Packing has also developed a case-ready pork program designed to supply supermarket chains with pre-packaged, weighed, labeled and pricedpre-priced fresh pork ready for immediate sale to the consumer. Management believes that these initiatives, over time, will result in greater brand identification and higher margins for the Company's fresh pork products. Processed Meat ProductsFor more on NPD pork, see "Business -- Hog Production Group" below. PROCESSED MEAT PRODUCTS. The Company manufactures a wide variety of processed meats, including smoked and boiled hams, bacon, sausage, hot dogs (pork, beef and chicken), deli and lunchluncheon meats and specialty products such as pepperoni and dry salami. In fiscal 1999, the Company produced 1.5 billion pounds of processed meat products. The Company markets its domestic processed meat products under labels that include among others, Smithfield, Smithfield Premium, Smithfield Lean Generation Pork, Gwaltney, Patrick Cudahy and John Morrell, as well as Dinner Bell, Ember Farms, Esskay, Jamestown,Great, Kretschmar, Luter's, Lykes, Peyton's, Tobin's First PrizePatrick's Pride, Rath and Valleydale. The Company also sells a substantial quantity of processed meats as private label products. The Company believes it is one of the largest producers of smoked hams and picnics in the United States. In response to growing consumer preference forrecent years, as consumers have become more nutritious and healthy meats,health conscious, the Company has for several years emphasized productionbroadened its product line to include leaner fresh pork products as well as fat-free, lower fat and lower salt processed meats. Management believes that leaner pork products combined with the industry's efforts to heighten public awareness of more closely-trimmed, leaner and lower-salt processed meats, suchpork as 40 percent-lower-fat bacon.an attractive protein source have led to increased consumer demand. The Company also markets a lower-fat line of value-priced lunchluncheon meats, smoked sausage and hot dogs, as well as fat-free hot dogs, and fat-free deli hams. - 5 - Raw Materialshams and 40-percent-lower-fat bacon. RAW MATERIALS. The Company'sMeat Processing Group's primary raw material is live hogs. Historically, hog prices have been subject to substantial fluctuations. In addition, hog prices tend to rise seasonally as hog supplies decrease during the hot summer months and tend to decline as supplies increase during the fall. This is due to lower farrowing performance during - 3 - the winter months and slower animal growth rates during the hot summer months. Hog supplies, and consequently prices, are also affected by factors such as corn and soybean meal prices, weather and interest rates. The Company producesMeat Processing Group purchases approximately 25% of its own hogs through Brown's and Smithfield-Carroll's andlive hog requirements from the Hog Production Group. In addition, the Company purchases hogs from several of the nation's largest hog producers, strategically located in proximity to the Company's hog slaughtering and further processing operations in North Carolina and Virginia, such as Carroll's Foods, Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc., as well as from other independent hog producers and dealers located in the East, Southeast and Midwest. The Company obtained 10.8% of the hogs it processed in fiscal 1998 from Brown's and Smithfield-Carroll's. The Company's raw material costs fall when hog production at Brown's and Smithfield-Carroll's is profitable and conversely rise when such production is unprofitable. The profitability of hog production is directly related to the market price of live hogs and the cost of corn. Hog producers such as Brown's and Smithfield-Carroll's generate higher profits when hog prices are high and corn prices are low, and lower profits (or losses) when hog prices are low and corn prices are high. Management believes that hog production at Brown's and Smithfield-Carroll's furthers the Company's strategic initiative of vertical integration and reduces the Company's exposure to fluctuations in profitability historically experienced by the pork processing industry.Virginia. The Company has also established multi-year agreements with Carroll's Foods, Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc. which provide the Company with a stable supply of high-quality hogs at market-indexed prices. These producers supplied 42.9%supply approximately 29% of the hogs currently processed by the Company in fiscal 1998.Company. The CompanyMeat Processing Group also purchases its hogs on a daily basis at its Southeastern and Midwestern slaughter plants;plants, at Company-owned buying stations in three Southeastern and five Midwestern states;states, from certain Canadian sources;sources, and through certain exclusive dealer-operated buying stations in the Midwest. The Company also purchases fresh pork from other meat processors to supplement its processing requirements, andrequirements. Additional purchases include raw beef, poultry and other meat products to add to itsthe Company's sausage, hot dogs and lunchluncheon meats. Such meat products and other materials and supplies, including seasonings, smoking and curing agents, sausage casings and packaging materials are readily available from numerous sources at competitive prices. Customers and MarketingCUSTOMERS AND MARKETING. The CompanyMeat Processing Group has significant market presence nationwide, and strong market positions in the Mid-Atlantic, Southeast, South and Midwest. The Company's fundamental marketing strategy is to sell large quantities of value-priced processed meat products as well as fresh pork to national and regional supermarket chains, wholesale distributors and the foodservice industry (fast food, restaurant and hotel chains, hospitals and other institutional customers) and export markets. Management believes that this marketing approach reaches the largest number of value-conscious consumers without requiring large advertising and promotional campaigns. The Company uses both in-house salespersons as well as independent commission brokers to sell its products. In fiscal 1998,1999, the Company sold its products to more than 3,500 customers, none of whom accounted for as much as 10% of the Company's revenues. The Company has no significant or seasonally variable backlog because most customers prefer to order products shortly before shipment, and therefore, do not enter into formal long-term contracts. Management believes that its registered trademarks have been important to the success of its branded processed meat products. In a number of markets, the Company's brands are among the leaders in selected product categories. The CompanyMeat Processing Group in recent years has placed major emphasis on growing and expanding its internationalexport sales. In fiscal 1998, international1999, export sales comprised approximately 6%5% of the Company's total dollar sales. The Company provides the Japanese marketmarkets with a line of unique, branded fresh pork products, as well as other chilled and frozen unbranded fresh pork products. In connection with export sales to Japan, the Company maintains a distributorship arrangement with Sumitomo Corporation of America. To serve other international markets, the Company may also enter into similar distribution and sales arrangements, as well as make international acquisitions or establish strategic joint ventures not only for product sales - 6 - but also for hog production and pork processing. The Company also had export sales to Russia, Mexico and to more than two dozen other foreign countries in fiscal 1998.1999. The Company expects continued growth in its internationalexport sales for the foreseeable future. InternationalExport sales are subject to factors beyond the Company's control, such as tariffs, exchange rate fluctuations and changes in governmental policies. The Company conducts all of its export sales in U.S. dollars and therefore bears no currency translation risk. The Company's processed meats business is somewhat seasonal in that, traditionally, the heavier periods of higher sales for hams are the holiday seasons such as Thanksgiving, Christmas and Easter, and the heavier periods of higher sales of smoked sausage, hot dogs and lunchluncheon meats are the summer months. The Company typically builds substantial inventories of hams in anticipation of its seasonal holiday business. The Company uses recognized price risk management and hedging techniques to enhance sales and to reduce the effect of adverse price changes on the Company's profitability. The Company's price risk management and hedging activities currently are utilized in the areas of forward sales, hog production margin management, procurement of raw materials (ham and bacon) for seasonal demand peaks, inventory hedging, hog contracting and truck fleet fuel purchases. TrademarksFor further information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Management." TRADEMARKS. The Company owns and uses numerous marks. These marks which are registered trademarks of the Company or are otherwise subject to protection under applicable intellectual property laws. The Company considers these marks and the accompanying goodwill and customer recognition valuable and material to its business. DistributionDISTRIBUTION. The CompanyMeat Processing Group uses a private fleet of leased tractors and trailers as well asand independent common carriers to distribute both fresh pork and processed meats to its customers, as well as to move raw material between plants for further processing. The Company coordinates deliveries and uses backhauling to reduce overall transportation costs. The - 4 - Company distributes its products directly from certain of its plants and from leased distribution centers located in Connecticut, Indiana, Missouri, Kansas, Texas and California. In addition, during fiscal 1998, theThe Company completed aalso operates distribution centercenters adjacent to its plantplants in Bladen County, North Carolina and Sioux Falls, South Dakota. CompetitionCOMPETITION. The protein industry generally, and the pork processing industry in particular, are highly competitive. The Company's products compete with a large number of other protein sources, including beef, chicken, turkey and seafood, but the Company's principal competition comes from other pork processors. Management believes that the principal competitive factors in the pork processing industry are price, quality, product distribution and brand loyalty. Some of the Company's competitors are larger, have correspondingly greater financial and other resources and enjoy wider recognition for their branded products. Some of these competitors are also more diverse than the Company. To the extent that their other operations generate profits, such companies may be able to subsidize their pork processing operations for a time. Employees AsINTERNATIONAL PROCESSING OPERATIONS In fiscal 1999, the Meat Processing Group made its first international acquisitions by acquiring operations in France, Poland and Canada. Such acquisitions reflect the Company's heightened emphasis on expansion into international markets. SCHNEIDER. In November 1998, Smithfield Foods acquired a 63% stake in Schneider Corporation of May 3,Canada. Schneider, based in Kitchener, Ontario, is one of Canada's largest producers of premium quality food products, with brands including Schneider's and Fleetwood. Schneider has annualized production volume of approximately 475 million pounds and manages its various subsidiaries and joint ventures through two operating groups, consumer foods and agribusiness. The consumer foods group, comprised of the processed meat and grocery operations, produces more than 1,000 products, including hams, sausage, wieners, bacon, luncheon meats, specialty meats and savory bakery products for sale through traditional grocery stores, delicatessens and foodservice establishments. Schneider has consumer foods operations in Kitchener, Ayr, St. Mary's, Guelph and Port Perry, Ontario; Winnipeg, Manitoba; Surrey, British Columbia; and St.-Anselme, Quebec. In addition, Schneider participates in the consumer foods sector through joint ventures with the Prince Group of Drummondville, Quebec; Cappola Food of Toronto, Ontario; National Meats of Toronto and Luigino's of Duluth, Minnesota. The agribusiness group, comprised of the fresh pork and live poultry operations, focuses on identifying and meeting the needs of retail, foodservice and export customers. Its plants in Winnipeg produce fresh pork products for sale in Canada, the United States, Japan and other international markets. Schneider markets its products in the poultry sector under the Schneiders brand and private labels to retail and foodservice customers. In March 1999, Schneider acquired a 32% stake in Mitchell's Gourmet Foods, a Western Canadian pork processor. ANIMEX. Between September 1998 and June 1999, Smithfield Foods acquired an 80% stake in Animex, the largest meat and poultry processing company in Poland. Animex produces a very broad line of fresh and processed meats and poultry products, with approximately 400 million pounds of annualized volume. Animex's brands include Krakus and Pek. Animex has 10 plants, six for red meat and four for poultry, located across Poland. The Company plans to expand Animex's network of distribution centers to include several additional areas in Poland. Approximately 26% of Animex's annualized sales are export sales. SOCIETE BRETONNE DE SALAISONS. In September 1998, the Company acquired Societe Bretonne de Salaisons, one of the largest private label manufacturer of ham, pork shoulder and bacon products in France. SBS has annualized production volume of approximately 19,50070 million pounds. HOG PRODUCTION GROUP GENERAL As a complement to the Company's hog processing operations, the Company has vertically integrated into highly efficient hog production through Brown's and Carroll's Foods, which operate numerous hog production facilities with approximately 350,000 sows producing about 5.6 million market hogs annually. The Company obtains approximately 25% of the live hogs it currently processes from Brown's and Carroll's Foods. Adjusting for sales by Circle Four to an unrelated party and for the minority interest in Brown's, the Company believes it is 28% vertically integrated. The Company's raw material costs decrease when hog production at Brown's and Carroll's Foods is profitable and conversely increase when production is unprofitable. The profitability of hog production is directly related to the market price of live hogs and the cost of corn and soybean meal. Hog producers such as Brown's and Carroll's Foods generate higher profits when hog prices are high and corn and soybean meal prices are low, and lower profits (or losses) when hog prices are low and corn and soybean - 5 - meal prices are high. Management believes that hog production at Brown's and Carroll's Foods furthers the Company's strategic initiative of vertical integration and reduces the Company's exposure to fluctuations in profitability historically experienced by the pork processing industry. In May 1991, the Company acquired from National Pig Development Company ("NPD"), a British firm, the exclusive United States franchise rights for genetic lines of specialized breeding stock. The Hog Production Group makes extensive use of these genetic lines, with approximately 308,000 NPD breeding sows. In addition, the Company has sub-licensed some of these rights to certain of the Company's strategic hog production partners. All NPD hogs produced under these sub-licenses are supplied to the Company. The Company believes the hogs produced by these genetic lines are the leanest hogs commercially available and enable the Company to market highly differentiated pork products. Management believes that the leanness and increased meat yields of these hogs will, over time, improve the Company's profitability with respect to both fresh pork and processed meat. In fiscal 1999, the Company processed 3.3 million NPD hogs. HOG PRODUCTION OPERATIONS The Hog Production Group is the world's largest hog producer. The Group uses advanced management techniques to produce premium quality hogs on a large scale as a low cost producer. The Company develops breeding stock, optimizes diets for its hogs at each stage of the growth process, processes feed for its hogs and designs and builds hog confinement facilities. The Company believes its economies of scale and production methods, together with its use of the advanced NPD genetics in approximately 88% of its breeding sows, make it a uniquely integrated low cost producer. The Hog Production Group uses a three-site production process consisting of sow, nursery and finishing sites. Production of market hogs begins in a facility known as a sow site. The Group's average commercial sow site is designed to house approximately 2,400 sows. The sow's purpose is to conceive, give birth to and nurse piglets which will be raised to become market hogs. Approximately 18 days after birth, the piglets are separated from the sows and transported to a separate nursery site. At each nursery site, the piglets are fed a closely monitored diet and grow to approximately 45 pounds, a process which takes approximately seven weeks. Once the hogs reach the desired weight, the Hog Production Group transports them to a finishing site where they are maintained and fed until reaching a market weight of approximately 250 pounds, a process which takes approximately 20 weeks. When the hogs reach market weight, they are transported to the Meat Processing Group's plants, principally those in Virginia and North Carolina (or, in the case of market hogs produced in Utah, sold to an unrelated third party). The Hog Production Group also utilizes independent farmers and their facilities to raise hogs produced from the Group's breeding stock. Under multi-year contracts, the farmer provides the initial facility investment, labor and front line management in exchange for a service fee. This contract farming is utilized primarily in the nursery and finishing stages where animal growth, feed and survival rates are most critical and are easily adapted to an incentive-based contract payment. Currently, approximately 60% of the Hog Production Group's market hogs come from contract farms. As of July 1999, the Hog Production Group operated farm sites in five states. Seventy percent of these sites are located in North Carolina, and approximately 12% in both Utah and Virginia. Colorado and South Carolina have 5% and 1% respectively. Except for some start-up activity in Utah and Colorado, the Hog Production Group's farm sites are mature operations with static production volume. NUTRIENT MANAGEMENT AND OTHER ENVIRONMENTAL ISSUES All of the Hog Production Group's hog production facilities have been designed to meet or exceed all applicable zoning and other government regulations. These requirements include the maintenance of certain separation distances between farms and nearby residences, schools, churches, public use areas and businesses, the maintenance of certain separation distances from rivers, streams and wells and adherence to certain required construction standards. The Hog Production Group follows a number of other protocols to minimize impact to the environment, including: ongoing employee training regarding environmental controls; walk-around inspections at all sites by trained personnel; a formal emergency response plan that is regularly updated; and a collaboration with manufacturers regarding testing and developing new equipment. - 6 - EMPLOYEES As of June 1, 1999, the Meat Processing Group had approximately 30,800 employees, approximately 10,80015,900 of whom are covered by collective bargaining agreements expiring between December 31, 1998May 19, 2000 and May 5, 2002.March 16, 2003, and the Hog Production Group had approximately 2,200 employees, none of whom are covered by collective bargaining agreements. The Company believes that its relationship with its employees is good. - 7 - Regulation Regulation Generally.REGULATION REGULATION GENERALLY Like other participants in the meat processing industry, the Company is subject to various laws and regulations administered by United States,federal, state and other government entities, including the Environmental Protection Agency ("EPA") and corresponding state agencies such as the Virginia State Water Control Board ("VSWCB"), the Virginia Department of Environmental Quality ("VDEQ"), the North Carolina Department of Environment and Natural Resources ("DENR"), the Iowa Department of Natural Resources and the South Dakota Department of Environment Natural Resources, as well as the United States Department of Agriculture, the United States Food and Drug Administration and the United States Occupational Safety and Health Administration. Management believes that Smithfield Foods presently is in compliance with all such laws and regulations in all material respects, and that continued compliance with these standards will not have a material adverse effect on the Company's financial position or results of operations. Furthermore, with respect to the litigation and investigationssuits discussed below, the Company believes that thetheir ultimate resolution of these suits will not have a material adverse effect on the Company's financial position or annual results of operations. Permit Violations At Smithfield Packing And Gwaltney Plants; Administrative Consent Orders; Connection To HRSD System. The National Pollutant Discharge Elimination System permit (the "discharge permit") for the Smithfield Packing and Gwaltney plants in Smithfield, Virginia, as modified by the VSWCB in 1990, imposed more stringent effluent limitations on phosphorus and two species of nitrogen (ammonia and Total Kjeldahl Nitrogen) than the wastewater treatment facilities at those plants were designed to meet. To achieve compliance with these new limitations, the Company agreed to discontinue wastewater discharges into the Pagan River and connect its wastewater treatment facilities to the regional sewage collection and treatment system operated by the Hampton Roads Sanitation District ("HRSD"), when available. This agreement was embodied in an administrative consent order issued by the VSWCB in 1991 (the "1991 Order"). The VSWCB issued a second consent order (the "1994 Order") which concerned compliance with other discharge permit terms pending connection to the HRSD system. The Company connected its Gwaltney and Smithfield Packing wastewater treatment facilities to the HRSD system in June 1996 and July 1997, respectively, which were the earliest dates that the HRSD could serve those individual plants. To prepare for making these connections, the Company made more than $2.7 million in capital expenditures to upgrade its existing wastewater treatment facilities. The Company must continue to operate these facilities to produce a wastewater suitable for treatment in the HRSD system and, in addition, pay the HRSD approximately $1.8 million per year for wastewater treatment. The Company will account for these wastewater treatment costs as current period charges in the years in which such costs are incurred. These wastewater treatment facilities no longer make any discharges that are subject to regulation under the discharge permit. However, before being connected to the HRSD system, these facilities exceeded applicable discharge permit and consent orders limitations as discussed below. Record-Keeping Violations. Under its discharge permit, the Company regularly tested wastewater to determine compliance with applicable effluent limitations. Federal and state laws require that records of such tests be maintained for three years. Failure to maintain these records may result in the imposition of civil penalties, and criminal sanctions may be imposed in the event of false reporting or destruction of records.EPA SUIT In July 1994, the Company learned that records of many tests conducted from 1991 through early 1994 could not be found. Despite a careful search, most of these records were never found and are believed to have been destroyed. The employee responsible for the supervision of the tests and the maintenance of the test records was replaced and subsequently terminated. In October 1996, that former employee entered a guilty plea and was convicted in the United States District Court for the Eastern District of Virginia of 23 violations of the United States Clean Water Act, including records destruction and making false reports. Eight of these violations related to his duties as the Company's employee, while 15 violations were committed during his outside consulting activities for public and private entities unrelated to Smithfield Foods. Beginning in January 1998, several Company employees responsible for wastewater treatment were subpoenaed and testified before a federal grand jury in Norfolk, Virginia. Subsequently, the grand jury issued subpoenas requiring production of various environmental materials relating to the Company's Smithfield, Virginia wastewater and further testimony by Company employees. Neither the Company nor any of its other present or former employees has been charged with any criminal violation arising from these matters, but there can be no assurance that charges will not be brought. - 8 - EPA Suit. On August 8, 1997, in United States of America v. Smithfield Foods, Inc. et al.UNITED STATES OF AMERICA V. SMITHFIELD FOODS, INC. ET AL. (Civil Case No. 2:96:cv1204), a federal judge for the United States District Court for the Eastern District of Virginia imposed a $12.6 million civil penalty on the Company and its Smithfield Packing and Gwaltney subsidiaries.subsidiaries for Clean Water Act violations at the Company's Smithfield, Virginia processing plants. The Company recognizedrecorded a nonrecurring charge of $12.6 million during the first quarter of fiscal 1998 with respect to this penalty. This suit was brought by the EPA for violations of the federal Clean Water Act before the Company's wastewater treatment facilities were connected to the HRSD system. The court found 6,982 days of violation. The Company asserted in its defense that approximately 5,500 of these violations were excused by the 1991 and 1994 Orders, which were issued by VSWCB in its role as primary enforcement authority under the federal-state Clean Water Act program. The Court held that the EPA was not bound by its awareness of, and failure to object to, those orders. The Company has appealed this trial verdict and other aspects of the court'sis awaiting a decision toby the United States Court of Appeals for the Fourth Circuit in Richmond, Virginia. There can be no assurance as to the outcome of such appeal or any subsequent proceedings regarding this matter. Suit bySUIT BY COMMONWEALTH OF VIRGINIA In 1998, the Commonwealth Of Virginia. On August 30, 1996, VDEQof Virginia filed a civil suit underagainst the laws of the Commonwealth of Virginia against Smithfield FoodsCompany in the Circuit Court of the County of Isle of Wight, Virginia. This suit alleged a total ofVirginia under Virginia's water pollution control laws. Virginia alleges that 22,517 wastewater discharge permit violations occurred at the GwaltneyCompany's Smithfield, Virginia processing plants between 1986 and Smithfield Packing facilities during the period from 1986 until such facilities1997. Most of these alleged violations were connected to the HRSD system in 1996 and 1997, respectively. The differencealso presented in the number of total violations charged by the EPA and the Commonwealth of Virginiasuit. This action is mainly attributable to their different methods of counting violations. The same categories of violations were involved in both suits, except that the Commonwealth of Virginia did not charge the Company with any permit violation excused by the 1991 and 1994 Orders. The Commonwealth's total was larger in part because the Commonwealth counted every missing record as a separate violation, and the EPA counted the number of days records were missing. In addition, the Commonwealth's suit alleged a separate violationset for each failure to test chlorine levels every hour, failure to make certain required reports, and failuretrial on certain days to properly staff Smithfield's facilities.October 18, 1999. While each violation is subject to a maximum penalty of $25,000, the Commonwealth'sVirginia follows a civil penalties policy is designed to recapture from the violator any economic benefit which accrued to the violator as a result of theits noncompliance, and to imposeplus a surcharge penalty for having committed such violations. In addition, the policy wouldmay increase the amount of penalties based upon the extent of environmental damage caused by the violations. At the beginning of theOn July 1997 trial of its case, the Commonwealth contended30, 1999, Virginia advised Smithfield Foods that the Company should pay a total of $6 million for the violations alleged, which includedVirginia will seek to prove Smithfield Foods received an alleged economic benefit of $4approximately $3.8 million. In the middle of the trial, however, the Commonwealth voluntarily dismissed its suit. One week later, the Commonwealth refiled the same suit in Isle of Wight County Circuit Court. On June 29, 1998, the Court overruled the Company's motions to dismiss this second suit on double jeopardy and res judicata grounds. If the Commonwealth's charges go to trial again,Among other defenses, the Company will present evidence to show and arguemaintain that among other things, no economic benefit accrued to Smithfield Foodsthe Company as a result of, and that no environmental damage was caused by, the violations. There can be no assurance as to the outcome of any suchthis proceeding. - 97 - ITEM 2. PROPERTIES The following table summarizes information concerninglists the principalCompany's material plants and other materially important physical properties. These properties ofare suitable for the Company:Company's needs.
APPROXIMATE LAND AREA FLOOR SPACE LOCATION OPERATION (ACRES) (SQ. FT.) - --------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------- Smithfield Packing Plant No. 1*Plant* Slaughtering and cutting hogs; 25.5 457,000 501 North Church Street manufacture of bacon products, Smithfield, Virginia smoked meats, and dry salt meats; production of hams and picnics Smithfield Packing Plant No. 2 Production of bone-in and boneless 20.0 218,000 2501 West Vernon Avenue cooked and smoked ham and other Kinston, North Carolina smoked meat products Smithfield Packing Plant No. 3 Production of bone-in smoked ham 7.8 136,000 5801 Columbia Park Drive and other smoked meat products Landover, Maryland Smithfield Packing Plant No. 4*Plant* Slaughtering and cutting hogs; 860.0 966,000 Carolina Food Processors production of boneless hams Bladen County, North Carolina and loins Division (Bladen County) Route #87 Tarheel, North Carolina Gwaltney Plant No. 1*Plant* Slaughtering and cutting hogs; 56.4 556,000 601 North Church Street production of boneless loins, bacon, Smithfield, Virginia bacon, sausage, bone-in and boneless cooked and smoked hams and picnics Gwaltney Plant No. 2 Production of hot dogs, lunch meats 13.1 200,000 3515 Airline Boulevard and sausage products Portsmouth, Virginia Gwaltney Plant No. 3 Manufacture of bacon, smoked 11.0 152,000 1013 Iowa Street sausage and boneless cooked hams Salem, Virginia John Morrell Plant No. 1*Plant* Slaughtering and cutting hogs and 88.0 2,350,000 1400 N. Weber Avenue lambs; production of boneless loins, Sioux Falls, South Dakota boneless loins, bacon, bothot dogs, lunchluncheon meats, smoked and canned hams, and packaged lard John Morrell Plant No. 2 Slaughtering and cutting hogs; 22.0 243,000 1200 Bluff Road production of boneless hams, loins, Sioux City, Iowa loins, butts and picnics John MorrellLykes Meat Group Plant No. 3 Production of hot dogs, lunchluncheon meats 21.0 177,000 801 East Kemper Road smoked sausage and smoked hams Springdale, Ohio
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APPROXIMATE LAND AREA FLOOR SPACE LOCATION OPERATION (ACRES) (SQ. FT.) - ------------------------------------------------------------------------------------------------------------------------ John Morrell Plant No. 4 Production of bacon and smoked hams 60.0 150,000 South 281 Highway Great Bend, Kansas Lykes Meat Group Plant No. 1 Production of hot dogs, lunch meats 55.0 206,763 4811 Lykes Road and sausage products Plant City, Florida Lykes Meat Group Plant No. 2 Production of hot dogs, lunch meats, 78.0 312,466 603 Cassidy Road cured meats, bacon, boneless cooked Thomasville, Georgia and smoked ham and other smoked bone-in meat products Patrick Cudahy Plant Manufacture of bacon, dry sausage, 60.0 1,090,000 3500 E. Barnard Avenue boneless cooked hams Cudahy, Wisconsin and refinery Cudahy, Wisconsin products Schneider Plant Production of processed and prepared meats, including Kitchener, Ontario, Canada wieners, luncheon meats, hams and specialty and dry sausages.
- --------------------------------- * Pledged as collateral under various loan agreements. The Company, through Brown's,Hog Production Group owns and leases numerous hog production facilities, primarily in North Carolina and Virginia, with additional hog production facilities in North Carolina andColorado, South Carolina and through Smithfield-Carroll's, owns hog productionUtah. A substantial number of these owned facilities in North Carolina and Virginia.are pledged under related loan agreements. The Company operates hog buying stations in North Carolina, South Carolina and Virginia which have facilities for purchasing and loading hogs for shipment to the Company's plants in Smithfield, Virginia and Bladen County, North Carolina and hog buying stations in Iowa, Kansas, Minnesota, Nebraska and South Dakota, which have facilities for purchasing and loading hogs for shipment to the Company's plants in Sioux City, Iowa and Sioux Falls, South Dakota. ITEM 3. LEGAL PROCEEDINGS Smithfield Foods and its subsidiaries and affiliates are parties in various lawsuits arising in the ordinary course of business, excluding certain matters discussed under "Business -- Regulation" above. In the opinion of management, any ultimate liability with respect to these ordinary course matters will not have a material adverse effect on the Company's financial position or results of operations. For a discussion of certain other regulatory and environmental matters, see "Item 1. Business -- Regulation" above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. - 118 - ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the name and age, position with the Company and business experience during the past five years of each of the executive officers of the Company. The Board of Directors elects executive officers to hold office until the next annual meeting of the Board or Directors or until their successors are elected, or until their resignation or removal.
POSITION BUSINESS EXPERIENCE NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS - ---------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------- --------------------------------------- Joseph W. Luter, III (59)(60) Chairman of the Board and Chief Mr. Luter has served as Chairman Chiefof Executive Officer of the ofCompany the Board and Chief Executive Company Officer since 1975. Prior to May 1995, he also served as President of the Company. Lewis R. Little (54)(55) President and Chief Operating Mr. Little was elected President and Officer of the Company, Lykes and Chief Operating Officer of the and Smithfield Packing Company and Smithfield Packing in November 1996 and President and Chief Operating Officer of Lykes in June 1998. From May 1993 until November 1996, he was President and Chief Operating Officer of Gwaltney. Prior to May 1993,Douglas W. Dodds (53) Chairman and Chief Executive Mr. LittleDodds has served as the Chief Officer of Schneider Corporation Executive Officer of Schneider since 1987 and was elected Chairman March 1997; from March 1996 until March 1997, he was Vice Chairman, and prior to March 1996 President, of Gwaltney.Schneider. Roger R. Kapella (57) President and Chief Operating Mr. Kapella has served as President Officer of Patrick Cudahy and Chief Operating Officer of Patrick Cudahy since 1986. Joseph B. Sebring (52) President and Chief Operating Mr. Sebring has served as President Officer of John Morrell and Chief Operating Officer of John Morrell since May 1994. Timothy A. Seely (48)(49) President and Chief Operating Mr. Seely was elected President and Officer of Gwaltney and Chief Operating Officer of Gwaltney in November 1996. Prior to that time, he was Vice President, Sales and Marketing, Fresh Meats, of Gwaltney. Roger R. Kapella (56) President and Chief Operating Mr. Kapella has served as Officer of Patrick Cudahy President and Chief Operating Officer of Patrick Cudahy since 1986. Joseph B. Sebring (51) President and Chief Operating Mr. Sebring has served as Officer of John Morrell President and Chief Operating Officer of John Morrell since May 1994. Between 1992 and May 1994, he served as President and Chief Executive Officer of Indiana Packers Company. Prior to 1992, Mr. Sebring was Executive Vice President of Fresh Mark, Inc.
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POSITION BUSINESS EXPERIENCE NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------------------ C. Larry Pope (43)(44) Vice President, Finance of the Mr. Pope was elected Vice President, Company President, Finance of the Company in July 1998. He joined the Company as Controller in 1980 and served as Vice President and Controller from August 1995 to July 1998. Aaron D. Trub (63) Vice President, Chief Financial Mr. Trub has served1998, and prior to that time as Vice Officer and Secretary of the President and Secretary of the Company Company since 1978. Prior to July 1998, he also held the position of Treasurer. In July 1998, he was elected Chief Financial Officer of the Company.Controller. Richard J. M. Poulson (59)(60) Vice President and Senior Advisor Mr. Poulson joined the Company as to the Chairman as Vice President and Senior Advisor to the Chairman in July 1998. Between 1994 and 1998, he was a senior managing director of the Appian Group, a private merchant bank with offices in Washington, D.C. and Paris. Prior to 1994, Mr. Poulson was a senior corporate partner with the law firm of Hogan & Hartson in Washington, D.C. and London. Aaron D. Trub (64) Vice President, Chief Financial Mr. Trub has served as Vice President Officer and Secretary of the and Secretary of the Company since Company 1978. Prior to July 1998, he also held the position of Treasurer. In July 1998, he was elected Chief Financial Officer of the Company.
- 139 - PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market InformationMARKET INFORMATION The Common Stock of the Company is traded in the national over-the-counter market and is authorized for quotation on The Nasdaq National Market under the symbol "SFDS." The following table sets forth, for the fiscal periods indicated, the highest and lowest sales prices of the Common Stock on The Nasdaq National Market. Range of Sales Prices ------------------------- High Low ------------------------- Fiscal year ended April 27, 1997 First quarter ................................... $15.00 $11.31 Second quarter .................................. 16.25 11.62 Third quarter ................................... 19.31 14.25 Fourth quarter .................................. 24.75 16.19 Fiscal year ended May 3, 1998 First quarter.................................... 31.12 22.00 Second quarter................................... 33.87 22.75 Third quarter.................................... 35.62 24.37 Fourth quarter................................... 36.37 28.62 Holders
RANGE OF SALES PRICES ----------------------- HIGH LOW ----------- ----------- Fiscal year ended May 3, 1998 First quarter .............. $ 31.12 $ 22.00 Second quarter ............. 33.87 22.75 Third quarter .............. 35.62 24.37 Fourth quarter ............. 36.37 28.62 Fiscal year ended May 2, 1999 First quarter .............. 31.00 22.62 Second quarter ............. 27.00 14.69 Third quarter .............. 36.12 19.62 Fourth quarter ............. 30.00 20.00
HOLDERS As of July 10, 1998,9, 1999, there were 1,1431,222 record holders of the Common Stock. DividendsIn addition, there were on such date 264 record holders of the Exchangeable Shares issued by Smithfield Foods' subsidiary Smithfield Canada Limited, an Ontario corporation. The terms of such Exchangeable Shares are an exhibit to this Annual Report on Form 10-K. DIVIDENDS The Company has never paid a cash dividend on its Common Stock and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the terms of certain of the Company's debt agreements prohibit the payment of cash dividends on the Common Stock. The payment of cash dividends, if any, will be made only from assets legally available for that purpose and will depend on the Company's financial condition, results of operations, current and anticipated capital requirements, restrictions under then existing debt instruments and other factors then deemed relevant by the board of directors. - 1410 - ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below for the fiscal years indicated were derived from the Company's audited consolidated financial statements. The information should be read in conjunction with the Company's consolidated financial statements (including the notes thereto) and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in, or incorporated by reference into, this report.
FISCAL YEAR ENDED --------------------------------------------------------------------------- May------------------------------------------------------------------------- MAY 2, MAY 3, AprilAPRIL 27, AprilAPRIL 28, AprilAPRIL 30, May 1,1999 1998 1997 1996 1995 1994 --------------------------------------------------------------------------- (In thousands, except per share data)------------- --------------- --------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Sales........................................Sales ............................................. $3,774,989 $ 3,867,442 $ 3,870,611 $ 2,383,893 $ 1,526,518 $ 1,403,485$2,383,893 $1,526,518 Cost of sales ............................... 3,479,828 3,549,673 2,203,626 1,380,586 1,287,880 --------------------------------------------------------------------------..................................... 3,235,414 3,479,629 3,546,816 2,202,112 1,380,243 ---------- ----------- ----------- ---------- ---------- Gross profit ................................ 387,614 320,938 180,267 145,932 115,605...................................... 539,575 387,813 323,795 181,781 146,275 Selling, general and administrative expenses ........................................ 295,610 219,861 191,225 103,095 61,723 50,738 Depreciation expense.........................expense .............................. 63,524 42,300 35,825 25,979 19,717 21,327 Interest expense.............................expense .................................. 40,521 31,891 26,211 20,942 14,054 11,605Minority interests ................................ (3,518) 199 2,857 1,514 343 Nonrecurring charge..........................charge ............................... - 12,600 - - - - ------------------------------------------------------------------------------------- ----------- ----------- ---------- ---------- Income from continuing operations before income taxes and change in accounting for income taxes...................................................................... 143,438 80,962 67,677 30,251 50,438 31,935 Income taxes.................................taxes ...................................... 48,554 27,562 22,740 10,465 18,523 12,616 ------------------------------------------------------------------------------------- ----------- ----------- ---------- ---------- Income from continuing operations before change in accounting for income taxes............................................... 94,884 53,400 44,937 19,786 31,915 19,319 Income (loss) from discontinued operations...operations ........ - - - (3,900) (4,075) 383 ------------------------------------------------------------------------------------- ----------- ----------- ---------- ---------- Net income................................Income ....................................... $ 94,884 $ 53,400 $ 44,937 $ 15,886 $ 27,840 $ 19,702 ===================================================================================== =========== =========== ========== ========== DILUTED INCOME (LOSS) PER SHARE: Continuing operations before cumulative effect of change in accounting for income taxes........................................................... $ 2.32 $ 1.34 $ 1.17 $ 530.53 $ 92 $ .550.92 Discontinued operations...................... - - (.11) (.12) .01 Cumulative effect of change in accounting for income taxes...............operations ........................... - - - - - -------------------------------------------------------------------------(0.11) (0.12) ---------- ----------- ----------- ---------- ---------- Net income...................................Income ........................................ $ 2.32 $ 1.34 $ 1.17 $ .420.42 $ .80 $ .56 =========================================================================0.80 ========== =========== =========== ========== ========== Average diluted shares outstanding...........outstanding ................ 40,962 39,732 38,558 35,000 33,923 33,697 BALANCE SHEET DATA: Working capital..............................capital ................................... $ 215,865 $ 259,188 $ 164,312 $ 88,026 $ 60,911 $ 81,529 Total assets.................................assets ...................................... 1,771,614 1,083,645 995,254 857,619 550,225 452,279 Long term debt and capital lease obligations...............................obligations ...... 594,241 407,272 288,486 188,618 155,047 118,942 Shareholders' equity.........................equity .............................. 542,246 361,010 307,486 242,516 184,015 154,950 OPERATING DATA: Fresh pork sales (pounds).................... ......................... 2,687,412 2,539,221 2,320,477 1,635,300 955,290 820,203 Processed meats sales (pounds)............... .................... 1,606,021 1,370,232 1,218,835 839,341 774,615 661,783 Total hogs purchased.........................purchased .............................. 19,093 17,952 16,869 12,211 8,678 7,414
- 11 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - 15 - Management'sThis discussion of management's views on the financial condition and analysis set forth belowresults of operations of the Company should be read in conjunction with the Company's consolidated financial statements (includingand the notes thereto)to the consolidated financial statements appearing elsewhere in this Form 10-K. IntroductionINTRODUCTION The CompanyCompany's business is comprised of two segments, a Meat Processing Group ("MPG") and a Hog Production Group ("HPG"). TheAs of May 2, 1999, the MPG consistsconsisted of fivesix wholly owned domestic pork processing subsidiaries, Gwaltney of Smithfield, Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc. ("Lykes"), North Side Foods Corp. ("North Side"), Patrick Cudahy Incorporated ("Patrick Cudahy") and The Smithfield Packing. The HPG consists of Brown'sPacking Company, Incorporated ("Smithfield Packing"), and the Company's interests in Smithfield-Carroll's and Circle Four. Acquisitions The Company has expanded through selective acquisitions of regional and multi-regionalthree international meat processing companies with well-recognized brand identities. The Company acquired John Morrell in December 1995 and Lykes in November 1996. The Company's fiscal 1998 operating results include those of John Morrell and Lykes for the full fiscal year. The Company's fiscal 1997 operating results include those of John Morrell for the full year and those of Lykes for 25 weeks. The Company's fiscal 1996 operating results include those of John Morrell for 18 weeks. In December 1997, the Company reached an irrevocable agreement with members of the Schneider family, the controlling shareholders, to purchase all of their shares insubsidiaries, Animex S.A. ("Animex"), a 67%-owned Polish subsidiary, Schneider Corporation ("Schneider") as part, a 63%-owned Canadian subsidiary, and Societe Bretonne de Salaisons ("SBS"), a wholly owned French subsidiary. As of May 2, 1999, the HPG consisted of Brown's of Carolina, Inc. ("Brown's"), an offer86%-owned subsidiary of the Company, a 50% interest in Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production arrangement between the Company and an affiliate of Carroll's Foods, Inc. ("CFI") and an 84% interest in Circle Four ("Circle Four"), a joint hog production arrangement between the Company and affiliates of CFI. Brown's and Smithfield-Carroll's produce hogs in Colorado, North Carolina and Virginia, which are sold primarily to the MPG. Circle Four produces hogs in Utah which are sold to an unrelated party. Effective May 3, 1999, the Company acquired CFI and its affiliated companies and partnership interests (See Note 15). Subsequent to the end of fiscal 1999, the Company increased its ownership in Animex from 67% to 80% of total equity. ACQUISITIONS In the third quarter of fiscal 1999, the Company acquired 100% of the voting common shares of Schneider and approximately 59% of its Class A non-voting shares, which in the aggregate represents approximately 63% of the total equity of Schneider, in exchange for approximately 2,527,000 Exchangeable Shares of Smithfield Canada Limited, a wholly owned subsidiary of the Company. Each Exchangeable Share is exchangeable by the Company to acquire allholder at any time for one common share of the shares of Schneider.Company. Schneider produces and markets fresh pork and a full line of processed meats and is the second largest meat processing company in Canada andCanada. Schneider had revenuessales in its fiscal year ended October 1998 of $548.1 million. In April 1999, the Company acquired, in a tender offer, 11,500,000 shares of the capital stock of Animex, the largest meat and poultry processing company in Poland. Following the tender offer, the Company's ownership represented 67% of the total equity and 51% voting control of Animex. Animex had calendar year 1998 sales of approximately $400.0 million. In September 1998, the Company acquired all of the capital stock of SBS, the largest private-label manufacturer of ham, pork shoulder and bacon products in France. SBS had calendar year 1998 sales of approximately $100.0 million. In October 1998, the Company acquired all of the assets and business of North Side, a major domestic supplier of precooked sausage to McDonald's Corporation. North Side had calendar year 1998 sales of approximately $58.0 million. Each of these acquisitions was accounted for using the purchase method of accounting and, accordingly, the accompanying financial statements include the financial position and results of operations from the dates of acquisition. In addition, during fiscal 1999, the Company increased its ownership in the Circle Four hog production operations from 37% to 84%. Accordingly, the accompanying financial statements include the financial position and results of operations from June 1, 1998, the date the Company's ownership interest exceeded 50%. Prior to June 1, 1998, Circle Four was accounted for using the equity method of accounting. RESULTS OF OPERATIONS The consolidated results of operations for fiscal 1999 compared to fiscal 1998 were favorably affected by significantly lower live hog and raw material prices. In fiscal 1999, hog prices fell to their lowest level in five decades. These prices were the primary reason for the substantially improved profits in the Company's MPG and the losses incurred in the HPG. Fiscal 1999 and 1997 included 52 weeks of US$512.7 million.operations compared to fiscal 1998, which included 53 weeks of operations. Accordingly, sales and all expense categories in fiscal 1999 and 1997 reflect the impact of one less week of operations compared to fiscal 1998. - 12 - CONSOLIDATED FISCAL 1999 COMPARED TO FISCAL 1998 Sales in fiscal 1999 decreased $92.5 million, or 2.4% from fiscal 1998. The decrease in sales reflected a 12.4% decrease in unit sales prices of meat products as the result of significantly lower raw material (live hog) prices passed through to customers in the form of lower unit selling prices. This decrease was nearly offset by a 10.2% increase in MPG sales tonnage due to the inclusion of the sales of Schneider, SBS and North Side and increased volumes at existing operations. Cost of sales decreased $244.2 million, or 7.0%, in fiscal 1999, reflecting a 33.9% decrease in live hog costs partially offset by the increased sales tonnage. Gross profit increased $151.8 million, or 39.1%, in fiscal 1999 compared to fiscal 1998. The increase in gross profit was primarily due to substantially higher margins in the MPG. Fresh pork margins improved substantially, reflecting the impact of the lower cost of raw materials (live hogs) and margins on increased sales tonnage of both fresh pork and processed meats. MPG gross profits were partially offset by substantial losses in the HPG due to lower live hog prices. Selling, general and administrative expenses increased $75.7 million, or 34.5%, in fiscal 1999 compared to fiscal 1998. The increase was primarily due to the inclusion of selling, general and administrative expenses of acquired businesses, higher selling, marketing and product promotion costs associated with the intensive efforts to market branded fresh pork and processed meats and expenses associated with preparing the Company's information systems for the Year 2000. Depreciation expense increased $21.2 million, or 50.2%, in fiscal 1999 compared to fiscal 1998. This increase was primarily due to the inclusion of the depreciation of acquired businesses. Interest expense increased $8.6 million, or 27.1%, in fiscal 1999 compared to fiscal 1998. This increase reflected the inclusion of the interest expense of the acquired businesses, the cost of borrowings to finance the additional investment in Circle Four and the borrowings to finance the acquisitions of SBS and North Side. A lawsuit contestingnonrecurring charge of $12.6 million in fiscal 1998 reflected the imposition of civil penalties against the Company by the U.S. District Court for the Eastern District of Virginia in a civil action brought by the U.S. Environmental Protection Agency ("EPA"). The Company has appealed the Court's judgment to the U.S. Court of Appeals for the Fourth Circuit. The effective income tax rate for fiscal 1999 was 33.9% compared to 29.5% in fiscal 1998, excluding the nondeductible nonrecurring charge. This increase reflected higher profits at higher marginal tax rates. The Company had no valuation allowance related to income tax assets as of May 2, 1999 and May 3, 1998. Reflecting the factors previously discussed, net income increased to $94.9 million, or $2.32 per diluted share, in fiscal 1999, up from net income of $66.0 million, or $1.66 per diluted share in fiscal 1998, excluding the nonrecurring charge. Including the nonrecurring charge, net income was $53.4 million, or $1.34 per diluted share, in fiscal 1998. FISCAL 1998 COMPARED TO FISCAL 1997 Sales in fiscal 1998 were flat compared to fiscal 1997. Sales reflected a 9.0% decrease in unit sales prices of meat products, as a result of lower raw material (live hog) prices passed through to customers in the form of lower unit selling prices, offset by a 9.4% increase in MPG sales tonnage. The increase in sales tonnage reflected an increase in the number of hogs slaughtered and the inclusion of a full year of the sales of Lykes. Cost of sales decreased $67.2 million, or 1.9%, in fiscal 1998, reflecting a 17.3% decrease in live hog costs offset by the increased sales tonnage. Gross profit increased $64.0 million, or 19.8%, in fiscal 1998 compared to fiscal 1997. The increase in gross profit reflected sharply improved margins on higher sales of both fresh pork and processed meats. Selling, general and administrative expenses increased $28.6 million, or 15.0%, in fiscal 1998. This increase was primarily due to the inclusion of the operations of Lykes and to higher selling, marketing and product promotion costs associated with intensified efforts to market branded fresh pork and processed meats. Depreciation expense increased $6.5 million, or 18.1%, in fiscal 1998. The increase was primarily due to completed capital projects at several of the Company's processing plants and to the inclusion of the operations of Lykes for the full fiscal year. - 13 - Interest expense increased $5.7 million, or 21.7%, in fiscal 1998, reflecting the higher cost of long-term debt placed during the past two fiscal years and higher average borrowing costs related to higher levels of inventory and accounts receivable in the first half of fiscal 1998. A nonrecurring charge of $12.6 million in fiscal 1998 reflected the imposition of civil penalties against the Company by the U.S. District Court for the Eastern District of Virginia in a civil action brought by the EPA. The Company has appealed the Court's judgment to the U.S. Court of Appeals for the Fourth Circuit. The effective income tax rate for fiscal 1998 decreased to 29.5%, excluding the nondeductible nonrecurring charge, from 33.6% in fiscal 1997. This decrease reflected the impact of a lower tax rate on increased export sales and employment-related tax credits. The Company had no valuation allowance related to income tax assets as of May 3, 1998 and April 27, 1997. Excluding the nonrecurring charge, net income increased to $66.0 million, or $1.66 per diluted share in fiscal 1998 from $44.9 million, or $1.17 per diluted share in fiscal 1997. Including the nonrecurring charge, net income was $53.4 million in fiscal 1998, or $1.34 per diluted share. MEAT PROCESSING GROUP FISCAL 1999 COMPARED TO FISCAL 1998 MPG sales in fiscal 1999 decreased $137.8 million, or 3.6%, from fiscal 1998. The decrease reflected a 12.4% decrease in unit sales prices as the result of sharply lower raw material (live hog) prices passed through to customers. This decrease was partially offset by a 10.2% increase in sales tonnage due to the inclusion of the sales of Schneider, SBS and North Side and increased volumes at existing operations. The increase in sales tonnage reflected a 5.8% increase in fresh pork tonnage, 17.2% increase in processed meats tonnage and 12.8% increase in the tonnage of other products. Fresh pork tonnage increased as the result of the inclusion of the sales of Schneider and a full fiscal year of second shift operations at John Morrell's Sioux City, Iowa plant compared to less than a full year of second shift operations in fiscal 1998. The increase in processed meats tonnage resulted from the inclusion of the sales of Schneider, SBS and North Side and increased tonnage at existing operations despite a sharp drop in hot dog exports to Russia. The MPG reported profit before income taxes of $233.4 million in fiscal 1999 compared to profit before income taxes of $121.2 million in fiscal 1998. This increase reflected sharply lower raw material (live hog) costs and the impact of acquired businesses and increased volumes from the base business. These increases were partially offset by increased marketing and distribution expenses incurred to market branded fresh and processed meat products and expenses related to preparing the Company's information systems for the Year 2000. FISCAL 1998 COMPARED TO FISCAL 1997 MPG sales in fiscal 1998 were flat compared to fiscal 1997. Sales reflected a 9.4% increase in tonnage offset by a 9.0% decrease in unit sales prices as a result of lower raw material (live hog) prices passed through to customers in the form of lower unit selling prices. The increase in sales tonnage reflected a 9.4% increase in fresh pork tonnage, 12.4% increase in processed meats tonnage and 4.5% increase in the tonnage of other products. The fresh pork tonnage increase was primarily related to an increase in the number of hogs slaughtered at the Company's Sioux City, Iowa and Bladen County, North Carolina plants. The increase in processed meats tonnage was primarily related to a full fiscal year of sales at Lykes compared to six months of sales in fiscal 1997. The MPG reported a profit before income taxes of $121.2 million in fiscal 1998 compared to profit before income taxes of $66.5 million in fiscal 1997. This increase reflected sharply improved margins as a result of significantly lower raw material (live hog) costs, which were partially offset by higher selling, marketing and product promotion costs associated with intensified efforts to market branded fresh pork and processed meats. HOG PRODUCTION GROUP FISCAL 1999 COMPARED TO FISCAL 1998 HPG sales were relatively flat in fiscal 1999 compared to fiscal 1998, as a 33.0% decrease in the unit selling price of live hogs, due to an oversupply of hogs in the market, was offset by a 48.5% increase in the number of hogs sold, primarily the result of including the sales of Circle Four. Intersegment sales to the MPG are eliminated in the Consolidated Statements of Income. - 14 - The HPG reported a pretax loss of $63.6 million in fiscal 1999, compared to a pretax loss of $9.7 million in fiscal 1998. The substantially higher loss was primarily the result of the lower unit selling prices of hogs, which were at their lowest levels in five decades. Despite the near-term weakness in live hog prices, management expects the HPG to return to profitability in fiscal 2000 through the utilization of hedging and price-risk management techniques and expected increases in hog prices toward the end of fiscal 2000. FISCAL 1998 COMPARED TO FISCAL 1997 HPG sales in fiscal 1998 increased by $4.8 million, or 3.1%, from fiscal 1997. The increase reflected a 19.9% increase in the number of hogs sold as a result of increased production at Brown's. The increase was partially offset by a 14.0% decrease in the unit selling price of live hogs, reflecting an overall industry expansion in hog production. Substantially all HPG sales in fiscal 1998 and 1997 were to the MPG and, accordingly, are intersegment sales which were eliminated in the Consolidated Statements of Income. The HPG reported a loss before income taxes of $9.7 million in fiscal 1998 compared to a profit before income taxes of $19.9 million in fiscal 1997. This is due to significantly lower selling prices for live hogs which were not offset by lower feed costs. LIQUIDITY AND CAPITAL RESOURCES The pork processing industry is characterized by high sales tonnage and rapid turnover of inventories and accounts receivable. Because of the rapid turnover rate, the Company considers its inventories and accounts receivable highly liquid and readily convertible into cash. Borrowings under the Company's credit facilities are used to finance increases in the levels of inventories and accounts receivable resulting from seasonal and other market-related fluctuations in raw material costs. The demand for seasonal borrowings usually peaks in early November when inventories are at their highest levels, and borrowings are repaid in January when accounts receivable are collected. Net cash provided by operations was $123.4 million in fiscal 1999 compared to $97.5 million in fiscal 1998. This increase primarily reflected higher earnings and noncash charges. Net cash used in investing activities totaled $261.9 million in fiscal 1999 compared to $104.9 million in fiscal 1998. In fiscal 1999, the Company expended $151.2 million for several business acquisitions (See Note 3) and $95.4 million for capital expenditures. These capital expenditures included renovations and expansion projects at several of the Company's processing plants, additional hog production facilities at Circle Four and replacement systems associated with the Year 2000. In fiscal 1998, the Company expended $7.8 million for business acquisitions and $92.9 million for capital expenditures. As of May 2, 1999, the Company had definitive commitments of $34.8 million for capital expenditures primarily to increase its processed meats and value-added fresh pork capacities at several of its processing plants. The Company has continuing plans to increase its processed meats and hog production businesses through strategic acquisitions and joint ventures, both in the United States and internationally. These investing activities will be funded with cash from operations, borrowings under the Company's revolving credit facilities and the issuance of additional shares of the Company's common stock. Effective May 3, 1999, the Company completed the acquisition of CFI and its affiliated companies and partnership interests for 4.2 million shares of the Company's common stock and the assumption of approximately $231.0 million in debt, plus other liabilities (See Note 15). Net cash provided by financing activities was filed by$108.5 million in fiscal 1999 compared to $42.1 million in fiscal 1998. The Company has aggregate credit facilities totaling $402.0 million, including a Canadian competitor$300.0 million revolving credit facility with a bank group, which expires July 2002. These credit facilities include $102.0 million of credit facilities from various U.S. and other Schneider shareholders. The court dismissed these claims, which have since been appealed. Ifinternational banks assumed in connection with businesses acquired in fiscal 1999. As of May 2, 1999, the Company is successfulhad unused capacity under these credit facilities of $214.0 million. Average borrowings under all facilities were $74.8 million in fiscal 1999, $149.7 million in fiscal 1998 and $165.1 million in fiscal 1997 at average interest rates of approximately 6%, 7% and 7%, respectively. Maximum borrowings were $152.5 million in fiscal 1999, $247.0 million in fiscal 1998 and $215.0 million in fiscal 1997. The outstanding borrowings were $134.9 million as of May 2, 1999, at an average interest rate of 7%. There were no borrowings under the appeals process, management anticipatesfacilities as of May 3, 1998. Management believes that through internally generated funds and access to global credit markets, funds are available to adequately meet the acquisition will be completedCompany's current and future operating and capital needs. - 15 - Long-term debt and capital lease obligations increased to $594.2 million as of May 2, 1999 from $407.3 million as of May 3, 1998, primarily due to the debt assumed in the second quarterbusiness acquisitions. The ratio of fiscal 1999. Price-Risk Managementlong-term debt to total capitalization decreased to 52.3% as of May 2, 1999 from 53.0% as of May 3, 1998. The decrease reflected increases in equity, resulting from earnings, common stock issued in connection with business acquisitions and stock option exercises. RISK MANAGEMENT Substantially all of the Company's products are manufacturedproduced from commodity-based raw materials, primarilycorn and soybean meal in the HPG and live hogs.hogs in the MPG. The cost of corn and soybean meal (the principal feed ingredients for hogs) and live hogs isare subject to wide fluctuations due to unpredictable factors such as the price of corn and soybean meal (the principal feed ingredients for a hog), weather conditions, economic conditions, government regulation and other unforeseen circumstances. The pricing of the Company's fresh pork and processed meats areis monitored and adjusted upward and downward in reaction to changes in the cost of the underlying raw materials. The unpredictability of the raw material costs limitlimits the Company's ability to forward price fresh pork and processed meat products without the use of commodity contracts through a program of price-risk management. The Company uses price-risk management to enhance its ability to engage in forward sales contracts, where prices for future deliveries are fixed, by purchasing (or selling) commodity contracts for future periods to reduce or eliminate the effect of fluctuations in future raw material costs on the profitability of the related sales. While this may tend to limit the Company's ability to participate in gains from favorable commodity price fluctuations,fluctuation, it also tends to reduce the risk of loss from adverse changes in raw material prices. In addition, the Company utilizes commodity contracts for live hogs and corn to manage hog production margins when management determines thatthe conditions are appropriatecorrect for such hedges. The particular hedging methods employed and the time periods for the contracts depend on a number of factors, including the availability of adequate contracts for the respective periods for the hedges.hedge. The Company attempts to closely match the commodity contract expiration periods with the dates for product sale and delivery. As a result, gains and losses from hedging transactions are recognized when the related sales and purchases are made and the hedges are lifted.made. As of May 2, 1999 and May 3, 1998, and April 27, 1997, the Company had deferred $1.9$8.9 million and $2.2$1.9 million, respectively, of unrealized hedging gains on outstanding futures contracts. As of May 2, 1999 and May 3, 1998, and April 27, 1997, the Company had open futures contracts with faircontract values of $59.6$219.7 million and $44.3$97.1 million, respectively. As of May 2, 1999 and May 3, 1998, and April 27, 1997, the Company had deposits with brokers for outstanding futures contracts of $15.6 million and $10.9 million, and $3.5 million, respectively, which were included in prepaid expenses and other current assets. For open futures contracts, the Company uses a sensitivity analysis technique to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments. As of May 3, 1998,2, 1999, the potential change in fair value of open futuresfuture contracts, assuming a 10% change in the underlying commodity price, was $2.1$10.4 million. - 16 - Operations Fiscal 1998 represented 53 weeks of operations comparedYEAR 2000 The Year 2000 problem relates to fiscal 1997computer systems that have date-sensitive programs that were designed to read years beginning with "19," but may not recognize the year 2000. Company information technology ("IT") systems (including non-IT systems) and 1996, each of which represented 52 weeks of operations. Accordingly, sales and all expense categories in fiscal 1998 reflect the impact of an additional week of operations compared to fiscal 1997. Fiscal 1998 Compared to Fiscal 1997. Sales in fiscal 1998 were flat compared to fiscal 1997. Sales reflected a 9.4% increase in sales tonnage offset by a 9.0% decrease in unit sales prices, reflecting the impact of lower live hog costs. The increase in sales tonnage reflected a 9.4% increase in fresh pork tonnage, a 12.4% increase in processed meats tonnage and a 4.5% increase in the tonnage of other products. The increase in fresh pork tonnage was primarily related to an increase in the number of hogs slaughtered at the Company's Sioux City, Iowa and Bladen County, North Carolina plants. The increase in processed meats tonnage was primarily related to Lykes. Cost of sales decreased $69.8 million, or 2.0%, in fiscal 1998, reflecting the increased sales tonnage offset by a 17.3% decrease in live hog costs. Gross profit increased $66.7 million, or 20.8%, in fiscal 1998 compared to fiscal 1997. The increase in gross profit reflected sharply improved margins on higher sales of both fresh pork (56.1% of dollar sales) and processed meats (40.2% of dollar sales). Selling, general and administrative expenses increased $28.6 million, or 15.0%, in fiscal 1998. This increase was primarily due to Lykes and to higher selling, marketing and product promotion costs associated with intensified efforts to market branded fresh pork and processed meats. Depreciation expense increased $6.5 million, or 18.1%, in fiscal 1998. The increase was primarily due to completed capital projects at several of the Company's processing plants and to Lykes. Interest expense increased $5.7 million, or 21.7%, in fiscal 1998, reflecting the higher cost of long-term debt placed during the past two fiscal years and higher average borrowing costs related to higher levels of inventory and accounts receivable in the first half of fiscal 1998. A nonrecurring charge of $12.6 million in fiscal 1998 reflected the imposition of civil penalties against the Company by the U.S. District Court for the Eastern District of Virginia in a civil action brought by the U.S. Environmental Protection Agency. The Company has appealed the Court's judgment to the U.S. Court of Appeals for the Fourth Circuit. Income before income taxes in fiscal 1998 was adversely affected by a loss of $1.2 million at the HPG compared to a $20.7 million profit in fiscal 1997. The effective income tax rate for fiscal 1998 increased to 34.0% from 33.6% in fiscal 1997, reflecting the impact of the $12.6 million nondeductible nonrecurring charge offset by a lower tax rate on increased foreign sales, benefits related to certain insurance contracts, and employment-related tax credits. Excluding the nonrecurring charge, the effective income tax for fiscal 1998 decreased to 29.5% from 33.6% in fiscal 1997. The Company had no valuation allowance related to income tax assets as of May 3, 1998, and there was no change in the valuation allowance during fiscal 1998. Excluding the nonrecurring charge, net income was $66.0 million, or $1.66 per diluted share, in fiscal 1998. Including the nonrecurring charge, net income increased to $53.4 million in fiscal 1998, or $1.34 per diluted share, from $44.9 million, or $1.17 per diluted share, in fiscal 1997. Fiscal 1997 Compared to Fiscal 1996. - 17 - Sales in fiscal 1997 increased $1.49 billion, or 62.4%, from fiscal 1996. This increase wasthird-party information systems that fail due to the inclusion ofYear 2000 may have a material adverse effect on the sales of John Morrell and Lykes, significant increases in unit sales prices for both fresh pork and processed meats, and increased sales of fresh pork relatedCompany. The Year 2000 issue has the potential to an increase in the number of hogs slaughtered ataffect the Company's Bladen County, North Carolina plant. The increase in unit sales prices reflected the pass-through of higher raw material costs due to an 18.8% increase in live hog costs. The increase in sales reflected a 41.9% increase in fresh pork tonnagesupply, production, distribution and a 45.2% increase in processed meats tonnage, primarily related to John Morrell and Lykes. Cost of sales increased $1.35 billion, or 61.1%, in fiscal 1997, reflecting the increased sales tonnage and increased live hog costs. Gross profit increased $140.7 million, or 78.0%, in fiscal 1997 compared to fiscal 1996, reflecting the inclusion of the operations of John Morrell and Lykes and increased overall margins at the Company's other operating subsidiaries. The increase in gross profit reflected significantly improved margins on sales of processed meats (37.3% of dollar sales) that were somewhat offset by lower margins on sales of fresh pork (58.9% of dollar sales). Fresh pork margins were adversely impacted by relatively high hog costs due to a shortage of live hogs, excess industry slaughter capacity and strong competition at the retail level from comparatively lower-priced beef and chicken. Selling, general and administrative expenses increased $88.1 million, or 85.5%, in fiscal 1997. This increase was primarily due to John Morrell and Lykes. Depreciation expense increased $9.8 million, or 37.9%, in fiscal 1997. The increase was primarily due to John Morrell and Lykes. Interest expense increased $5.3 million, or 25.2%, in fiscal 1997, reflecting borrowings to finance the acquisition of Lykes, increased carrying costs on higher levels of inventories and accounts receivable related to higher live hog costs and the higher cost of long-term debt placed during the fiscal year. Income before income taxes was favorably affected by a $20.7 million profit at the HPG in fiscal 1997 compared to a $10.8 million profit in fiscal 1996. The effective income tax rate in fiscal 1997 decreased to 33.6% from 34.6% in fiscal 1996, reflecting a lower tax rate on increased foreign sales and a reduction in the effective rate of state income taxes.financial chains. The Company had no valuation allowance related to income tax assets as of April 27, 1997, and there was no change inbegan addressing the valuation allowance during fiscal 1997. Income from continuing operations increased $25.1 million in fiscal 1997, reflecting the operating results of John Morrell for the full fiscal year, significantly improved margins on processed meats and substantially increased profitability of the HPG. Reflecting the factors discussed above, net income increased to $44.9 million, or $1.17 per diluted share, in fiscal 1997, up from $15.9 million, or $.42 per diluted share, in the prior fiscal year. Financial Condition The pork processing industry is characterized by high sales tonnage and rapid turnover of inventories and accounts receivable. Because of the rapid turnover rate, the Company considers its inventories and accounts receivable highly liquid and readily convertible into cash. Borrowings under the Company's credit facilities are used to finance increases in the levels of inventories and accounts receivable resulting from seasonal and other market-related fluctuations in raw material costs. The demand for seasonal borrowings usually peaks in early November when ham inventories are at their highest levels, and borrowings are repaid in January when accounts receivable generated by sales of the hams are collected. - 18 - In July 1997, the Company entered into loan agreements with a bank group providing for $350 million in revolving credit facilities, consisting of a five-year $300 million revolving credit facility and a 364-day $50 million revolving credit facility. In connection with this refinancing, the Company repaid all borrowings under its previous $300 million credit facilities, which were terminated. The 364-day $50 million revolving credit facility was terminated in February 1998. Average borrowings under the facilities were $149.7 million in fiscal 1998, $165.1 million in fiscal 1997 and $133.4 million in fiscal 1996 at average interest rates of approximately 7% for each year. Maximum borrowings were $247.0 million in fiscal 1998, $215.0 million in fiscal 1997 and $179.8 million in fiscal 1996. There were no borrowings under the facility as of May 3, 1998. The outstanding borrowings were $150.0 million as of April 27, 1997 at an average interest rate of 7%. In February 1998, the Company issued $200 million in aggregate principal amount of 10-year 7.625% senior subordinated notes. The net proceeds from the sales of the notes were used to repay indebtedness under the Company's $300 million revolving credit facility with the balance invested in short-term marketable debt securities. Capital expenditures totaled $92.9 million in fiscal 1998 and included renovation and expansion of certain of the Company's processing plants, as well as the acquisition of an idle slaughter plant in South Dakota and hog production facilities in North Carolina. In addition, during fiscal 1998, the Company acquired substantially all of the assets and business of Curly's Foods, Inc. and certain of the assets and business of Mohawk Packing Co. for an aggregate $15.9 million in cash plus $11.8 million of assumed liabilities. The capital expenditures and the business acquisitions were funded with internally generated funds. As of May 3, 1998, the Company had definitive commitments of $18.9 million for capital expenditures primarily to increase its processed meats and value-added fresh pork capacities at several of its processing plants and to replace and upgrade portions of its hardware and software in response to the Year 2000. The Company plans to make capital expenditures in fiscal 1999 to expand its hog production operations and to increase its processed meats business through strategic acquisitions and joint ventures, both in the United States and internationally. This will be funded by cash flows from operations and borrowings under the $300 million revolving credit facility. The Company's various debt agreements contain financial covenants that require the maintenance of certain levels and ratios for working capital, net worth, current ratio, fixed charges, capital expenditures and, among other restrictions, limit additional borrowings, the acquisition, disposition and leasing of assets, and payment of dividends to shareholders. Year 2000 Management has assessed and is in the process of modifying or replacing the Company's affected hardware and software and is evaluating whether external service providers, significant vendors and customers are taking the appropriate action to remedy problemspotential exposure associated with the Year 2000.2000 during fiscal 1998. Management expectshas approved the plan necessary to have substantially allremediate, upgrade and replace the effected systems to be Year 2000 compliant. A corrective five-point action plan was developed including: 1) analysis and planning, 2) allocation of resources and commencing correction, 3) remediation, correction and replacement, 4) testing, and 5) development of contingency plans. The Company has identified and defined the critical IT and non-IT projects. These projects relate to systems which include any necessary technology used in manufacturing or administration with date-sensitive information that is critical to the day-to-day operations of the systemsbusiness. Of the critical IT projects, 87% have been completed, 10% are in correction and application changesreplacement, and the remaining, less critical projects are being analyzed and planned. All critical IT system implementations and remediations are expected to be substantially completed by the end of fiscal 1999 (May 2, 1999)July 1999. The non-IT (plant) projects have identified system components that have a potential issue with rolling dates into the Year 2000. Of these components, 98% are fully compliant and believes that its levelthe others are at various stages of preparedness is appropriate. Management is currentlyprogress in the processaction plan. Substantially all critical non-IT system implementation and remediation is complete or in final stages. The cost of quantifying the costs associated with the Year 2000; however, the ultimate costs are still not determinable. Costs are being charged to expense as incurred with the exception of2000 solution, including hardware and software costs that are capitalizablereplacement, is expected to be approximately $33.9 million, of which $26.5 million has been expended to date. The Company has expensed approximately $8.5 million - 16 - in fiscal 1999. The Company estimates $19.6 million of the $33.9 million will be capitalized in accordance with generally accepted accounting principles. These expenditures are anticipated to continue through December 1999. Third-party risk is being proactively assessed through inquiries and questionnaires. Significant vendors, electronic commerce customers and financial institutions have been sent inquiries about the status of their compliance for the Year 2000. Additionally, the Company will follow up the inquiries and questionnaires with interviews. This process is expected to be an ongoing evaluation. At this point management cannot determine the level of risk associated with third parties. The Company believes its planning efforts are adequate to address its Year 2000 concerns. The Company is developing a worst-case scenario and contingency plan that includes an evaluation of the criticality of each manufacturing process and the determination of possible manual alternatives, including the purchase of additional inventory and related storage for production supplies. The Company, while substantially complete on all critical and non-critical IT and non-IT systems, continues to assess the Year 2000 readiness of Animex (See Note 3) and CFI (See "Subsequent Events" below and Note 15). The preliminary review of CFI's Year 2000 readiness is complete. Approximately 53% of the critical systems are compliant. The remaining systems are targeted to be compliant by September 30, 1999. Management has not determined the level of readiness for Animex. The assessment is expected to be completed by the end of July 1999. The costs of the Year 2000 solution are exclusive of Animex and CFI's remediation efforts. While the Company believes that it is taking the appropriate steps to address its readiness for the Year 2000, the costs of the project and the expected completion dates are based on management's best estimates, which were derived using assumptions of future events, includingdependent upon the continued availability of certain resources and other factors. However, thereThere can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that could influence the results may include, but are not limited to, the availability and cost of personnel trained in this area, and the ability to locate and correct all relevant computer codes and similar uncertainties. Cautionary Statement Pursuant to Safe Harbor ProvisionsSUBSEQUENT EVENTS Effective May 3, 1999, the Company completed the acquisition of CFI and its affiliated companies and partnership interests for 4.2 million shares of the Private Securities Litigation Reform ActCompany's common stock and the assumption of 1995 - 19 - approximately $231.0 million in debt, plus other liabilities (See Note 15). The acquisition includes 100% of the capital stock of CFI, CFI's 50% interest in Smithfield-Carroll's, CFI's 16% interest in Circle Four, CFI's 50% interest in Tar Heel Turkey Hatchery, 100% of CFI's turkey grow-out operation, CFI's 49% interest in Carolina Turkeys, and certain hog production interests in Brazil and Mexico. The Company will account for this acquisition using the purchase method of accounting. Subsequent to the end of fiscal 1999, the Company increased its ownership in Animex from 67% to 80% of total equity. FORWARD-LOOKING INFORMATION This report may contain "forward-looking" information within the meaning of the federal securities laws. The forward-looking information may include among other information, statements concerning the Company's outlook for fiscal 1998, volume trends, industry conditions and expectations for capital expenditures. There may also bethe future, as well as other statements of exceptions, beliefs, future plans and strategies or anticipated events, or trends and similar expressions concerning matters that are not historical facts. The forward-looking information andForward-looking statements in this report are subject to risks and uncertainties including availability and prices of raw materials, product pricing, competitive environment and related market conditions, operating efficiencies, access to capital and actions of governments, that could cause actual results to differ materially from those expressed in, or implied by, the information or statements. These risks and uncertainties include availability and prices of live hogs, raw materials and supplies, live hog production costs, product pricing, the competitive environment and related market conditions, operating efficiencies, access to capital, and actions of domestic and foreign governments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements listed in Item 14(a) hereof are incorporated herein by reference and are filed as a part of this report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. - 2017 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (a) Information required by this Item regarding directors and all persons nominated or chosen to become directors is incorporated by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998.September 2, 1999. (b) Information required by this Item regarding the executive officers of the Company is included in Part I, Item 4A of this report. There is no family relationship between any of the persons named in response to Item 10. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is incorporated by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998.September 2, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is incorporated by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998.September 2, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is incorporated by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998.September 2, 1999. - 2118 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. and 2. Index to Financial Statements and Financial Statement Schedule An "Index to Financial Statements and Financial Statement Schedule" has been filed as a part of this Form 10-K Annual Report on page F-1 hereof. 3. Exhibits Exhibit 3.1 -- Articles of Incorporation of the Company, as amended to date (incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997). Exhibit 3.2 -- By-Laws of the Company, as amended to date (incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997). Exhibit 4.1 -- Articles of Incorporation of the Company, as amended to date (see Exhibit 3.1 above). Exhibit 4.2 -- Form of Certificate representing the Company's Common Stock, par value $.50 per share (including Rights legend) (incorporated by reference to Exhibit 6 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997) Exhibit 4.3 -- Form of Certificate representing Rights (incorporated by reference to Exhibit 5 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997) Exhibit 4.4 -- Rights Agreement dated as of May 1, 1998, by and between the Company and Harris Trust and Savings Bank, Rights Agent. Exhibit 4.5 Exhibit 3.1(a) -- Articles of Incorporation of the Company, as amended through October 27, 1998 (incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997). Exhibit 3.1(b) -- Articles of Amendment filed October 28, 1999 to Articles of Incorporation, as amended, authorizing terms for one Series B Special Voting Preferred Share, par value $1.00 per share. Exhibit 3.2 -- By-Laws of the Company, as amended to date (incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997). Exhibit 4.1 -- Articles of Incorporation of the Company, as amended to date (see Exhibit 3.1 above). Exhibit 4.2 -- Form of Certificate representing the Company's Common Stock, par value $.50 per share (including Rights legend) (incorporated by reference to Exhibit 6 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997). Exhibit 4.3 -- Form of Certificate representing Rights (incorporated by reference to Exhibit 5 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997). Exhibit 4.4 -- Rights Agreement, as amended, dated as of May 1, 1998, by and between the Company and Harris Trust and Savings Bank, Rights Agent (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for its fiscal year ended May 3, 1998 filed with the Commission on July 30, 1998). Exhibit 4.5(a) -- Form of Certificate representing the Company's share of Series B Special Voting Preferred, par value $1.00 per share (incorporated by reference to Exhibit 4.8 to the Company's Registration Statement on Form S-4, as amended, filed with the Commission on September 25, 1998 (the "Exchange Offer Registration Statement")). Exhibit 4.5(b) -- Form of Certificate representing Smithfield Canada Limited Exchangeable Shares (incorporated by reference to Exhibit 4.9 to the Exchange Offer Registration Statement). Exhibit 4.5(c) -- Voting, Support and Exchange Trust Agreement among Smithfield Foods, Inc., Smithfield Canada Limited and CIBC Mellon Trust Company, dated as of November 10, 1998. Exhibit 4.5(d) -- Exchangeable Share Provisions (excerpted from the Articles of Incorporation, as amended, of Smithfield Canada Limited). Exhibit 4.6(a) -- Five-Year Credit Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, relating to a $300,000,000 secured five-year revolving credit facility (incorporated by reference to Exhibit 4.5 of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); and Amendment Number One to the Five-Year Credit Agreement dated as of November 19, 1997 (incorporated by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998); and Amendment Number Two to the Five-Year Credit Agreement dated as of August 16, 1998 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 2, 1998 filed with the Commission on September 14, 1998). Exhibit 4.5(a) -- 364-Day Credit Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, relating to a $50,000,000 secured 364-day revolving credit facility (incorporated by reference to Exhibit 4.5(a) of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); and Amendment Number One to the 364-Day Credit Agreement dated as of November
- 19 1997 (incorporated by reference to Exhibit 4.5(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). - 22 - Exhibit 4.5(b) -- Collateral Agency, Pledge and Security Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, The Chase Manhattan Bank, as Collateral Agent, relating to the Company's five-year revolving credit facility and its 364- day revolving credit facility (incorporated by reference to Exhibit 4.5(b) of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.6 -- Note Purchase Agreement dated as of July 15, 1996, among Smithfield Foods, Inc. and each of the Purchasers listed on Annex 1 thereto, relating to $140,000,000 in senior secured notes (incorporated by reference to Exhibit 4.7 to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended July 28, 1996); Amendment Number One to the Note Purchase Agreement dated as of July 15, 1997 (incorporated by reference to Exhibit 4.6 of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); Amendment Number Two to the Note Purchase Agreement dated as of December 1, 1997 (incorporated by reference to Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998); and Amendment Number Three to the Note Purchase Agreement dated as of January 30, 1998. Exhibit 4.6(a) -- Joint and Several Guaranty dated as of July 15, 1996, by Gwaltney of Smithfield, Ltd., John Morrell & Co., The Smithfield Packing Company, Incorporated, SFFC, Inc., Patrick Cudahy Incorporated, and Brown's of Carolina, Inc. (incorporated by reference to Exhibit 4.7(a) to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended July 28, 1996); and Amendment Number One to the Note Purchase Agreement dated as of July 15, 1997 (incorporated by reference to Exhibit 4.6(a) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.6(b) -- 364-Day Credit Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, relating to a $50,000,000 secured 364-day revolving credit facility (incorporated by reference to Exhibit 4.5(a) of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); and Amendment Number One to the 364-Day Credit Agreement dated as of November 19, 1997 (incorporated by reference to Exhibit 4.5(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). Exhibit 4.6(c) -- Collateral Agency, Pledge and Security Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, The Chase Manhattan Bank, as Collateral Agent, relating to the Company's five-year revolving credit facility and its 364-day revolving credit facility (incorporated by reference to Exhibit 4.5(b) of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.7(a) -- Note Purchase Agreement dated as of July 15, 1996, among Smithfield Foods, Inc. and each of the Purchasers listed on Annex 1 thereto, relating to $140,000,000 in senior secured notes (incorporated by reference to Exhibit 4.7 to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended July 28, 1996); Amendment Number One to the Note Purchase Agreement dated as of July 15, 1997 (incorporated by reference to Exhibit 4.6 of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); Amendment Number Two to the Note Purchase Agreement dated as of December 1, 1997 (incorporated by reference to Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998); and Amendment Number Three to the Note Purchase Agreement dated as of January 30, 1998. Exhibit 4.7(b) -- Joint and Several Guaranty dated as of July 15, 1996, by Gwaltney of Smithfield, Ltd., John Morrell & Co., The Smithfield Packing Company, Incorporated, SFFC, Inc., Patrick Cudahy Incorporated, and Brown's of Carolina, Inc. (incorporated by reference to Exhibit 4.7(a) to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended July 28, 1996); and Amendment Number One to the Note Purchase Agreement dated as of July 15, 1997 (incorporated by reference to Exhibit 4.6(a) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.7(c) -- Joint and Several Guaranty dated as of July 15, 1997, by Lykes Meat Group, Inc., Sunnyland, Inc., Valleydale Foods, Inc., Hancock's Old Fashioned Country Hams, Inc., Copaz Packing Corporation, and Smithfield Packing - Landover, Inc. (incorporated by reference to Exhibit 4.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.8(a) -- Master Lease Agreement dated May 14, 1993 between General Electric Capital Corporation and Brown's of Carolina, Inc. (incorporated by reference to Exhibit 4.12 to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 4.8(b) -- Corporate Guaranty by Smithfield Foods, Inc. dated May 14, 1993 (incorporated by reference to Exhibit 4.12(a) to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 4.9 -- Indenture between the Company and SunTrust Bank, Atlanta (incorporated by reference to Exhibit 4.8 to the Company's Current Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). Exhibit 4.10(a) -- Consolidating Loan Agreement between Cape Fear Farm Credit, ACA ("Farm Credit") and Carroll's Foods, Inc., Carroll's Realty, Inc., and Carroll's Realty Partnership ("Carroll's Borrower's") dated as of August 28, 1998 (schedules omitted). Exhibit 4.10(b) -- Loan and Loan Document Modification Agreement between Farm Credit and the Carroll's Borrowers, dated as of May 7, 1999. Exhibit 4.10(c) -- Unconditional Guaranty to Farm Credit from Smithfield Foods, Inc. dated as of May 7, 1999. Exhibit 4.10(d) -- Unconditional Guaranty to Farm Credit from Carroll's Turkeys, Inc. to Farm Credit dated as of May 7, 1999.
- Landover, Inc. (incorporated by reference to Exhibit 4.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.7 -- Master Lease Agreement dated May 14, 1993 between General Electric Capital Corporation and Brown's of Carolina, Inc. (incorporated by reference to Exhibit 4.12 to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 4.7(a) -- Corporate Guaranty by Smithfield Foods, Inc. dated May 14, 1993 (incorporated by reference to Exhibit 4.12(a) to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 4.8 -- Indenture between the Company and SunTrust Bank, Atlanta (incorporated by reference to Exhibit 4.8 to the Company's Current Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). Exhibit 4.8(a) -- Purchase Agreement between the Company and Chase Securities, Inc. (incorporated by reference to Exhibit 4.8(a) to the Company's Current Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). Exhibit 4.8(b) -- Registration Rights Agreement between the Company and Chase Securities, Inc. (incorporated by reference to Exhibit 4.8(b) to the Company's Current Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). - 2320 - Exhibit 10.1 -- Subscription Agreement dated September 3, 1992 between Smithfield Foods, Inc. and Carroll's Foods, Inc., covering 1,000,000 shares of Smithfield Foods, Inc. Common Stock (incorporated by reference to Exhibit 10.1 of the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993); and Amendment No. 1 to Subscription Agreement dated January 31, 1995 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 1996 filed with the Commission on July 18, 1996). Exhibit 10.2 -- Smithfield Foods, Inc. 1984 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Form 10-K Annual Report for the fiscal year ended April 28, 1991). Exhibit 10.3 -- Smithfield Foods, Inc. 1992 Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 10.4 -- Smithfield Foods, Inc. Incentive Bonus Plan applicable to the Company's Chairman of the Board and Chief Executive Officer (incorporated by reference to Exhibit 10.8 to the Company's Form 10-K Annual Report for the fiscal year ended April 30, 1995 filed with the Commission on July 28, 1995). Exhibit 10.5 -- Smithfield Foods, Inc. 1997 Incentive Bonus Plan applicable to the Company's President and Chief Operating Officer (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K Annual Report for the fiscal year ended April 28, 1996 filed with the Commission on July 18, 1996). Exhibit 10.6 -- Smithfield Foods, Inc. 1998 Incentive Bonus Plan applicable to the Company's Chief Operating Officer (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K Annual Report for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 10.7 -- Smithfield Foods, Inc. 1998 Stock Incentive Plan. Exhibit 10.1(a) -- Agreement with Shareholders dated as of May 7, 1999 by and between the Company and Jeffrey S. Matthews, Carroll M. Baggett and James O. Matthews (incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K dated May 7, 1999 and filed with the Commission on May 12, 1999). Exhibit 10.1(b) -- Registration Rights Agreement dated as of May 7, 1999 by and between the Company and Jeffrey S. Matthews, Carroll M. Baggett and James O. Matthews (incorporated by reference to Exhibit 2.4 to the Company's Current Report on Form 8-K dated May 7, 1999 and filed with the Commission on May 12, 1999). Exhibit 10.2 -- Smithfield Foods, Inc. 1984 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Form 10-K Annual Report for the fiscal year ended April 28, 1991). Exhibit 10.3 -- Smithfield Foods, Inc. 1992 Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 10.4 -- Smithfield Foods, Inc. 1998 Incentive Bonus Plan applicable to the Company's Chief Operating Officer (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K Annual Report for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 10.5 -- Smithfield Foods, Inc. 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Form 10-K Annual Report for the fiscal year ended May 3, 1998 filed with the Commission on July 30, 1998). Exhibit 10.6 -- Agreement between Schneider Corporation and Douglas W. Dodds, including first, second and third amendments. Exhibit 21 -- Subsidiaries of the Registrant. Exhibit 23 -- Consent of Independent Public Accountants. Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K 1. The Company filed a Current Report on Form 8-K for February 9, 1998, was filed25, 1999, with the Commission on February 10, 1998,26, 1999, to report under Item 5 a summary of earnings results for the closingthird fiscal quarter and the signing of a private offeringletter of $200,000,000 aggregate principal amountintent concerning the acquisition of 7-5/8% Senior Subordinated Notes due 2008.Carroll's Foods, Inc. - 2421 - SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SMITHFIELD FOODS, INC. Date: July 27, 1998 By: /s/ JOSEPH W. LUTER, III --------------------SMITHFIELD FOODS, INC. By: /s/ JOSEPH W. LUTER, III Date: July 30, 1999 ------------------------------------- Joseph W. Luter, III Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on July 27, 1998.30, 1999.
SIGNATURE TITLE --------- ----- /s/ Joseph W. Luter, III Chairman of the Board and Chief Executive /s/ JOSEPH W. LUTER, III---------------------------------- Officer, and Director - ------------------------------------------------ Joseph W. Luter, III /s/ Lewis R. Little President and Chief Operating Officer, /s/ LEWIS R. LITTLE---------------------------------- and Director - ------------------------------------------------ Lewis R. Little /s/ Aaron D. Trub Vice President, Chief Financial Officer /s/ AARON D. TRUB---------------------------------- and Secretary, and Director - ----------------------------------------------- (Principal-Financial-Officer) Aaron D. Trub /s/ C. Larry Pope Vice President, Finance /s/ C. LARRY POPE---------------------------------- (Principal Accounting Officer) - ----------------------------------------------- C. Larry Pope Director /s/ ROBERT L. BURRUS, JR. - ----------------------------------------------- Robert L. Burrus, Jr. Director ---------------------------------- Robert L. Burrus, Jr. /s/ F. J. FAISON, JR. - -----------------------------------------------Douglas W. Dodds Director ---------------------------------- Douglas W. Dodds /s/ F. J. Faison, Jr. Director ---------------------------------- F. J. Faison, Jr. /s/ JOEL W. GREENBERG - ----------------------------------------------- Joel W. Greenberg Director ---------------------------------- Joel W. Greenberg /s/ GEORGE E. HAMILTON, JR. - ----------------------------------------------- George E. Hamilton, Jr. - S-1 - Director - ----------------------------------------------- Richard J. Holland---------------------------------- George E. Hamilton, Jr. /s/ Robert G. Hofmann, II Director ---------------------------------- Robert G. Hofmann, II
- 22 - Director --------------------------------- Richard J. Holland /s/ Roger R. Kapella Director ---------------------------------- Roger R. Kapella /s/ William H. Prestage Director ---------------------------------- William H. Prestage /s/ ROGER R. KAPELLA - ----------------------------------------------- Roger R. Kapella Director /s/ WILLIAM H. PRESTAGE - ----------------------------------------------- William H. Prestage Director /s/ JOSEPH B. SEBRING - ----------------------------------------------- Joseph B. Sebring Director ---------------------------------- Joseph B. Sebring /s/ Timothy A. Seely Director ---------------------------------- Timothy A. Seely - S-223 - SMITHFIELD FOODS, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE(S) ------------- FINANCIAL STATEMENTS Report of Independent Public Accountants ............................................ F-2 Consolidated Balance Sheets for the Fiscal Years Ended April 27, 1997,May 2, 1999 and May 3, 1998 .................................................................. F-3 Consolidated Statements of Income for the Fiscal Years 1999, 1998, 1997, and 19961997 ......... F-4 Consolidated Statements of Cash Flows for the Fiscal Years 1999, 1998, 1997, and 19961997 ..... F-5 Consolidated Statements of Shareholders' Equity for the Fiscal Years ended April 28, 1996, April 27, 1997, and May 3, 1998, ............................................and May 2, 1999 ............................................... F-6 Notes to Consolidated Financial Statements .......................................... F-7 to F-22F-23 FINANCIAL STATEMENTSTATEMENTS SCHEDULE Independent Public Accountants' Report on Financial Statement Schedule .............. F-23I ............ F-24 Schedule I -- Condensed Financial Information of Registrant ......................... F-24F-25 to F-28F-29
- F-1 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF SMITHFIELD FOODS, INC.: We have audited the accompanying consolidated balance sheets of Smithfield Foods, Inc. (a Virginia corporation), and subsidiaries as of May 2, 1999, and May 3, 1998, and April 27, 1997, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended May 3, 1998.2, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Smithfield Foods, Inc., and subsidiaries as of May 2, 1999, and May 3, 1998, and April 27, 1997, and the results of their operations and their cash flows for each of the three years in the period ended May 3, 1998,2, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Richmond, Virginia June 10, 19981999 - F-2 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
FISCAL YEARS ENDED ------------------------------------------------------------- MAY 2, MAY 3, APRIL 27,1999 1998 1997 ----------------------------- ------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ..................................................... $ 60,52230,590 $ 25,79160,522 Accounts receivable less allowances of $1,541$2,656 and $1,499 ......................$1,541....................... 252,332 156,091 166,094 Inventories ................................................................... 348,856 249,511 253,276 Prepaid expenses and other current assets ..................................... 50,302 44,999 43,217 --------------------- ---------- Total current assets ........................................................ 682,080 511,123 488,378 --------------------- ---------- Property, plant and equipment: Land .......................................................................... 29,605 15,157 13,964 Buildings and improvements .................................................... 404,002 240,032 205,523 Machinery and equipment ....................................................... 590,139 418,810 344,328 Construction in progress ...................................................... 59,670 31,873 50,578 ----------- ---------- ---------- 1,083,416 705,872 614,393 Less accumulated depreciation ................................................. (292,640) (233,652) (187,518) --------------------- ---------- Net property, plant and equipment ........................................... 790,776 472,220 426,875 --------------------- ---------- Other assets: Investments in partnerships ................................................... 80,182 49,940 44,582 Goodwill, net of accumulated amortization of $1,964$2,871 and $1,716 ................$1,964................. 103,017 12,360 4,062 Other ......................................................................... 115,559 38,002 31,357 --------------------- ---------- Total other assets .......................................................... 298,758 100,302 80,001 ----------- ---------- $ 1,083,645 $ 995,254 ===========---------- $1,771,614 $1,083,645 ========== ========== LIABILITIES AND STOCKHOLDERS'SHAREHOLDERS' EQUITY Current liabilities: Notes payable ................................................................. $ -63,900 $ 77,500- Current portion of long-term debt and captialcapital lease obligations ............... 25,828 8,511 7,800 Accounts payable .............................................................. 207,703 118,909 132,268 Accrued expenses and other current liabilities ................................ 168,784 124,515 106,498 --------------------- ---------- Total current liabilities ................................................... 466,215 251,935 324,066 --------------------- ---------- Long-term debt and capital lease obligations ................................... 594,241 407,272 288,486 --------------------- ---------- Other noncurrent liabilities: Pension and postretirement benefits ........................................... 62,276 38,486 55,320 Deferred income taxes ......................................................... 31,523 11,745 7,260 Other ......................................................................... 13,197 12,636 -----------17,638 8,120 ---------- ---------- Total other noncurrent liabilities .......................................... 63,428 75,216 ----------- ----------111,437 58,351 Minority interests ............................................................. 57,475 5,077 Commitments and contingencies Shareholders' equity: Preferred stock, $1.00 par value, 1,000,000 authorized shares .................shares.................. - - Common stock, $.50 par value, 100,000,000 and 25,000,000 shares authorized; 41,847,359 and 37,537,362 and 19,196,681 issued ............................................shares .................................................... 20,924 18,769 9,598 Additional paid-inPaid-in capital ................................................................................................................... 180,020 96,971 113,661 Retained earnings ............................................................. 340,154 245,270 191,870 Treasury stock, at cost, 437,000 shares .......................................Accumulated other comprehensive income ........................................ 1,148 - (7,643) --------------------- ---------- Total shareholders' equity .................................................. 542,246 361,010 307,486 ----------- ---------- $ 1,083,645 $ 995,254 ===========---------- $1,771,614 $1,083,645 ========== ==========
The accompanyingSee notes are an integral part of theseto consolidated balance sheets.financial statements - F-3 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ----------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 ---------------- ---------------- --------------------------- --------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales ......................................................................................................... $3,774,989 $ 3,867,442 $ 3,870,611 $ 2,383,893 Cost of sales ................................................. 3,479,828 3,549,673 2,203,626 ------------ ------------........................................ 3,235,414 3,479,629 3,546,816 ---------- ----------- ----------- Gross profit ................................................. 387,614 320,938 180,267........................................ 539,575 387,813 323,795 Selling, general and administrative expenses ........................... 295,610 219,861 191,225 103,095 Depreciation expense ........................................................................... 63,524 42,300 35,825 25,979 Interest expense ................................................................................... 40,521 31,891 26,211 20,942 ------------ ---------------------- ----------- ----------- Minority interests ................................... (3,518) 199 2,857 Nonrecurring charge ...........................................(See Note 12) .................... - 12,600 - - Income from continuing operations before income taxes .........taxes............................ 143,438 80,962 67,677 30,251 Income taxes ........................................................................................... 48,554 27,562 22,740 10,465 ------------ ---------------------- ----------- Income from continuing operations ............................. 53,400 44,937 19,786 Loss from discontinued operations, net of tax ................. - - (3,900) ------------ ------------ ----------- Net income ............................................................................................... $ 94,884 $ 53,400 $ 44,937 $ 15,886 ============ ====================== =========== =========== Net income available to common shareholders ............................. $ 94,884 $ 53,400 $ 43,699 $ 14,734 ============ ====================== =========== Income (loss)=========== Net income per basic share: Continuing operations ........................................common share .................... $ 2.39 $ 1.42 $ 1.21 $ .55 Discontinued operations ...................................... - - ( .11) ============ ====================== =========== =========== Net income ................................................... $ 1.42 $ 1.21 $ .44 ============ ============ =========== Income (loss) per diluted share: Continuing operations ........................................common share .................. $ 2.32 $ 1.34 $ 1.17 $ .53 Discontinued operations ...................................... - - ( .11) ============ ====================== =========== Net income ................................................... $ 1.34 $ 1.17 $ .42 ============ ============ ===========
The accompanyingSee notes are an integral part of theseto consolidated statements.financial statements - F-4 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ------------------------------------------------------------------------------------- 1999 1998 1997 1996 ------------- ------------- ----------------------- ------------ ------------ (IN THOUSANDS) Cash flows from operatingOperating activities: Net income ...................................................................................................................... $ 94,884 $ 53,400 $ 44,937 $ 15,886 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............................................................................. 68,566 45,872 39,057 28,299 Deferred income taxes .............................................................................................. 20,737 14,752 7,810 (27,059) (Gain) loss on sale of property and equipment .............................................. (138) 216 (3,288) 2,168 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable ............................................................................................... 954 15,115 (12,606) (9,251) Inventories ............................................................................................................... (17,680) 11,672 (30,008) (41,316) Prepaid expenses and other current assets ................................................... (2,225) (10,550) (1,605) 1,535 Other assets ............................................................................................................. (55,563) (7,746) (10,410) 22,682 Accounts payable, accrued expenses and other liabilities ..................... 13,849 (25,194) 9,377 19,166 ---------- ---------- ------------------- Net cash provided by operating activities .......................................................... 123,384 97,537 43,264 12,110 ---------- ---------- --------- Cash flows from investing---------- Investing activities: Capital expenditures .................................................................................................. (95,447) (92,913) (69,147) (74,888) Business acquisitions, net of cash acquired .................................................... (151,223) (7,810) (34,835) (14,079) Investments in partnerships .................................................................................... (16,206) (5,357) (7,293) (2,486) Net advances to joint hog production arrangements ................... - (113) 6,464 Proceeds from sale of property and equipment .................................................. 991 1,153 4,141 82Other investing activities ............................................ - - (113) ---------- ---------- ------------------- Net cash used in investing activities .................................................................. (261,885) (104,927) (107,247) (84,907) ---------- ---------- --------- Cash flows from financing---------- Financing activities: Net (repayments) borrowings on notes payable .................................................. 24,182 (75,000) (33,063) 33,592 Proceeds from issuance of long-term debt .......................................................... 22,948 450,050 171,250 50,000Net borrowings on long-term credit facility ........................... 71,000 - - Principal payments on long-term debt and capital lease obligationsobligations..... (21,754) (333,053) (76,974) (16,672) Proceeds from issuance of preferred stock ........................... - - 20,000 Exercise of common stock options .......................................................................... 12,155 124 1,270 768 Dividends on preferred stock .................................................................................. - - (1,238) (1,152) ---------- ---------- ------------------- Net cash provided by financing activities .......................................................... 108,531 42,121 61,245 86,536 ---------- ---------- ------------------- Net (decrease) increase (decrease) in cash and cash equivalents .................................... (29,970) 34,731 (2,738) 13,739Effect of foreign exchange rate changes on cash ........................ 38 - - Cash and cash equivalents at beginning of year ................................................ 60,522 25,791 28,529 14,790 ---------- ---------- ------------------- Cash and cash equivalents at end of year ............................................................ $ 30,590 $ 60,522 $ 25,791 $ 28,529 ========== ========== =================== Supplemental disclosures of cash flow information: Interest paid, net of amount capitalized .......................................................... $ 37,696 $ 31,428 $ 25,751 $ 20,684 ---------- ---------- ------------------- Income taxes paid ........................................................................................................ $ 15,306 $ 10,179 $ 15,043 $ 1,685 ---------- ---------- ------------------- Non-cash investing and financing activities: Refinancing of long-term debt ............................................................................ $ - $ - $ 59,707 $ - ---------- ---------- ------------------- Conversion of preferred stock to common stock ..................... $ - $ 20,000 $ 10,000 ---------- ---------- --------- Common stock issued for acquisition ...................................................... $ - $ - $ 33,00020,000 ---------- ---------- ------------------- Common stock issued for acquisitions ................................ $ 73,049 $ - $ - ---------- ---------- ---------- Conversion of net advances to joint hog production arrangements to investments in partnerships ..................................... $ - $ - $ 7,691 $ - ========== ========== ===================
The accompanyingSee notes are an integral part of theseto consolidated statements.financial statements - F-5 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED COMMON STOCK ADDITIONAL ------------------------OTHER ---------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHARES PAR VALUE CAPITAL EARNINGS INCOME STOCK TOTAL ---------- ----------- ----------- ------------ ---------------------------- ------------ ----------- (IN THOUSANDS) Balance, April 30, 1995 ..................... 16,83428, 1996 ................. 18,453 $ 8,4179,227 $ 49,80492,762 $148,171 $ 133,437- $ (7,643) $242,517 Comprehensive income: Net income ............................................................ - - - 15,88644,937 - Common stock issued for acquisition of John Morrell & Co. ....................... 1,094 547 32,453- 44,937 ------ ------- -------- -------- ------ -------- -------- Total comprehensive income .......... - - - - - - 44,937 ------ ------- -------- -------- ------ -------- -------- Conversion of preferred stock .......... 667 333 19,667 - - - 20,000 Exercise of stock options .............. 465 233 9,76777 38 1,232 - - - 1,270 Dividends on preferred stock ........... - - - (1,238) - - (1,238) ------ ------- -------- -------- ------ -------- -------- Balance, April 27, 1997 ................. 19,197 9,598 113,661 191,870 - (7,643) 307,486 Comprehensive income: Net income ........................... - - - 53,400 - - 53,400 ------ ------- -------- -------- ------ -------- -------- Total comprehensive income .......... - - - - - - 53,400 ------ ------- -------- -------- ------ -------- -------- Two-for-one stock split ................ 19,200 9,600 (9,600) - - - - Exercise of stock options .................. 60 30 738 - - Dividends on preferred stock ............... - - - (1,152) - ------ -------- -------- --------- --------- Balance, April 28, 1996 ..................... 18,453 9,227 92,762 148,171 (7,643) Net income ................................. - - - 44,937 - Conversion of preferred stock .............. 667 333 19,667 - - Exercise of stock options .................. 77 38 1,232 - - Dividends on preferred stock ............... - - - (1,238) - ------ -------- -------- --------- --------- Balance, April 27, 1997 ..................... 19,197 9,598 113,661 191,870 (7,643) Net income ................................. - - - 53,400 - Two-for-one stock split .................... 19,200 9,600 (9,600) - - Exercise of stock options .................. 14 8 116 - - - 124 Reclassification of treasury stock .............. (874) (437) (7,206) - - 7,643 - ------ ------- -------- -------- ------ -------- -------- --------- --------- Balance, May 3, 1998 ............................................ 37,537 $ 18,769 $ 96,971 $ 245,270 - - 361,010 Comprehensive income: Net income ........................... - - - 94,884 - - 94,884 Other comprehensive income ........... - - - - 1,148 - 1,148 ------ ------- -------- -------- ------ -------- -------- Total comprehensive income .......... - - - - - - 96,032 ------ ------- -------- -------- ------ -------- -------- Common stock issued .................... 2,986 1,493 71,556 - - - 73,049 Exercise of stock options .............. 1,324 662 11,493 - - - 12,155 ------ ------- -------- -------- ------ -------- -------- Balance, May 2, 1999 .................... 41,847 $20,924 $180,020 $340,154 $1,148 $ - $542,246 ====== ======= ======== ======== ========= =============== ======== ========
The accompanyingSee notes are an integral part of theseto consolidated statements.financial statements - F-6 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Smithfield Foods, Inc. and subsidiaries (the "Company") operateoperates as a producer, manufacturer, marketer, seller and distributor of fresh pork and processed meats. The Company's principal hog slaughtering and further processing operations are conducted through five wholly-owned subsidiaries:the Meat Processing Group ("MPG") which consists of six wholly owned domestic pork processing subsidiaries, Gwaltney of Smithfield, Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc. ("Lykes"), North Side Foods Corp. ("North Side"), Patrick Cudahy Incorporated ("Patrick Cudahy") and The Smithfield Packing Company, Incorporated ("Smithfield Packing")., and three international meat processing subsidiaries, Animex S.A. ("Animex"), a 67%-owned Polish subsidiary, Schneider Corporation ("Schneider"), a 63%-owned Canadian subsidiary, and Societe Bretonne de Salaisons ("SBS"), a wholly owned French subsidiary. The Company also conductsCompany's hog production operations principallyare conducted through its 86%-owned subsidiary,the Hog Production Group ("HPG") which consists of Brown's of Carolina, Inc. ("Brown's"), an 86%-owned subsidiary of the Company, a 50% interest in Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production arrangement between the Company and an affiliate of Carroll's Foods, Inc. ("CFI") and an 84% interest in Circle Four ("Circle Four"), a joint hog production arrangement between the Company and affiliates of CFI. Effective May 3, 1999, the Company acquired CFI and its affiliated companies and partnership interests (See Note 15). PRINCIPLESBASIS OF CONSOLIDATIONPRESENTATION The accompanying consolidated financial statements include the accounts of the Company after elimination of all material intercompany balances and transactions. Investments in partnerships are accounted forrecorded using the equity method of accounting. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in these financial statements.disclosures. Actual results could differ from those estimates. FISCAL YEAR The Company'sFiscal 1999 and 1997 included 52 weeks of operations compared to fiscal year1998 which included 53 weeks of operations. FOREIGN CURRENCY TRANSLATION Financial statements of foreign operations, where the local currency is the 52- or 53-weekfunctional currency, are translated using exchange rates in effect at period ending onend for assets and liabilities, and average exchange rates during the Sunday nearest April 30. The fiscal year ended May 3, 1998 includes 53 weeks whileperiod for results of operation. Related translation adjustments are reported as a component of other comprehensive income in shareholders equity. All amounts presented in the fiscal years ended April 27, 1997 and April 28, 1996 each include 52 weeks.consolidated financial statements are in US dollars. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying value of cash equivalents approximates market value. AtAs of May 2, 1999 and May 3, 1998, cash and cash equivalents include $30,100,000$3,400 and $30,100, respectively, in short-term marketable debt securities. INVENTORIES The Company's inventories are valued at the lower of first-in, first-out cost or market. Cost includes direct materials, labor and applicable manufacturing and production overhead. Inventories consist of the following:
MAY 2, 1999 MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS)------------ Fresh and processed meats ......... $ 171,090 $ 183,480.......... $219,647 $171,090 Hogs on farms ........................................... 83,352 49,263 44,563 Manufacturing supplies ......................... 30,201 18,538 15,732 Other ........................................................... 15,656 10,620 9,501 --------- --------- $ 249,511 $ 253,276 ========= =========-------- -------- $348,856 $249,511 ======== ========
- F-7 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued FINANCIAL INSTRUMENTS The Company uses commodity hedging instruments, including futures and options, to reduce the risk of price fluctuations related to future raw material requirements and product sales. The terms of such instruments generally do not exceed twelve months and depend on the commodity and other market factors. The Company attempts to closely match the commodity contract expiration periods with the dates for product sale and delivery. Gains and losses from hedging transactions are recognized when the related sales and purchases are made. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets. Buildings and improvements are depreciated over periods from 20 to 40 years. Machinery and equipment is depreciated over periods from 2two to 20 years. Breeding stock is depreciated over two and one-half years. Repair and maintenance charges are expensed as incurred. Improvements that materially extend the life of the asset are capitalized. Gains and losses from dispositions or retirements of property, plant and equipment are recognized currently. Interest on capital projects is capitalized during the construction period. Total interest capitalized was $2,530,000$2,377 in fiscal 1999, $2,530 in fiscal 1998 $2,640,000and $2,640 in fiscal 1997 and $2,021,000 in fiscal 1996.1997. Repair and maintenance expenses totaled $106,481,000, $89,670,000$120,833, $106,481 and $59,951,000$89,670 in fiscal 1999, 1998 and 1997, and 1996, respectively. F-7 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued OTHER ASSETS Goodwill is being amortized over no more than 40 years. Organization costs are amortized over a five-year period. Deferred debt issuance costs are amortized over the terms of the related loan agreements. REVENUE RECOGNITION Revenues from product sales are recorded upon shipment to customers. PRICE-RISKENVIRONMENTAL EXPENDITURES Environmental expenditures that relate to current or future operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and cleanups are probable and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the Company's commitment to a formal plan of action (See Note 12). SELF-INSURANCE PROGRAMS The Company is self-insured for certain levels of general and vehicle liability, workers' compensation and health care coverage. The cost of these self-insurance programs is accrued based upon estimated settlements for known and anticipated claims. Any resulting adjustments to previously recorded reserves are reflected in current operating results. NET INCOME PER SHARE The Company presents a dual computation of net income per share (See Note 13). The basic computation is based on weighted-average common shares outstanding during the period. The diluted computation reflects the potentially dilutive effect of common stock equivalents such as options and convertible preferred stock during the period. RECENTLY ISSUED ACCOUNTING STANDARDS In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for reporting and display of comprehensive income and its components. The adoption of SFAS 130 had no impact on the Company's net income. In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 established standards for determining an entity's operating segments and for disclosure - F-8 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued of financial information on such segments. The adoption of SFAS 131 had no impact on the Company's financial position or results of operations (See Note 14). In fiscal 1999, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -- an amendment of statements No. 87, 88 and 106" ("SFAS 132"). SFAS 132 standardized the disclosure requirement for pensions and other postretirement benefits and, to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis. The adoption of SFAS 132 had no impact on the Company's financial position or results of operations (See Note 9). In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established accounting and reporting standards for derivative instruments and hedging activities and requires, among other things, that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS 133 is not required to be adopted until fiscal 2001. The Company has not completed the analysis required to estimate the impact of the standard. RECLASSIFICATIONS Certain prior year amounts have been restated to conform to fiscal 1999 presentations. NOTE 2 -- RISK MANAGEMENT Substantially all of the Company's products are manufacturedproduced from commodity-based raw materials, primarilycorn and soybean meal in the HPG and live hogs.hogs in the MPG. The cost of corn and soybean meal (the principal feed ingredients for hogs) and live hogs isare subject to wide fluctuations due to unpredictable factors such as the price of corn and soybean meal (the principal feed ingredients for a hog), weather conditions, economic conditions, government regulation and other unforeseen circumstances. The pricing of the Company's fresh pork and processed meats areis monitored and adjusted upward and downward in reaction to changes in the cost of the underlying raw materials. The unpredictability of the raw material costs limitlimits the Company's ability to forward price fresh pork and processed meat products without the use of commodity contracts through a program of price-risk management. The Company uses price-risk management to enhance its ability to engage in forward sales contracts, where prices for future deliveries are fixed, by purchasing (or selling) commodity contracts for future periods to reduce or eliminate the effect of fluctuations in future raw material costs on the profitability of the related sales. While this may tend to limit the Company's ability to participate in gains from favorable commodity price fluctuations,fluctuation, it also tends to reduce the risk of loss from adverse changes in raw material prices. In addition, the Company utilizes commodity contracts for live hogs and corngrains to manage hog production margins when management determines thatthe conditions are appropriatecorrect for such hedges. The particular hedging methods employed and the time periods for the contracts depend on a number of factors, including the availability of adequate contracts for the respective periods for the hedges.hedge. The Company attempts to closely match the commodity contract expiration periods with the dates for product sale and delivery. As a result, gainsof May 2, 1999 and losses from hedging transactions are recognized when the related sales are made and the hedges are lifted. As of May 3, 1998, and April 27, 1997, the Company had deferred $1,867,000$8,895 and $2,183,000,$1,867, respectively, of unrealized hedging gains on outstanding futures contracts. As of May 2, 1999 and May 3, 1998, and April 27, 1997, the Company had open futures contracts with faircontract values of $59,645,000$219,748 and $44,291,000,$97,072, respectively. As of May 2, 1999 and May 3, 1998, and April 27, 1997, the Company had deposits with brokers for outstanding futures contracts of $10,888,000$15,591 and $3,512,000$10,888, respectively, included in prepaid expenses and other current assets. For open futures contracts, the Company uses a sensitivity analysis technique to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments. As of May 3, 1998,2, 1999, the potential change in fair value of open futuresfuture contracts, assuming a 10% change in the underlying commodity price, was $2,124,000. ENVIRONMENTAL EXPENDITURES Environmental expenditures that relate to current or future operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused$10,418. NOTE 3 -- ACQUISITIONS In the third quarter of fiscal 1999, the Company acquired 100% of the voting common shares of Schneider and approximately 59% of its Class A non-voting shares, which in the aggregate represents approximately 63% of the total equity of Schneider, in exchange for approximately 2,527,000 Exchangeable Shares of Smithfield Canada Limited, a wholly owned subsidiary of the Company. Each Exchangeable Share is exchangeable by past operations and do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and cleanups are probable and the cost can be reasonably estimated. Generally, the timingholder at any time for one common share of these accruals coincides with the Company's commitment to a formal plan of action (see Note 12). SELF-INSURANCE PROGRAMS The Company is self-insured for certain levels of general and vehicle liability, workers' compensation and health care coverage. The cost of these self-insurance programs is accrued based upon estimated settlements for known and anticipated claims. Any resulting adjustments to previously recorded reserves are reflected in current operating results. F-8- F-9 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 13 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESACQUISITIONS -- Continued INCOME PER SHAREthe Company. Schneider produces and markets fresh pork and a full line of processed meats and is the second largest meat processing company in Canada. The Company has adopted Statementtotal purchase price of Financial Accounting Standards ("SFAS") No. 128, "Earnings$69,700 was allocated to assets acquired and liabilities assumed based on fair values at the date of the acquisition. The balance of the purchase price in excess of the fair value of assets acquired and liabilities assumed at the date of acquisition was recorded as an intangible asset totaling $36,900. Had the acquisition of Schneider occurred at the beginning of fiscal 1998, sales, net income and net income per Share" ("SFAS 128"), effectivediluted share would have been $4,053,798, $98,146 and $2.33 for fiscal 1999 and $4,405,239, $59,447 and $1.40 for fiscal 1998. SFAS 128 requiresIn April 1999 the Company acquired, in a dual computationtender offer, 11,500,000 shares of the capital stock of Animex, the largest meat and presentationpoultry processing company in Poland. Following the tender offer, the Company's ownership represented 67% of income per share (see Note 13). The basic computation isthe total equity and 51% voting control of Animex. A preliminary allocation of the purchase price was made to assets acquired and liabilities assumed based on average common shares outstandingtheir estimated fair values. The final purchase price allocation will be determined during fiscal 2000 when appraisals, other studies and additional information become available. Had the period. The diluted computation reflectsacquisition of Animex occurred at the potentially dilutive effect of common stock equivalents such as options and convertible preferred stock during the period. All income per share amounts for all periods are presented to conform to the SFAS 128 requirements. On September 26, 1997, a two-for-one stock splitbeginning of the Company's common stock was effected in the form of a stock dividend. Accordingly, all historical share and per share amountsfiscal 1999, sales would have been restated to reflect the stock split. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reportingapproximately $4,175,000, and display of comprehensive income and its components. Adoption of SFAS 130 in fiscal 1999 willit would not have no impacthad a material effect on the Company's net income or shareholders' equity. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for determining an entity's operating segments and for disclosure of financial information on such segments. Adoption of SFAS 131 in fiscal 1999 will have no impact on the Company's financial position or results of operations, but will require expanded disclosure for identified operating segments.net income per diluted share. In FebruarySeptember 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits -- an amendment of FASB Statements No. 87, 88 and 106" ("SFAS 132"). In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 132 and SFAS 133 are not required to be adopted until fiscal 2000. The Company has not completedacquired all of the analysis required to estimatecapital stock of SBS, the impactlargest private-label manufacturer of these statements. NOTE 2 -- ACQUISITIONSham, pork shoulder and bacon products in France. In November 1996,October 1998, the Company acquired substantially all of the assets and business of Lykes from Lykes Bros. Inc. for $34,835,000 in cash and the assumptionNorth Side, a major domestic supplier of $10,616,000precooked sausage to McDonald's Corporation. Each of current liabilities. The following unaudited pro forma information combines the operating results of the Company and Lykes, assuming the acquisition had been made as of the beginning of each of the periods presented:
1997 1996 ---------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales ..................................... $ 3,948,091 $ 2,630,031 Income from continuing operations ......... 33,839 12,291 Net income ................................ 33,839 8,391 Income per basic share: Continuing operations ................... $ .90 $ .33 Net income .............................. .90 .21 Income per diluted share: Continuing operations ................... $ .88 $ .32 Net income .............................. .88 .21
The preceding pro forma amounts are not intended to be projections of future results or trends and do not purport to be indicative of what actual consolidated results of operations might have been if thethese acquisitions had been effective as of the beginning of the periods presented. The Company made several acquisitions in fiscal 1998 which, in the aggregate, would not have a material effect on pro forma results. F-9 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 2 -- ACQUISITIONS -- Continued The Companywas accounted for the Lykes and other acquisitions using the purchase method of accounting. Theaccounting and, accordingly, the accompanying financial statements include the financial position and results of operations of these acquired businesses are included in the accompanying consolidated statements of income from the respective dates of acquisition. Had the acquisitions of North Side and SBS occurred at the beginning of fiscal 1999, it would not have had a material effect on sales, net income or net income per diluted share for the year ended May 2, 1999. In addition, during fiscal 1999, the Company increased its ownership in the Circle Four hog production operation from 37% to 84%, requiring the Company to consolidate the accounts of Circle Four and to discontinue using the equity method of accounting. During fiscal 1998 and 1997, Circle Four was accounted for using the equity method of accounting. NOTE 34 -- JOINT HOG PRODUCTION ARRANGEMENTS SMITHFIELD-CARROLL'S The Company has an arrangement with certain affiliates of Carroll's Foods, Inc. ("CFI")CFI to produce hogs for the Company's meat processing plants in North Carolina and Virginia. The arrangement ("Smithfield-Carroll's") involves: (1) Smithfield-Carroll's Farms, a partnership owned jointly by the Company and Carroll's Farms of Virginia, Inc. ("CFAV"), which owns the hog raising facilities, and (2) a long-term purchase contract between the Company and Carroll's Foods of Virginia, Inc. ("CFOV"), which leases and operates the facilities, obligating the Company to purchase all the hogs produced by CFOV at prices equivalent to market at the time of delivery. A director of the Company is the president and a director of CFI, CFAV and CFOV. In addition, the Company has a long-term agreement to purchase hogs from CFI at prices which, in the opinion of management, are equivalent to market. A director of the Company is the president and a director of CFI, CFAV and CFOV. As of May 2, 1999 and May 3, 1998, and April 27, 1997, the Company had investments of $29,357,000$30,031 and $27,943,000,$29,357, respectively, in the Smithfield-Carroll's partnership. Profits and losses are shared equally under the arrangement. During fiscal 1997, the Company converted net advances to the arrangement of $7,691,000 to investments in the arrangement. Substantially all revenues of the partnership consist of lease payments from CFOV which cover debt service, depreciation charges and other operating expenses. For the fiscal years 1999, 1998 1997 and 1996,1997, revenues were $7,386,000, $8,227,000$7,680, $7,386 and $8,912,000,$8,227, respectively. Pursuant to the long-term purchase contract, the Company purchased $79,087,000, $93,049,000$53,282, $79,087 and $70,540,000$93,049 of live hogs from CFOV in fiscal 1999, 1998 1997 and 1996,1997, respectively. The contract resulted in decreasedincreased raw material costs (as compared to market costs) of $359,000, $5,245,000$12,465 in fiscal 1999 and $2,617,000decreased raw material costs of $359 and $5,245 in fiscal 1998 and 1997, and 1996, respectively. In fiscal 1997, the Company received $6,905,000 from CFOV in repayment of all outstanding demand loans. Pursuant to the agreement with CFI, the Company purchased $246,371,000, $269,499,000$161,965, $246,371 and $201,878,000$269,499 of hogs in fiscal 1998, 1997 and 1996, respectively. CIRCLE FOUR The Company has an arrangement with certain of its principal hog suppliers to produce hogs in the state of Utah for sale to an unrelated party. The chief executive officers of two of the suppliers and the president of another served as directors of the Company during fiscal 1998. As of May 3, 1998, the Company had a 37% interest in the arrangement. As of May 3,1999, 1998 and April 27, 1997, the Company had investments of $16,198,000 and $12,673,000, respectively, in the arrangement. B&G Brown's has an arrangement with a company owned by the daughter and son-in-law of the chairman and chief executive officer of the Company. The arrangement, B&G Farms LLC ("B&G"), involves the leasing of hog production facilities to Brown's and the production of hogs by Brown's on a contractual basis. In addition, the Company has a contract to purchase all of the hogs produced by B&G at prices which, in the opinion of management, are equivalent to market. Profits and losses are shared equally under the arrangement. As of May 3, 1998 and April 27, 1997, B&G had advanced $1,504,000 and $1,430,000, respectively, to Brown's for working capital. As of May 3, 1998 and April 27, 1997, the Company had investments of $1,147,000 and $1,291,000, respectively, in B&G. B&G's revenues consist of lease payments from Brown's, which cover debt service and depreciation charges, and the profits or losses on the sale of hogs. Pursuant to the contract, the Company purchased $7,944,000, $6,439,000 and $7,990,000 of hogs in fiscal 1998, 1997 and 1996, respectively. - F-10 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 3 -- JOINT HOG PRODUCTION ARRANGEMENTS -- Continued The following summarized financial information represents an aggregation of the financial position of the unconsolidated hog production operations of Smithfield-Carroll's, Circle Four and B&G:
MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) Current assets ...................... $ 25,738 $ 17,116 Property and equipment, net ......... 147,171 134,937 Other assets ........................ 1,988 6,978 --------- --------- $ 174,897 $ 159,031 ========= ========= Current liabilities ................. $ 21,773 $ 15,721 Long-term debt ...................... 72,290 71,094 Equity .............................. 80,834 72,216 --------- --------- $ 174,897 $ 159,031 ========= =========
NOTE 4 -- DEBT Long-term debt consists of the following:
MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) 7.625% senior subordinated notes, due February 2008 ......... $ 200,000 $ - 8.52% senior notes, due August 2006 ......................... 100,000 100,000 8.34% senior notes, due August 2003 ......................... 40,000 40,000 8.41% senior notes, payable through August 2004 ............. 14,779 14,779 9.85% senior notes, payable through November 2006 ........... 11,333 13,000 8.41% senior notes, payable through August 2006 ............. 9,853 9,853 9.80% senior notes, payable through August 2003 ............. 7,500 8,437 10.75% senior notes, payable through August 2005 ............ 7,250 8,500 Long-term credit facility ................................... - 75,000 Other long-term debt ........................................ 6,126 4,036 --------- --------- 396,841 273,605 Less current portion ........................................ (7,020) (5,949) --------- --------- $ 389,821 $ 267,656 ========= =========
Scheduled maturities of long-term debt are as follows:
(IN THOUSANDS) --------------- Fiscal year 1999 ................... $ 7,020 2000 ................... 2,915 2001 ................... 3,170 2002 ................... 3,083 2003 ................... 10,473 Thereafter ............. 370,180 -------- $396,841 ========
In July 1997, the Company entered into loan agreements with a bank group for $350,000,000 in revolving credit facilities, consisting of a five-year $300,000,000 revolving credit facility and a 364-day $50,000,000 revolving credit facility. In connection with this refinancing, the Company repaid all borrowings under its previous $300,000,000 credit facilities, which F-11 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 4 -- DEBTSMITHFIELD-CARROLL'S -- Continued were terminated. The borrowingsEffective May 3, 1999, the Company purchased CFI in a business combination (See Note 15). NOTE 5 -- DEBT Long-term debt consists of the following:
MAY 2, 1999 MAY 3, 1998 ------------- ------------ 7.625% senior subordinated notes, due February 2008 ............. $ 200,000 $200,000 8.52% senior notes, due August 2006 ............................. 100,000 100,000 Long-term credit facility, expiring July 2002 ................... 71,000 - Libor + 1.50% notes, payable through December 2005 .............. 42,534 - 8.34% senior notes, due August 2003 ............................. 40,000 40,000 Euribor 3 mos. + .50% French Franc notes, payable through April 2004 .................................................... 19,355 - 8.41% senior notes, payable through August 2004 ................. 14,779 14,779 9.70% Canadian dollar notes, payable through September 2010...... 13,114 - Libor + 1.50% notes, payable through December 2006 .............. 13,000 - 9.85% senior notes, payable through November 2006 ............... 10,333 11,333 8.41% senior notes, payable through August 2006 ................. 9,853 9,853 8.56% Canadian dollar notes, payable through November 2003 ...... 9,749 - 8.03% weighted average notes, payable July 1999 through October 2017 .................................................. 41,113 - Other Euribor weighted average 3 mos. + .72% notes, due December 2000 through November 2003 ........................... 11,865 20,876 Miscellaneous ................................................... 5,841 - --------- -------- 602,536 396,841 Less current portion ............................................ (24,102) (7,020) --------- -------- $ 578,434 $389,821 ========= ========
Scheduled maturities of long-term debt are prepayable and bear interest, at the Company's option, at various rates based on margins over the federal funds rate or Eurodollar rate. The Company pays a commitment fee on the unused portion. The 364-day $50,000,000 revolving credit facility was terminated in February 1998.as follows: Fiscal year 2000 ................... $ 24,102 2001 ................... 25,487 2002 ................... 24,371 2003 ................... 94,711 2004 ................... 89,804 Thereafter ............. 344,061 -------- $602,536 ========
In Februaryfiscal 1998, the Company issued $200,000,000$200,000 in aggregate principal amount of 10-year 7.625% senior subordinated notes. The net proceeds from the sale of the notes were used to repay indebtedness under the Company's revolving credit facility with the balance invested in short-term marketable debt securities. In fiscal 1997, the Company privately placed $140,000,000$140,000 of senior secured notes with a group of institutional lenders. The placement consisted of $40,000,000$40,000 of seven-year 8.34% notes and $100,000,000$100,000 of 10-year 8.52% notes.notes secured by four of the Company's major processing plants. The proceeds of the financing were used to repay $65,200,000$65,200 of long-term bank debt and to reduce short-term borrowings. In conjunction with the placement of the senior secured notes, the Company refinanced $59,707,000$59,707 of existing institutional long-term debt with the same institutional lenders. The refinancing resulted in revised maturity dates and repayment schedules for the refinanced debt; however, no additional proceeds resulted from this refinancing. - F-11 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 5 -- DEBT -- Continued In fiscal 1998, the Company entered into a loan agreement with a bank group for a five-year $300,000 revolving credit facility. In connection with this refinancing, the Company repaid all borrowings under its previous $300,000 credit facilities, which were terminated. The borrowings are prepayable and bear interest, at the Company's option, at various rates based on margins over the federal funds rate or Eurodollar rate. The Company has aggregate credit facilities totaling $402,000 including a $300,000 revolving credit facility with a bank group which expires July 2002. As of May 2, 1999, the Company had unused capacity under these credit facilities of $214,000. Included in the aggregate credit facilities are $102,000 of short-term credit facilities with various U.S. and international banks assumed in connection with businesses acquired during fiscal 1999. These short-term credit facilities are classified as notes payable in the Consolidated Balance Sheet. These facilities are generally at prevailing market rates. The Company pays a commitment fee on the unused portion of the $300,000 revolving credit facility. Average borrowings under credit facilities were $149,723,000$74,820 in fiscal 1999, $149,723 in fiscal 1998 $165,071,000and $165,071 in fiscal 1997 and $133,400,000 in fiscal 1996 at average interest rates of approximately 6%, 7% for each year.and 7%, respectively. Maximum borrowings were $247,000,000$152,510 in fiscal 1999, $247,000 in fiscal 1998 $215,000,000and $215,000 in fiscal 1997 and $179,800,000 in fiscal 1996.1997. Total outstanding borrowings were $134,900 as of May 2, 1999, at an average interest rate of 7%. There were no borrowings under the facility as of May 3, 1998. The outstanding borrowings were $150,000,000 as of April 27, 1997, at an average interest rate of 7%. The senior subordinated notes are unsecured. The seniorSenior notes are secured by four of the Company's major processing plants and certain other property, plant and equipment. The $300,000 credit facility is secured by substantially all of the Company's U.S. inventories and accounts receivable. The Company determines the fair value of long-term debt instruments for public debt using quoted market prices and values all other debt using discounted cash flow techniques at estimated market prices for similar issues. As of May 3, 1997,2, 1999, the fair value of long-term debt, based on the market value of debt with similar maturities and covenants, was approximately $407,511,000.$599,015. The Company's various debt agreements contain financial covenants that require the maintenance of certain levels and ratios for working capital, net worth, current ratio, fixed charges, capital expenditures and, among other restrictions, limit additional borrowings, the acquisition, disposition and leasing of assets, and payments of dividends to shareholders. NOTE 56 -- INCOME TAXES Total incomeIncome tax expense (benefit) was allocated as follows:consists of the following:
1999 1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS)---------- ---------- ---------- Income from continuing operations .........Current tax expense: Federal ..................... $ 20,445 $ 11,315 $ 12,765 State ....................... 5,409 2,043 2,805 Foreign ..................... 1,963 - - -------- -------- -------- 27,817 13,358 15,570 -------- -------- -------- Deferred tax expense (benefit): Federal ..................... 19,924 15,684 9,424 State ....................... (2,082) (1,480) (2,254) Foreign ..................... 2,895 - - -------- -------- -------- 20,737 14,204 7,170 -------- -------- -------- $ 48,554 $ 27,562 $ 22,740 $ 10,465 Discontinued operations ................... - - (2,600) -------- -------- -------- $ 27,562 $ 22,740 $ 7,865 ======== ======== ========
- F-12 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 56 -- INCOME TAXES -- Continued Income tax expense attributable to income from continuing operations consists of the following:
1998 1997 1996 ----------- ----------- ------------ (IN THOUSANDS) Current tax expense: Federal ..................... $ 11,315 $ 12,765 $ 8,850 State ....................... 2,043 2,805 1,530 -------- -------- -------- 13,358 15,570 10,380 -------- -------- -------- Deferred tax expense (benefit): Federal ..................... 15,684 9,424 (129) State ....................... (1,480) (2,254) 214 14,204 7,170 85 -------- -------- -------- $ 27,562 $ 22,740 $ 10,465 ======== ======== ========
A reconciliation of taxes computed at the federal statutory rate to the provision for income taxes is as follows:
1999 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Federal income taxes at statutory rate ................................... 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit ................... 2.5 1.0 1.7 3.9 Nondeductible settlements ............................................................. - 4.5 1.6 - Foreign sales corporation benefit ............................................. (1.4) (2.0) (1.4) (2.4) Benefits of certain insurance contracts ................................. (1.1) (3.3) (3.6) (3.1) Other ..................................................................................................... (1.1) (1.2) 0.3 1.2 ---- ---- ---- 33.9% 34.0% 33.6% 34.6% ==== ==== ====
The tax effects of temporary differences consist of the following:
MAY 2, 1999 MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS)------------ Deferred tax assets: Employee benefits ........................................... $ 23,264 $ 28,986$17,748 $23,264 Alternative minimum tax credit .............................. 5,283 5,781 12,278 Tax credits, carryforwards and net operating losses ......... 14,308 12,773 11,807 Inventories ................................................. 1,627 1,286 1,377 Accrued expenses ............................................ 5,398 12,867 12,519 -------- -------- $ 55,971 $ 66,967 ======== ========------- ------- $44,364 $55,971 ======= ======= Deferred tax liabilities: Property, plant and equipment ............................... $ 36,488 $ 35,072$47,876 $36,488 Investments in subsidiaries ................................. 3,293 719 3,154 Other assets ................................................ 4,167 6,875 2,100 -------- -------- $ 44,082 $ 40,326 ======== ========------- ------- $55,336 $44,082 ======= =======
As of May 2, 1999 and May 3, 1998, and April 27, 1997, the Company had $23,634,000$20,551 and $33,901,000,$23,634, respectively, of net current deferred tax assets included in prepaid expenses and other current assets. The Company had no valuation allowance related to income tax assets as of May 2, 1999 or May 3, 1998, and April 27, 1997, and there was no change in the valuation allowance during fiscal 19981999 and 1997.1998. The tax credits, carryforwards and net operating losses expire from fiscal 19982000 to 2012.2013. The alternative minimum tax credits do not expire. F-13 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUEDAs of May 2, 1999, foreign subsidiary net earnings of $7,195 were considered permanently reinvested in those businesses. Accordingly, federal income taxes have not been provided for such earnings. It is not practicable to determine the amount of unrecognized deferred tax liabilities associated with such earnings. NOTE 67 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following:
MAY 2, 1999 MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS)------------ Payroll and related benefits ................................. $ 60,079 $ 46,834 $ 43,723 Self-insurance reserves ........................................... 33,870 24,794 18,112 Pension and postretirement benefits ................... 12,671 23,931 17,518 Other ............................................................................... 62,164 28,956 27,145 --------- --------- $ 124,515 $ 106,498 ========= =========-------- -------- $168,784 $124,515 ======== ========
- F-13 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 78 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK REINCORPORATION AND TREASURY STOCK In August 1997,fiscal 1998, the Company's shareholders approved the reincorporation of the Company in Virginia from Delaware. The purpose of the reincorporation was to reduce annual franchise taxes and does not affect the Company's capitalization or the manner in which it operates. Since Virginia law does not recognize treasury stock, the shares previously classified as treasury stock reverted to unissued shares resulting in a reduction in common stock and additional paid-in capital for the cost basis of the shares. AUTHORIZED COMMON SHARES In August 1997, the Company's shareholders approved an increase in the number of authorized common shares from 25,000,000 to 100,000,000. STOCK SPLIT As discussed in Note 1,On September 26, 1997, the Company effected a two-for-one split of its common stock in September 1997. Share amounts presented in the Consolidated Balance Sheets and the Consolidated Statements of Shareholders' Equity reflect the actual share amounts outstanding for each period presented.stock. Stock option agreements provide for the issuance of additional shares for the stock split. All stock options outstanding and per share amounts for all periods have been restated to reflect the effect of this split. ISSUANCE OF COMMON STOCK In fiscal 1996,1999, the Company issued 2,188,546 split-adjusted2,527,000 Exchangeable Shares of Smithfield Canada Limited, a wholly owned subsidiary of the Company, in exchange for the voting common shares and the Class A non-voting shares of Schneider Corporation. Each Exchangeable Share is exchangeable by the holder at any time for one common share of the Company. The Company considers each Exchangeable Share as equivalent to a share of its common stock and therefore these shares are included in common stock issued on the consolidated balance sheets and in the computation of net income per share. Also in fiscal 1999, the Company issued 459,000 shares of its common stock to Chiquita Brands International, Inc. as part of the acquisition of John Morrell.purchase price for North Side. PREFERRED STOCK The Company has 1,000,000 shares of $1.00 par value preferred stock authorized, none of which are issued. The board of directors is authorized to issue preferred stock in series and to fix, by resolution, the designation, dividend rate, redemption provisions, liquidation rights, sinking fund provisions, conversion rights and voting rights of each series of preferred stock. In fiscal 1996,1997, all of the Company authorized and issued 2,000 shares of Series C 6.75% cumulative convertible redeemable preferred stock, in a private transaction for $20,000,000. In fiscal 1997, all of these shares weretotaling $20,000, was converted into 1,333,332 split-adjusted shares of the Company's common stock at $15.00 per share. In fiscal 1996, all of the Series B 6.75% cumulative convertible redeemable preferred stock, totaling $10,000,000, was converted into 930,232 split-adjusted shares of the Company's common stock at $10.75 per share. F-14 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 7 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued STOCK OPTIONS Under the Company's 1984 Stock Option Plan (the "1984 Plan"), officers and certain key employees were granted incentive and nonstatutory stock options to purchase shares of the Company's common stock for periods not exceeding 10 years at prices that were not less than the fair market value of the common stock on the date of grant. Stock appreciation rights which are exercisable upon a change in control of the Company are attached to the options granted pursuant to the 1984 Plan. The 1984 Plan has expired in fiscal 1999 with the exceptionfinal exercise of outstanding options. Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"), management and other key employees may be granted nonstatutory stock options to purchase shares of the Company's common stock exercisable five years after grant for periods not exceeding 10 years. The exercise price for options granted prior to August 31, 1994 was not less than 150% of the fair market value of the common stock on the date of grant. On August 31, 1994 the Company amended and restated the 1992 Plan, changing the exercise price of options granted on or after that date to not less than the fair market value of the common stock on the date of grant. The Company reserved 2,500,000 shares of common stock under the 1992 Plan. As of May 3, 1998,2, 1999, there were 394,000294,000 options available for grant under the 1992 Plan. Under the Company's 1998 Stock Incentive Plan (the "1998 Plan"), management and other key employees may be granted nonstatutory stock options to purchase shares of the Company's common stock exercisable five years after grant for periods not exceeding 10 years. The Company reserved 1,500,000 shares under the 1998 Plan. As of May 2, 1999, there were no options granted under this plan. - F-14 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 8 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued The following is a summary of transactions for the 1984 Plan and the 1992 Plan during fiscal 1997, 1998 1997 and 1996:1999:
STOCK OPTIONWEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE SHARES PER SHARE -------------- ----------------------------- --------- Outstanding at April 30, 1995 ......... 3,132,200 $ 7.90 Granted ............................. 690,000 12.65 Exercised ........................... (119,200) 3.30 Cancelled ........................... (100,000) 11.53 --------- -------- Outstanding at April 28, 1996 ......... 3,603,000 $ 8.86 Granted ............................. 160,000 15.67 Exercised ........................... (154,000) 3.11 Cancelled ........................... (540,000) 12.29 --------- --------------- Outstanding at April 27, 1997 ......... 3,069,000 8.90 Granted ............................. 314,000 25.39 Exercised ........................... (17,000) 4.06 --------- --------------- Outstanding at May 3, 1998 ............ 3,366,000 10.47 Granted ............................. 260,000 27.96 Exercised ........................... (1,323,500) 4.42 Cancelled ........................... (160,000) 15.56 ---------- ------- Outstanding at May 2, 1999 ............ 2,142,500 $ 10.47 ========= ========15.95 ========== =======
As of May 2, 1999, May 3, 1998 and April 27, 1997, and April 28, 1996, the number of option shares exercisable werewas 1,127,500, 1,260,000 1,278,000 and 1,432,000,1,278,000, respectively, at weighted average per share exercise prices of $4.06,$11.53, $4.06 and $3.96,$4.06, respectively. The following table summarizes information about stock options outstanding as of May 3, 1998:2, 1999:
OPTION SHARES WEIGHTED WEIGHTED EXERCISE OUTSTANDING AVERAGE REMAINING AVERAGE PRICE RANGE MAY 3, 19982, 1999 CONTRACTUAL LIFE EXERCISE PRICE - ------------------ --------------------------------- --------------- ------------------- --------------- $ 4.06 1,260,000 1.0 $ 4.06 10.72$10.72 to 11.75 1,291,000 5.6 11.52 13.621,227,500 4.6 $ 11.51 13.63 to 15.31 450,000 7.7 13.70310,000 6.7 13.74 16.47 to 17.84 100,000 8.6 16.88 25.5318.78 110,000 7.8 17.05 26.25 to 27.72 200,000 9.1 26.5129.19 440,000 8.8 27.56 31.63 to 32.75 65,000 9.6 32.4255,000 8.6 32.38
Stock options with an exercise price of $4.06$11.53 per share are the only options exercisable as of May 3, 1998.2, 1999. The Company has adopted the supplemental disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly,does not recognize compensation costs are not recognized for theits stock option plans. Had the Company determined compensation costcosts based on the fair value at the grant date for its stock options granted insubsequent to fiscal 1998, 1997 and 1996 consistent with the provisions of SFAS 123,1995, the Company's net income F-15 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 7 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued from continuing operations and net income per common share from continuing operations would have been reduced to the pro forma amounts as follows:
1999 1998 1997 1996 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA)------------ ------------ ------------ Income from continuing operations,Net income, as reported .......................... $ 94,884 $ 53,400 $ 44,937 $ 19,786 Pro forma net income from continuing operations ................................ 93,705 52,571 44,553 19,715 IncomeNet income per common share, from continuing operations, as reported: Basic ................................................................................. $ 2.39 $ 1.42 $ 1.21 $ .55 Diluted ............................................................................. 2.32 1.34 1.17 .53 Pro forma net income per common share from continuing operations:share: Basic ................................................................................. $ 2.36 $ 1.40 $ 1.20 $ .55 Diluted ............................................................................. 2.29 1.32 1.16 .53
The weighted-average fair values of option shares granted were $13.40, $11.88 $7.62 and $6.01$7.62 for fiscal 1999, 1998 1997 and 1996,1997, respectively. The fair value of each stock option share granted beginning in fiscal 1995 is estimated at date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: - F-15 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 8 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
1999 1998 1997 1996 ------------- ------------- ------------- Expected option life ............... 6.07.0 years 6.0 years 6.0 years Expected annual volatility ......... 35.0% 35.0% 35.0% Risk-free interest rate ............ 5.3% 6.3% 6.2% 5.8% Dividend yield ..................... 0.0% 0.0% 0.0%
PREFERRED SHARE PURCHASE RIGHTS As part of the reincorporation, the Company adopted a preferred share purchase rights plan (the "Rights Plan") and declared a dividend of one preferred share purchase right (a "Right") on each outstanding share of common stock. Under the terms of the Rights Plan, if the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder to purchase, at the Right's then current exercise price, a number of the acquiring company's common shares having a market value of twice such price. In addition, if a person or group acquires 20% (or other applicable percentage, as summarized in the Rights Plan) or more of the outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right's then current exercise price, a number of shares of common stock having a market value of twice such price. Each Right will entitle its holder to buy one one-thousandth of a Series A junior participating preferred share ("Preferred Share"), par value $1.00 per share, at an exercise price of $37.50 subject to adjustment. Each Preferred Share will entitle its holder to 1,000 votes and will have an aggregate dividend rate of 1,000 times the amount, if any, paid to holders of common stock. The Rights will expire on May 31, 2001, unless the date is extended or unless the Rights are earlier redeemed or exchanged at the option of the board of directors for $.0001 per Right. Generally, each share of common stock issued after May 31, 1991 will have one Right attached. NOTE 89 -- PENSION AND OTHER RETIREMENT PLANS The Company sponsors several defined benefit pension and defined contribution plans covering substantially all U.S. and Canadian employees. Pension plans covering salaried employees provide benefits based on years of service and average salary levels. Pension plans covering hourly employees provide benefits of stated amounts for each year of service. TheIn general, the Company's funding policy for pension plans is to contribute annually the minimum amount required under ERISA.government regulations. The pension plan assets are invested primarily in equities, debt securities, insurance contracts and money market funds. F-16 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued The status of the Company's pension plans and the components of pension expense are as follows:
MAY 3, 1998 APRIL 27, 1997 ---------------------------- ----------------------------- OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED PLANS PLANS PLANS PLANS ------------ ------------- ------------ -------------- (IN THOUSANDS) Accumulated benefit obligation ............................. $ 42,938 $ 185,420 $ 30,974 $ 170,850 ========= ========== ========= ========== Vested benefit obligation .................................. $ 34,508 $ 181,563 $ 26,483 $ 168,222 ========= ========== ========= ========== Plan assets at fair value .................................. $ 63,447 $ 139,945 $ 47,179 $ 123,417 Projected benefit obligation ............................... (48,664) (193,890) (38,805) (177,114) --------- ---------- --------- ---------- Excess (deficiency) of plan assets over projected benefit obligation ................................................ 14,783 (53,945) 8,374 (53,697) Items not recorded on balance sheets: Unrecognized net transition gain .......................... - - (90) - Unrecognized net gain from experience differences ......... (11,121) (1,874) (6,799) (10,173) Unrecognized prior service cost ........................... 797 - 992 88 --------- ---------- --------- ---------- Prepaid (accrued) pension costs ........................... $ 4,459 $ (55,819) $ 2,477 $ (63,782) ========= ========== ========= ==========
1998 1997 1996 ------------ ------------ ---------- Net periodic pension cost included the following: Service costs for benefits earned ........................ $ 4,103 $ 4,054 $ 2,662 Interest accrued on projected benefit obligation ......... 16,730 16,299 7,532 Actual return on plan assets ............................. (35,052) (15,556) (6,691) Net amortization and deferral ............................ 18,606 878 (200) --------- --------- -------- Net periodic pension cost .............................. $ 4,387 $ 5,675 $ 3,303 ========= ========= ========
In determining the projected benefit obligation in fiscal 1998 and 1997, the average assumed discount rate was 7% and 8%, respectively, while the assumed rate of increase in future compensation was 4% in fiscal 1998 and 5% in fiscal 1997. The average expected long-term rate of return on plan assets was 9% in fiscal 1998 and 1997. The Company provides health care and life insurance benefits for certain retired employees. These plans are unfunded and generally pay covered costs reduced by retiree premium contributions, co-payments and deductibles. The Company retains the right to modify or eliminate these benefits. - F-16 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 9 -- PENSION AND OTHER RETIREMENT PLANS -- Continued The changes in the status of the Company's pension and postretirement plans, the related components of pension and postretirement expense and the amounts recognized in the Consolidated Balance Sheets are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------------------- ---------------------------- MAY 2, 1999 MAY 3, 1998 APRIL 27, 1997MAY 2, 1999 MAY 3, 1998 ------------- --------------- (IN THOUSANDS)------------- ------------- ------------ Accumulated postretirement benefit obligation: Retirees and dependents ..................................... $ 6,806 $ 8,226 Active plan participants .................................... 4,011 1,404 -------- -------- Total accumulated postretirement Change in benefit obligation Benefit obligation at beginning of year ................ $ 242,554 $ 215,919 $ 10,817 $ 9,630 Service cost ......................................... 6,626 4,104 397 58 Interest cost ........................................ 22,007 16,730 1,416 741 Plan amendments ...................................... 15,681 - - - Acquisitions ......................................... 156,343 - 18,843 - Benefits paid ........................................ (22,285) (16,590) (1,055) (895) Foreign currency changes ............................. 10,676 - 1,138 - Actuarial (gain) loss ................................ 11,150 22,391 (1,262) 1,283 --------- --------- --------- --------- Benefit obligation at end of year ...................... 442,752 242,554 30,294 10,817 --------- --------- --------- --------- Change in plan assets Fair value of plan assets at beginning of year ......... 10,817 9,630203,392 170,596 - - Actual return on plan assets ......................... 12,979 35,052 - - Acquisitions ......................................... 172,116 - - - Employer contributions ............................... 19,049 14,334 984 895 Foreign currency changes ............................. 11,474 - - - Benefits paid ........................................ (22,285) (16,590) (984) (895) --------- --------- --------- --------- Fair value of plan assets at end of year ............... 396,725 203,392 - - --------- --------- --------- --------- Reconciliation of accrued cost Funded status .......................................... (46,027) (39,162) (30,294) (10,817) Unrecognized net gain (loss) ................................ (1,060) 651 -------- --------actuarial (gain) or loss .................. 11,303 (12,995) (490) 1,060 Unrecognized prior service cost ........................ 15,728 797 - - --------- --------- --------- --------- Accrued postretirementcost at end of year .......................... $ (18,996) $ (51,360) $ (30,784) $ (9,757) --------- --------- --------- --------- Amounts recognized in the statement of financial position consist of ............................................. Prepaid benefit cost .............................................................. $ 9,75719,546 $ 10,281 ======== ========1,300 $ - $ - Accrued benefit liability .............................. (44,163) (52,660) (30,784) (9,757) Intangible asset ....................................... 410 - - - Accumulated other comprehensive income ................. 5,211 - - - --------- --------- --------- --------- Net amount recognized at end of year ................. $ (18,996) $ (51,360) $ (30,784) $ (9,757) --------- --------- --------- --------- Components of net periodic cost Service cost ........................................... $ 6,626 $ 4,104 $ 397 $ 58 Interest cost .......................................... 22,007 16,730 1,416 767 Expected return on plan assets ......................... (25,834) (15,309) - - Net amortization ....................................... 86 (1,137) 95 69 --------- --------- --------- --------- Net periodic cost ...................................... $ 2,885 $ 4,388 $ 1,908 $ 894 ========= ========= ========= =========
The projected benefit obligations, accumulated benefit obligations and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $204,648, $193,010 and $139,027, respectively, as of May 2, 1999, and $193,890, $185,420 and $139,945, respectively, as of May 3, 1998. - F-17 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 9 -- PENSION AND OTHER RETIREMENT PLANS -- Continued In determining the projected benefit obligation and the accumulated postretirement benefit obligation in fiscal 1999 and 1998, the following assumptions were made:
PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------------------- ---------------------------- MAY 2, 1999 MAY 3, 1998 MAY 2, 1999 MAY 3, 1998 ------------- ------------- ------------- ------------ Weighted average assumptions: Discounted rate ................... 6.8% 7.0% 6.7% 7.0% Expected return on assets ......... 9.0% 9.0% - - Compensation increase ............. 3.9% 4.5% - -
In determining the accumulated postretirement benefit obligation in fiscal 1999 and 1998, and 1997, the average assumed discount rate was 7% and 8%, respectively. The assumed annual rate of increase in per capita cost of covered health care benefits is F-17 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued 7.5% for fiscal 1998,was 6.5% for fiscal 1999, 6.0% for fiscal 2000 and 5.5% thereafter. Anthereafter for U.S. plans. For non-U.S. plans the assumed annual rate of increase of 1% in thewas 8.5% for fiscal 1999 and decreased by 0.5% each year until leveling at 5.0%. The assumed health care cost trend would increaserate has an effect on the accumulated postretirement benefit obligation as of May 3, 1998 by $1,228,000 andamounts reported. A one percentage point change in the annual expense by $94,000. The totalassumed per capita cost of postretirementcovered health care benefits was $894,000, $1,072,000 and $673,000 in fiscal 1998, 1997 and 1996, respectively.would have the following effect:
ONE ONE PERCENTAGE PERCENTAGE POINT POINT INCREASE DECREASE ------------ ----------- Effect on postretirement benefit obligation as of May 2, 1999 ...... $2,106 $ (2,247) Effect on annual benefit cost in fiscal 1999 ....................... $ 178 $ (155)
NOTE 910 -- LEASE OBLIGATIONS AND COMMITMENTS The Company leases transportation equipment under operating leases ranging from one to 10 years with options to cancel at earlier dates. In addition, the Company has a long-term maintenance agreement related to this equipment. Maintenance fees are based upon fixed monthly charges for each vehicle, as well as the maintenance facility itself and contingent fees based upon transportation equipment usage. The amounts shown below as minimum rental commitments do not include contingent maintenance fees. The Company has agreements, expiring in fiscal 2004 and 2008, to use two cold storage warehouses owned by a partnership, 50% of which is owned by the Company. The Company has agreed to pay prevailing competitive rates for use of the facilities, subject to aggregate guaranteed minimum annual fees of $3,600,000.$3,600. In fiscal 1999, 1998 1997 and 1996,1997, the Company paid $6,228,000, $5,372,000$5,807, $6,228 and $4,641,000,$5,372, respectively, in fees for use of the facilities. As of May 2, 1999 and May 3, 1998, and April 27, 1997, the Company had investments of $1,411,000$1,108 and $1,137,000,$1,411, respectively, in the partnership. In fiscal 1998, the Company entered into a 15-year agreement, expiring in 2013, to use a cold storage warehouse owned by a partnership, 50% of which is owned by the Company. The Company has agreed to leasebegan leasing the facility beginning in fiscal 1999 for an amount which will covercovering debt service costs plus a minimum guaranteed annual fee totaling $2,174,000 in fiscal 1999.$2,174. As of May 2, 1999 and May 3, 1998, the Company had an investmentinvestments of $1,826,000$1,028 and $1,826, respectively, in the partnership. Minimum rental commitments under all noncancelable operating leases and maintenance agreements are as follows:
(IN THOUSANDS) Fiscal year 1999 ...............2000 ................... $ 20,986 2000 ............... 18,77423,053 2001 ............... 16,219................... 17,695 2002 ............... 21,535................... 21,127 2003 ............... 9,900................... 10,152 2004 ................... 8,546 Thereafter ......... 34,651 --------- $ 122,065 =========............. 30,487 -------- $111,060 ========
- F-18 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 10 -- LEASE OBLIGATIONS AND COMMITMENTS -- Continued Rental expense was $24,839,000$24,535 in fiscal 1999, $24,839 in fiscal 1998 $24,270,000and $24,270 in fiscal 1997 and $17,664,000 in fiscal 1996.1997. Rental expense in fiscal 1999, 1998 and 1997 included $2,787, $3,231 and 1996 included $3,231,000, $3,593,000 and $3,389,000$3,593 of contingent maintenance fees, respectively. The Company has a sale and leaseback arrangement for certain hog production facilities at Brown's. The arrangement provides for an early termination at predetermined amounts in fiscal 2004. Property, plant and equipment under capital leases as of May 3, 1998 consists of land of $1,911,000, buildings and improvements of $5,647,000, and machinery and equipment of $6,550,000, less accumulated depreciation of $6,001,000. F-18 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 9 -- LEASE OBLIGATIONS AND COMMITMENTS -- Continued Future minimum lease payments for assets under capital leases and the present value of the net minimum lease payments are as follows:
(IN THOUSANDS) Fiscal year 1999 ....................................2000 ............................................. $ 3,016 2000 .................................... 3,0703,126 2001 .................................... 3,184............................................. 3,248 2002 ................................................................................. 3,195 2003 ............................................. 3,190 2003 .................................... 3,190 Thereafter ..............................2004 ............................................. 9,602 -------- 25,25222,361 Less amounts representing interest ...... (6,310)............... (4,828) -------- Present value of net minimum obligations 18,942......... 17,533 Less current portion .................... (1,491)............................. (1,726) -------- Long-term capital lease obligations ................... $ 17,45115,807 ========
As of May 3, 1998,2, 1999, the Company had definitive commitments of $18,871,000$34,841 for capital expenditures primarily to increase its processed meats and value-added fresh pork capacities at several of its processing plants and to replace and upgrade portions of its hardware and software in response to the Year 2000. NOTE 1011 -- RELATED PARTY TRANSACTIONS A director of the Company is the chairman, president and chief executive officer and a director of Prestage Farms, Inc. ("PFI"). The Company has a long-term agreement to purchase hogs from PFI at prices which, in the opinion of management, are equivalent to market. Pursuant to this agreement with PFI, the Company purchased $168,829,000, $182,576,000 and $129,577,000 of hogs in fiscal 1998, 1997 and 1996, respectively. The chairman and chief executive officer and a director of Murphy Family Farms, Inc. ("MFF") was a director of the Company until May 1998. The Company has a long-term agreement to purchase hogs from MFF at prices which,that, in the opinion of management, are equivalent to market. Pursuant to this agreement with MFF, the Company purchased $366,397,000, $433,861,000$239,974, $366,397 and $330,033,000$433,861 of hogs in fiscal 1999, 1998 and 1997, respectively. A director of the Company is the chairman, president and 1996,chief executive officer and a director of Prestage Farms, Inc. ("PFI"). The Company has a long-term agreement to purchase hogs from PFI at prices that, in the opinion of management, are equivalent to market. Pursuant to this agreement with PFI, the Company purchased $106,365, $168,829 and $182,576 of hogs in fiscal 1999, 1998 and 1997, respectively. A director and the owner of 50% of the voting stock of Maxwell Foods, Inc. ("MFI") was a director of the Company until May 1998. The Company has a long-term agreement to purchase hogs from MFI at prices which,that, in the opinion of management, are equivalent to market. Pursuant to this agreement with MFI, the Company purchased $118,041,000, $109,470,000$72,838, $118,041 and $76,448,000$109,470 of hogs in fiscal 1999, 1998 1997 and 1996,1997, respectively. In fiscal 1999, 1998 1997 and 1996,1997, the Company purchased raw materials totaling $18,524,000, $12,772,000$5,997, $18,524 and $10,069,000,$12,772, respectively, from a company which was 48%-owned by the chairman and chief executive officer's children.children in fiscal 1998 and fiscal 1997. In the opinion of management, these purchases were made at prices that were equivalent to market. The Company is engaged in a hog production arrangementsarrangement with several related parties. SeeCFI (See Note 3 for additional information regarding these arrangements. NOTE 11 -- DISCONTINUED OPERATIONS In fiscal 1996, the Company completed the disposition of the assets and business of Ed Kelly, Inc., its former retail electronics subsidiary, which is reported separately as discontinued operations in the consolidated statements of income. A loss from discontinued operations of $3,900,000 is reflected in fiscal 1996. F-19 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED4). NOTE 12 -- REGULATION AND LITIGATION Like other participants in the meat processing industry, the Company is subjectsubjected to various laws and regulations administered by federal, state and other government entities, including the U.S. Environmental Protection Agency ("EPA"), the U.S. Department of Agriculture, the U.S. Food and Drug Administration, the U.S. Occupational Safety and Health - F-19 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 12 -- REGULATION AND LITIGATION -- Continued Administration and corresponding state agencies in states where the Company operates. Management believes that the Company presently is in compliance with all such laws and regulations in all material respects and that continued compliance will not have a material adverse effect on the Company's financial position or results of operations. The Company believes that the ultimate resolution of the litigation and investigations discussed below will not have a material adverse effect on its financial position or results of operations. Under the water pollution control laws of the United States and the Commonwealth of Virginia ("Virginia"), the Company is required to maintain certain test records for three years. Failure to do so may result in the imposition of civil penalties. Criminal sanctions may be imposed in the event of false reporting or destruction of records. In July 1994, the Company learned that records of many tests conducted at its Smithfield, Virginia packing plants from 1991 through early 1994 could not be found and may have been destroyed. In 1997, the employee responsible for such testing and record-keeping was convicted in the United States District Court for the Eastern District of Virginia on eight charges of records destruction and making false reports. Since January 1998, several of the Company's employees responsible for wastewater treatment operations have been called to testify under subpoena before a federal grand jury in Norfolk, Virginia. The grand jury also issued subpoenas requiring production of various environmental materials relating to the Company's wastewater treatment operations at these plants. Neither the Company nor any of its other present or former employees has been charged with any criminal violation arising from these matters, but there can be no assurance that such charges will not be brought. On August 8, 1997, in a civil suit filed by the EPA against the Company, the United States District Court for the Eastern District of Virginia imposed a $12,600,000$12,600 civil penalty on the Company for Clean Water Act violations at itsthe Company's Smithfield, Virginia packingprocessing plants. The Company recorded a nonrecurring charge of $12,600,000$12,600 during the first quarter of fiscal 1998 with respect to this penalty. The Company has appealed this decision toand is awaiting a decision by the United States Court of Appeals for the Fourth Circuit. There can be no assurance as to the outcome of such appeal or any subsequent proceedings regarding this matter. Prior to the filing of the EPA suit,In 1998, the Commonwealth of Virginia filed a civil suit against the Company in the Circuit Court of the County of Isle of Wight, Virginia under Virginia's water pollution control laws. Virginia's action allegedVirginia alleges that 22,517 wastewater discharge permit violations occurred at the Company's Smithfield, Virginia packingprocessing plants during the periodbetween 1986 untiland 1997. Most of these alleged violations were also presented in the EPA suit. This action is set for trial on October 18, 1999. While each violation is subject to a maximum penalty of $25,000,$25, Virginia follows a civil penalties policy designed to recapture from the violator any economic benefit which accrued as a result of theits noncompliance, plus a surcharge penalty for having committed such violations. In addition, the policy may increase the amount of penalties based upon the extent of environmental damage caused by the violations. At the beginning of the July 1997 trial of its case, Virginia contended that the Company had received an economic benefit of $4,000,000 due to its noncompliance and should pay a total of $6,000,000 for the alleged violations. In the middle of the trial, however, Virginia voluntarily dismissed itscivil penalties in this suit. One week later, Virginia refiled the same suit in Isle of Wight County Circuit Court. On June 29, 1998, the Court overruled the Company's motions to dismiss this second suit on double jeopardy and res judicata grounds. If Virginia's charges go to trial again,Among other defenses, the Company will present evidence to show and argue, among other things,maintain that no economic benefit accrued to the Company as a result of, and that no environmental damage was caused by, the violations. There can be no assurance as to the outcome of any suchthis proceeding. NOTE 13 -- NET INCOME PER SHARE The computation for basic and diluted net income per share follows:
NET INCOME SHARES PER SHARE ------------ -------- ---------- Fiscal 1999 Net income per basic share ......................................... $94,884 39,628 $ 2.39 Effect of dilutive stock options ................................... - 1,334 - ------- ------ ------- Net income per diluted share ..................................... $94,884 40,962 $ 2.32 ======= ====== ======= Fiscal 1998 Net income per basic share ......................................... $53,400 37,532 $ 1.42 Effect of dilutive stock options ................................... - 2,200 - ------- ------ ------- Net income per diluted share ..................................... $53,400 39,732 $ 1.34 ======= ====== ======= Fiscal 1997 Net income per basic share ......................................... $44,937 - $ - Less preferred stock dividends ..................................... (1,238) - - ------- ------ ------- Net income available to common shareholders per basic share ........ 43,699 36,121 1.21 Effect of dilutive stock options ................................... - 1,144 - Effect of dilutive convertible preferred stock ..................... 1,238 1,293 - ------- ------ ------- Net income per diluted share ..................................... $44,937 38,558 $ 1.17 ======= ====== =======
- F-20 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 13 -- NET INCOME PER SHARE The computation for basic and diluted income per share is as follows:
INCOME SHARES PER SHARE ------------ -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Fiscal 1998 Net income per basic share ...................................... $ 53,400 37,532 $ 1.42 Effect of dilutive stock options ................................ - 2,200 - -------- ------ ------- Net income per diluted share ................................... $ 53,400 39,732 $ 1.34 ======== ====== ======= Fiscal 1997 Net income per basic share ...................................... $ 44,937 - - Less preferred stock dividends .................................. (1,238) - - -------- ------ ------- Net income available to common shareholders per basic share ..... 43,699 36,121 $ 1.21 Effect of dilutive stock options ................................ - 1,144 - Effect of dilutive convertible preferred stock .................. 1,238 1,293 - -------- ------ ------- Net income per diluted share ................................... $ 44,937 38,558 $ 1.17 ======== ====== ======= Fiscal 1996 Income from continuing operations ............................... $ 19,786 - - Less preferred stock dividends .................................. (1,152) - - -------- ------ ------- Income from continuing operations available to common shareholders per basic share ................................... 18,634 33,865 $ .55 Effect of dilutive stock options ................................ - 1,135 - -------- ------ ------- Income from continuing operations per diluted share ............ $ 18,634 35,000 $ .53 ======== ====== =======
-- Continued The summary below lists stock options outstanding at the end of each fiscal year which were not included in the computation of net income per diluted share because the averageoptions' exercise price of the options wasprices were greater than the average market price of the common shares. These options, which have varying expiration dates, were still outstanding atas of May 3, 1998.2, 1999.
1999 1998 1997 1996------------ ----------- ------------ ------------ (SHARES IN THOUSANDS) Stock option shares excluded ....... 495,000 65,000 100,000 440,000 Average option price per share ..... $ 32.4228.10 $ 16.8832.42 $ 13.7016.88
NOTE 14 -- SEGMENTS In fiscal 1999, the Company adopted SFAS 131, which established standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in the interim financial reports. SFAS 131 also establishes standards for related disclosures about products or services and geographic areas. The Company identified two reportable operating segments that met the quantitative disclosure threshold of SFAS 131. The segments identified include the MPG and the HPG. The overriding determination of the Company's reportable segments was based on how the chief operating decision-maker evaluates the results of operations. The underlying factors used to identify the reportable segments include the differences in products produced and sold. The MPG markets its products to food retailers, distributors, wholesalers, restaurant and hotel chains, other food processors and manufacturers of pharmaceuticals and animal feeds in both domestic and international markets. The HPG primarily supplies raw materials (live hogs) to the hog slaughtering operations of the Company. The following tables present information about the results of operations and the assets of each of the Company's reportable segments for the fiscal years ended May 2, 1999, May 3, 1998 and April 27, 1997. The information contains certain allocations of expenses that the Company deems reasonable and appropriate for the evaluation of results of operations. Segment assets do not include intersegment account balances as the Company feels that such an inclusion would be misleading or not meaningful. Management believes all intersegment sales are at prices which approximate market. - F-21 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 14 -- SEGMENTS -- Continued
MEAT HOG GENERAL PROCESSING PRODUCTION CORPORATE TOTAL ------------ ------------ ----------- ------------- Fiscal 1999 Sales ................................. $3,729,644 $ 155,796 $ - $3,885,440 Intersegment sales .................... - (110,451) - (110,451) Interest expense ...................... 25,565 12,583 2,373 40,521 Depreciation and amortization ......... 48,814 16,541 3,211 68,566 Profit (loss) before income tax ....... 233,385 (63,625) (26,322) 143,438 Assets ................................ 1,292,633 343,069 135,912 1,771,614 Capital expenditures .................. 62,315 28,755 4,377 95,447 Fiscal 1998 Sales ................................. $3,867,442 $ 156,565 $ - $4,024,007 Intersegment sales .................... - (156,565) - (156,565) Interest expense ...................... 22,854 7,390 1,647 31,891 Depreciation and amortization ......... 34,936 9,206 1,730 45,872 Profit (loss) before income tax ....... 121,195 (9,682) (30,551) 80,962 Assets ................................ 787,274 178,078 118,293 1,083,645 Capital expenditures .................. 70,329 13,252 9,332 92,913 Fiscal 1997 Sales ................................. $3,870,611 $ 151,807 $ - $4,022,418 Intersegment sales .................... - (151,807) - (151,807) Interest expense ...................... 23,090 6,128 (3,007) 26,211 Depreciation and amortization ......... 28,842 8,776 1,439 39,057 Profit (loss) before income tax ....... 66,494 19,910 (18,727) 67,677 Assets ................................ 738,524 169,209 87,521 995,254 Capital expenditures .................. 42,840 23,099 3,208 69,147
The following table presents the Company's sales and long-livedassets attributed to operations in the U. S. and international geographic areas.
1999 1998 1997 ------------- ------------- ------------- Sales: U.S. ........................... $3,470,307 $3,867,442 $3,870,611 Canada ......................... 244,121 - - France ......................... 60,561 - - ---------- ---------- ---------- Total ......................... $3,774,989 $3,867,442 $3,870,611 ========== ========== ========== Long-lived assets at end of year: U.S. ........................... $ 449,593 $ 477,375 $ 448,612 Canada ......................... 169,038 - - Poland ......................... 78,201 - - France ......................... 43,489 - -
NOTE 15 -- SUBSEQUENT EVENTS Effective May 3, 1999, the Company completed the acquisition of Carroll's Foods, Inc. ("CFI") and its affiliated companies and partnership interests for 4,200,000 shares of the Company's common stock (subject to post closing adjustments) - F-22 - SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 15 -- SUBSEQUENT EVENTS -- Continued and the assumption of approximately $231,000 in debt, plus other liabilities. The acquisition includes 100% of the capital stock of CFI, CFI's 50% interest in Smithfield-Carroll's, CFI's 16% interest in Circle Four, CFI's 50% interest in Tar Heel Turkey Hatchery, 100% of CFI's turkey grow-out operation, CFI's 49% interest in Carolina Turkeys, and certain hog production interests in Brazil and Mexico. The Company will account for this acquisition using the purchase method of accounting. The following unaudited pro forma information combines the operating results of the Company and CFI, assuming the acquisition had been made as of the beginning of each of the periods presented:
1999 1998 --------------- --------------- Sales ................................. $ 3,892,769 $ 3,994,674 Net income ............................ 66,080 61,075 Net income per basic share ............ $ 1.51 $ 1.46 Net income per diluted share .......... $ 1.46 $ 1.39
The preceding pro forma amounts are not intended to be projections of future results or trends and do not purport to be indicative of what actual consolidated results of operations might have been if the acquisition had been effective as of the beginning of the periods presented. Subsequent to the end of fiscal 1999, the Company increased its ownership in Animex from 67% to 80% of total equity. NOTE 16 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH ------------ ------------- -------------- ---------------- -------------- (UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)--------------- ------------- Fiscal1999 Sales ............................ $865,823 $ 874,378 $ 1,035,728 $ 999,060 Gross profit ................... 72,178 115,132 201,204 151,061 Net (loss) income ................ (5,325) 18,481 54,980 26,748 Net (loss) income per common share Basic .......................... $ (.14) $ .48 $ 1.35 $ .64 Diluted ........................ (.14) .47 1.31 .63 1998 Sales ...................... $ 914,963............................ $914,963 $ 982,699 $ 1,095,999 $ 873,781 Gross profit .............. 75,184 93,970 116,663 101,797................... 76,445 94,654 116,590 100,124 Net (loss) income (loss) .......................... (6,541) 15,548 23,719 20,674 Net (loss) income per common share: Basic .......................... $ (.17) $ .41 $ .63 $ .55 Diluted ........................ (.17) .39 .60 .52 Fiscal 1997 Sales ...................... $ 892,870 $ 969,226 $ 1,080,979 $ 927,536 Gross profit .............. 58,762 73,577 88,704 99,895 Net income ................. 746 9,017 15,734 19,440 Net income per common share:share Basic .......................... $ .01(.17) $ .24.41 $ .43.63 $ .53.55 Diluted ........................ .01 .23 .40 .50(.17) .39 .60 .52
F-22- F-23 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE I TO THE SHAREHOLDERS OF SMITHFIELD FOODS, INC. We have audited in accordance with generally accepted auditing standards the consolidated financial statements included in the Form 10-K Annual Report of Smithfield Foods, Inc. and subsidiaries for the fiscal yearyears ended May 2, 1999, May 3, 1998, and April 27, 1997, and have issued our report thereon dated June 10, 1998.1999. Our audit wasaudits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed on the Index to Financial Statements and Financial Schedule I, filed as a part of the Company's Form 10-K Annual Report is the responsibility of the Company's management and is presented for purposes offor complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the auditaudits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Richmond, Virginia June 10, 19981999 - F-23F-24 - SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC. PARENT COMPANY BALANCE SHEETS AS OF MAY 2, 1999 AND MAY 3, 1998 AND APRIL 27, 1997
FISCAL YEARS ENDED ---------------------------------------------------------- MAY 2, MAY 3, 1999 1998 APRIL 27, 1997 ------------- -------------------------- (IN THOUSANDS) ASSETS CURRENT ASSETS:Current assets: Cash and cash equivalents ......................................................................................................................................... $ 7,80024 $ 387,800 Accounts receivable ................................................................ 15,137 324 3,675 ReceivablesReceivable from related parties ................................................... -- 1,414.................................................... 4,051 - Refundable income taxes ............................................................ 1,458 2,300 -- Deferred income taxes .............................................................. 20,551 23,634 33,901 Other ..............................................................................current assets ............................................................... 16,005 15,921 5,137 --------- --------- TOTAL CURRENT ASSETS---------- -------- Total current assets ............................................................. 57,226 49,979 44,165 --------- ------------------- -------- Investments in and net advances to subsidiaries, at cost plus equity in undistributed earnings ........................................................................... 885,291 679,266 444,149 --------- --------- OTHER ASSETS: Investments---------- -------- Other assets: Investment in partnerships ................................................................................................................. 31,139 46,966 41,753 Property, plant and equipment, net ................................................. 21,422 18,327 9,838 Other .............................................................................. 42,447 26,353 16,476 --------- --------- TOTAL OTHER ASSETS---------- -------- Total other assets ............................................................... 95,008 91,646 68,067 --------- --------- $ 820,891 $ 556,381 ========= =========---------- -------- $1,037,525 $820,891 ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable ....................................................................... $ -- $ 2,500Current liabilities: Current portion of long-term debt .................................................. $ 5,633 $ 6,248 4,263 Accounts payable ................................................................... 5,086 2,795 5,167 Accrued expenses ................................................................... 61,254 45,232 28,617 Income taxes payable ............................................................... -- 1,789 --------- --------- TOTAL CURRENT LIABILITIES---------- -------- Total current liabilities ........................................................ 71,973 54,275 42,336 --------- ------------------- -------- Long-term debt ...................................................................... 385,370 387,732 192,384 --------- ------------------- -------- Deferred income taxes and other noncurrent liabilities .............................. 37,936 17,874 14,175 --------- ------------------- -------- Shareholders' equity ................................................................ 542,246 361,010 307,486 --------- --------- $ 820,891 $ 556,381 ========= =========---------- -------- $1,037,525 $820,891 ========== ========
The accompanying notes are an integral part of these balance sheets. F-24statements. - F-25 - SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC. PARENT COMPANY STATEMENTS OF INCOME
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDEDMAY 2, 1999 MAY 3, 1998 APRIL 27, 1997 APRIL 28, 1996 ---------------- ---------------- --------------- (IN THOUSANDS) Sales ................................................... $ --- $ --- $ --- Cost of Salessales ........................................... 5,073 9,589 1,820 (2,540) --------- --------- ----------------- Gross Profitprofit ............................................ (5,073) (9,589) (1,820) 2,540 General and administrative expenses, net of allocation to subsidiaries ................................................................................... 8,366 4,686 10,911 5,780 Depreciation expense .................................... 1,252 843 903 892 Interest expense ........................................ 24,930 24,578 16,434 2,556 Nonrecurring charge ..................................... - 12,600 -- --- --------- --------- ----------------- Loss before income tax benefit and equity in earnings of subsidiaries ................................................................................... (39,621) (52,296) (30,068) (6,688) Income tax benefit ...................................... (16,677) (19,130) (12,562) (2,400) --------- --------- ----------------- Loss before equity in earnings of subsidiaries .......... (22,944) (33,166) (17,506) (4,288) Equity in earnings of subsidiaries ...................... 117,828 86,566 62,443 20,174 --------- --------- ----------------- Net income .............................................. $ 94,884 $ 53,400 $ 44,937 $ 15,886 ========= ========= =================
The accompanying notes are an integral part of these statements. F-25- F-26 - SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC.INC PARENT COMPANY STATEMENTS OF CASH FLOWS
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDEDMAY 2, 1999 MAY 3, 1998 APRIL 27, 1997 APRIL 28, 1996 ---------------- ---------------- --------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES:Cash flows from operating activities: Net income ....................................................Income ......................................................... $ 94,884 $ 53,400 $ 44,937 $ 15,886 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................................... 2,758 1,461 1,040 1,162 Gain(Gain) loss on sale of property, plant and equipment ...................... --............. 30 - (2,328) (1) Changes in operating assets and liabilities: Deferred income taxes and other noncurrent liabilities ......................................................... 23,145 13,966 (37,308) 5,343 Accounts receivables .......................................receivable ............................................. (14,813) 3,351 (1,329) (2,171) Receivables from related parties ........................................................... (4,051) 1,414 45 6,615 Other current assets ................................................................................... (84) (10,784) (3,367) (1,318) Accounts payable and accrued expenses ................................................. 18,313 14,243 15,696 260 Refundable income taxes .................................... (2,300) -- 3,458 Income taxes payable ....................................... (1,789)......................................... 842 (4,089) 1,560 229 Other assets ................................................................................................... (17,600) (10,495) (1,541) (4,778)---------- ---------- --------- ---------- Net cash provided by operating activities ............................................... 103,424 62,467 17,405 24,685---------- ---------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES:Cash flows from investing activities: Capital expenditures ......................................................................................... (4,377) (9,332) (3,226) (2,987) Proceeds from sale of property, plant and equipment ........... --................ - - 3,424 38 Increase in investmentsinvestment in and net advances to subsidiaries net of common stock issued to acquire John Morrell & Co. ................. (131,827) (235,117) (80,800) (36,649) InvestmentInvestments in partnerships ............................................................................ 15,827 (5,213) (5,660) (2,376)---------- ---------- --------- ---------- Net cash used in investing activities ................................................... (120,377) (249,662) (86,262) (41,974)---------- ---------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES:Cash flows from financing activities: Proceeds from issuance (repayments) of short-term debt ........ --.......................... - - (500) 500 Proceeds from issuance of long-term debt ................................................. - 447,150 140,000 -- Principal payments on long-term debt ......................................................... (2,977) (252,317) (71,200) (2,420) ExerciseProceeds from exercise of stock options ....................................................................... 12,154 124 1,270 767 Issuance of preferred stock ................................... -- -- 20,000 Preferred dividends ........................................... --................................................ - - (1,238) (1,152)---------- ---------- --------- ---------- Net cash provided by financing activities ........................................... 9,177 194,957 68,332 17,695 ---------- --------- ---------- NET INCREASE (DECREASE)Net (decrease) increase in cash and cash equivalents ........................... (7,776) 7,762 (525) 406 CASH AND CASH EQUIVALENTSCash and cash equivalents at beginning of year ....................................... 7,800 38 563 157---------- ---------- --------- ---------- CASH AND CASH EQUIVALENTSCash and cash equivalents at end of year ................................................... $ 24 $ 7,800 $ 38 $ 563========== ========== ========= ==========
The accompanying notes are an integral part of these statements. F-26- F-27 - SCHEDULE I --- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS May(DOLLARS IN THOUSANDS) MAY 2, 1999 AND MAY 3, 1998 and April 27, 1997 1. The Notes to Parent Company Financial Statements should be read in conjunction with the Registrant's Notes to Consolidated Financial Statements included herein. 2. Restricted assets of Registrant: Existing loan covenants contain provisions which limit the amount of funds available for transfer from the subsidiaries to Smithfield Foods, Inc. without the consent of certain lenders. 3. Accrued expenses as of May 2, 1999 and May 3, 1998 and April 27, 1997 are as follows: (In thousands) 1998 1997 -------------- --------- --------- Self-insurance reserves $21,834 $14,151 Other 23,398 14,466 -------- -------- $45,232 $28,617
1999 1998 ---------- ---------- Self-insurance reserves .......... $20,216 $21,834 Other ............................ 41,038 23,398 ------- ------- $61,254 $45,232 ======= ======= ========
4. Long-Term Debt: In fiscal 1998, the Registrant entered into a loan agreementsagreement with a bank group providing for $350,000,000 in revolving credit facilities, consisting of a five-year $300,000,000 revolving credit facility and a 364-day $50,000,000$300,000 revolving credit facility. In connection with this refinancing, the Registrant repaid all borrowings under its previous $300,000,000$300,000 credit facilities, which were terminated. The 364-day $50,000,000 revolving credit facility was later terminated. In fiscal 1998, the Registrant issued $200,000,000$200,000 in aggregate principal amount of 10-year 7.625% senior subordinated notes. The net proceeds from the salessale of the notes were usedissued to repay indebtedness under the Registrant's $300,000,000$300,000 revolving credit facility with the balance invested in short-term marketable debt securities. In fiscal 1997, the Registrant privately placed $140,000,000 of senior secured notes. The proceeds of the financing were used to repay $65,200,000 of long-term bank debt and for investments in and advances to subsidiaries. In conjunction with the placement of these notes, the Registrant refinanced $59,707,000 of existing long-term debt previously recorded by its subsidiaries. The result of the refinancing was to transfer debt to the parent and revise maturity dates and repayment schedules for the refinanced debt. No additional proceeds resulted from this refinancing. As of May 3, 1998,2, 1999, the Registrant is guaranteeing $18,942,000$17,500 of capital lease obligations of its subsidiaries and a $300,000,000$300,000 credit facility that had nohas an outstanding balance.balance of $71,000. Scheduled maturities of the Registrant's long-term debt consists of the following (in thousands): Fiscal Year 1999 $6,248 2000 2,362 2001 3,134 2002 3,083 2003 10,473 Thereafter 368,680 ------- $393,980following:
FISCAL YEAR - -------------- 2000 $ 5,633 2001 3,133 2002 3,084 2003 10,473 2004 49,886 Thereafter 318,794 -------- $391,003 ========
5. The amount of dividends received from subsidiaries in fiscal 1999 and 1998 was $76,700 and 1997 was $43,423,000 and $65,316,000,$43,400, respectively. 6. In fiscal 1997, all of the Series C 6.75% cumulative convertible redeemable preferred stock, totaling $20,000,000, was converted into the Registrant's common stock. F-27 7. In fiscal 1998, the Registrant's shareholders approved the reincorporation of the Registrant in Virginia from Delaware. The purpose of the reincorporation was to reduce annual franchise taxes and does not affect the Registrant's capitalization or the manner in which it operates. 8.- F-28 - SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS -- CONTINUED 7. Supplemental disclosures of cash flow information (in thousands): Fiscal Year 1998 1997 1996information:
FISCAL YEAR 1998 1998 1997 - ----------------------------------------------------------------- ---------- ---------- ---------- Interest paid, net of amount capitalized ........................ $28,180 $20,901 $11,106 ======= ======= ======= Income taxes paid ............................................... $15,306 $10,179 $15,043 ======= ======= ======= Noncash investing and financing activities: Refinancing of long-term debt .................................. $ - $ - $59,707 ======= ======= ======= Conversion of preferred stock to common stock .................. $ - $ - $20,000 ======= ======= ======= Common stock issued for acquisitions ........................... $73,049 $ - $ - ======= ======= ======= Conversion of advances to investments in partnerships .......... $ - $ - $ 7,691 ======= ======= =======
- ----------- ---- ---- ---- Interest paid, net of amount capitalized $20,901 $11,106 $ 1,807 ====== ====== ===== Income taxes paid $10,179 $15,043 $ 1,685 ====== ====== ===== Noncash investing and financing activities: Refinancing of long-term debt $F-29 - $59,707 $ - ====== ====== ===== Conversion of preferred stock to common stock $ - $20,000 $10,000 ====== ====== ===== Common stock issued for acquisition $ - $ - $33,000 ====== ====== ====== Conversion of receivables from related parties to investments in partnership $ - $ 7,691 $ - ====== ====== ====== F-28