SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) DECEMBER 21, 1995
Commission file number 0-2258
SMITHFIELD FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of Incorporation)
0-2258 52-0845861
(Commission File Number) (I.R.S. Employer
Identification No.)
900 Dominion Tower, 999 Waterside Drive, Norfolk, Virginia 23510
(Address of principal executive offices)
Registrant's telephone number, including area code (804) 365-3000
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 20, 1995, Smithfield Foods, Inc. ("Smithfield Foods" or the
"Company") acquired from Chiquita Brands International, Inc. ("Chiquita") all of
the outstanding capital stock of John Morrell & Co. ("John Morrell"), for a
total purchase price of $58 million, consisting of $25 million in cash (borrowed
under the Company's $200 million revolving credit facility with a group of six
banks) and the issuance of 1,094,273 shares of its common stock, par value $.50
per share. In addition, Smithfield Foods assumed all of John Morrell's
liabilities. The parties determined the terms of the transaction pursuant to
arms length negotiations, there having been no prior relationships between them.
John Morrell is a large fresh pork and processed meats processor
located in the Midwest, with sales of $1.4 billion in the year ended December
31, 1994. John Morrell markets a full line of processed meats primarily in the
Midwest and Western U.S. under a variety of brand names, including John Morrell,
Kretschmar, Tobin's First Prize, Peyton's and Dinner Bell.
John Morrell's principal production facilities are located in Sioux
Falls, South Dakota; Sioux City, Iowa; Cincinnati, Ohio; and Great Bend, Kansas.
The Sioux Falls facility produces processed meats as well as fresh pork; Sioux
City is a fresh pork plant; and the Cincinnati and Great Bend locations produce
processed meats. The Morrell facility at Sioux Falls slaughters 17,000 hogs per
day and the facility at Sioux City slaughters 13,000 per day. John Morrell also
operates a spice plant in Chicago, Illinois.
Smithfield Foods will maintain Morrell as a separate subsidiary. John
O. Nielson, President and Chief Operating Officer of Smithfield Foods, will
assume the additional duties of Chairman and Chief Executive Officer of John
Morrell. Joseph B. Sebring will continue as President and Chief Operating
Officer of John Morrell and will report to Mr. Nielson, who from 1983 to 1989
served at John Morrell in various management positions, including President and
Chief Operating Officer from April 1988 to June 1989.
Smithfield Foods is a leading hog producer, pork processor and fresh
pork and processed meats marketer with significant market presence in the
Mid-Atlantic and Southeast and increasing market positions in other regions of
the United States. The Company's brands include Smithfield, Smithfield Lean
Generation Pork, Gwaltney, Patrick Cudahy, Luter's, Esskay, Hamilton's,
Valleydale, Mash's, Jamestown, Realean, Patrick's Pride and Great. Smithfield
Foods had sales of $1.5 billion in the fiscal year ended April 30, 1995.
(1)
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
Page
(a) Financial statements of John Morrell & Co.
Year Ended December 31, 1994
Report of Independent Auditors 3
Statement of Operations - For the Years Ended
December 31, 1994, January 1, 1994 and
January 2, 1993 4
Balance Sheet - As of December 31, 1994 and
January 1, 1994 5-6
Statement of Cash Flow - For the Years Ended
December 31, 1994, January 1, 1994 and
January 2, 1993 7
Statement of Shareholder's Equity - For the Years
Ended December 31, 1994, January 1, 1994 and
January 2, 1993 8
Notes to Financial Statements 9-17
Thirty-nine Weeks Ended September 30, 1995
Statement of Operations - For the Thirty-nine Weeks
Ended September 30, 1995 and October 1, 1994 18
Balance Sheet - As of September 30, 1995 19-20
Statement of Cash Flow - For the Thirty-nine Weeks
Ended September 30, 1995 and October 1, 1994 21
Notes to Financial Statements 22
(b) Pro forma financial statements of Smithfield
Foods, Inc. and Subsidiaries
Pro Forma Consolidated Balance Sheet - As of
October 29, 1995 23
Pro Forma Consolidated Statement of Income - For
the Twenty-six weeks Ended October 29, 1995 24
Pro Forma Consolidated Statement of Income - For
the Year Ended April 30, 1995 25
Notes to Pro Forma Consolidated Financial
Statements 26-27
(c) Exhibit Index 29
(2)
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
John Morrell & Co.
We have audited the accompanying balance sheets of John Morrell & Co. as of
December 31, 1994 and January 1, 1994, and the related statements of operations,
shareholder's equity, and cash flow for each of the three years in the period
ended December 31, 1994. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of John Morrell & Co. at December
31, 1994 and January 1, 1994, and the results of its operations and its cash
flow for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Notes 2 and 8 to the financial statements, the Company changed
its method of accounting in 1993 for postretirement benefits other than pensions
and in 1992 for income taxes.
January 31, 1995, except for Ernst & Young LLP
Note 9 as to which the date
is February 7, 1996
(3)
JOHN MORRELL & CO.
STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
1994 1993 1992
---- ---- ----
Net sales $1,455,894 1,549,712 1,744,796
--------- --------- ---------
Operating costs and expenses:
Cost of sales 1,308,313 1,418,082 1,638,651
Selling, general and administrative 111,283 116,751 125,999
Depreciation 8,852 9,007 10,163
Gain on sale of Specialty Meat Division (10,156) - -
--------- --------- ---------
1,418,292 1,543,840 1,774,813
--------- --------- ---------
Operating income (loss) 37,602 5,872 (30,017)
Net interest expense (2,488) (5,322) (5,194)
--------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change 35,114 550 (35,211)
Provision (benefit) for income taxes (306) (45) 274
--------- --------- ---------
Income (loss) before cumulative effect of
accounting change 35,420 595 (35,485)
Cumulative effect of change in accounting
method for income taxes - - (21,215)
--------- --------- ---------
Net income (loss) $ 35,420 595 (56,700)
========= ========= =========
See Notes to Financial Statements
(4)
JOHN MORRELL & CO.
BALANCE SHEET
(Dollars in thousands)
Fiscal year-end December
ASSETS 1994 1993
------ --------- -------
CURRENT ASSETS:
Cash and equivalents $ 13,332 -
Accounts receivable, principally trade (less
allowances of $1,090 and $640, respectively) 57,765 58,847
Inventories:
Product 35,165 48,174
Supplies 8,016 9,668
Prepaid expenses 1,598 975
------- -------
Total current assets 115,876 117,664
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 755 1,300
Buildings 39,802 51,024
Machinery and equipment 127,507 145,180
Construction in progress 4,266 1,606
-------- -------
172,330 199,110
Less accumulated depreciation 125,604 145,020
-------- -------
46,726 54,090
INTANGIBLES, NET 5,911 13,566
OTHER ASSETS 7,946 7,470
-------- -------
$176,459 192,790
See Notes to Financial Statements
(Continued)
(5)
JOHN MORRELL & CO.
BALANCE SHEET
(Dollars in thousands)
Fiscal year-end December
LIABILITIES AND SHAREHOLDER'S EQUITY 1994 1993
- ------------------------------------ --------- -------
CURRENT LIABILITIES:
Notes payable $ 123 26,129
Current maturities of long-term debt 21 4,018
Accounts payable 37,498 41,821
Accrued claims under self insurance programs 14,990 14,687
Accrued payroll expense 9,052 8,355
Current portion accrued pension liability 2,517 1,358
Accrued other retiree benefits 8,689 7,250
Other accrued expenses 7,036 9,721
-------- -------
Total current liabilities 79,926 113,339
LONG-TERM LIABILITIES:
Long-term debt 1,041 12,762
Accrued pension liability, noncurrent 45,470 52,279
Other liabilities 1,345 290
-------- -------
Total liabilities 127,782 178,670
-------- -------
SHAREHOLDER'S EQUITY:
Preferred stock, $1 par value;
1,000 shares authorized and unissued - -
Common stock, no par value;
1,000 shares authorized and outstanding 12,649 12,649
Additional paid-in capital 48,380 48,251
Accumulated earnings (deficit) 2,772 (28,851)
Minimum pension liability adjustment (15,124) (17,929)
-------- -------
Total shareholder's equity 48,677 14,120
-------- -------
$176,459 192,790
See Notes to Financial Statements
(6)
JOHN MORRELL & CO.
STATEMENT OF CASH FLOW
(Dollars in thousands)
1994 1993 1992
--------- --------- -------
CASH PROVIDED (USED) BY:
OPERATIONS
Net income (loss) $ 35,420 595 (56,700)
Cumulative effect of accounting change - - 21,215
Depreciation and amortization 9,880 9,473 11,049
Gain on sale of Specialty Meat Division (10,156) - -
Changes in current assets and liabilities:
Accounts receivable (960) (4,970) 20,954
Inventories (8,869) (5,025) 16,766
Accounts payable and accrued expenses (238) 3,238 (7,940)
Prepaid expenses (685) 535 1,512
Other (8,070) (4,339) (7,958)
--------- --------- --------
CASH FLOW FROM OPERATIONS 16,322 ( 493) (1,102)
--------- --------- --------
INVESTING
Capital expenditures (11,853) (8,826) (8,741)
Proceeds from sale or disposal of property,
plant and equipment:
Specialty Meat Division 52,700 - -
Other, net 540 350 4,768
--------- --------- ---------
CASH FLOW FROM INVESTING 41,387 (8,476) (3,973)
--------- --------- ---------
FINANCING
Change in amount due to/from Chiquita (1,904) 2,217 (4,094)
Capital contributions - 900 15,950
Increase (decrease) in notes payable (26,006) 8,429 (3,700)
Redemption of preferred stock (12,500) - -
Repayments of long-term debt ( 3,217) (4,527) (5,778)
Cash dividends on preferred stock (750) - -
--------- --------- --------
CASH FLOW FROM FINANCING (44,377) 7,019 2,378
--------- --------- ---------
Increase (decrease) in cash and equivalents 13,332 (1,950) (2,697)
Balance at beginning of year - 1,950 4,647
--------- --------- ---------
Balance at end of year $ 13,332 - 1,950
========= ========= =========
See Notes to Financial Statements
(7)
JOHN MORRELL & CO.
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in thousands)
Minimum
Common Stock Additional Accumulated Pension Total
Preferred Stated Paid-in Earnings Liability Shareholder's
Stock Shares Value Capital (Deficit) Adjustment Equity
Balance fiscal year-end 1991 $ - 1,000 $12,649 $31,119 $27,254 $(1,111) $69,911
Net loss - - - - (56,700) - (56,700)
Change in minimum pension
liability adjustment - - - - - (5,814) (5,814)
Capital contribution from Chiquita - - - 15,950 - - 15,950
Tax benefit realized by Chiquita
on exercise of stock options by
Morrell employees - - - 282 - - 282
Balance fiscal year-end 1992 - 1,000 12,649 47,351 (29,446) (6,925) 23,629
Net income - - - - 595 - 595
Change in minimum pension
liability adjustment - - - - - (11,004) (11,004)
Capital contribution from Chiquita - - - 900 - - 900
Balance fiscal year-end 1993 - 1,000 12,649 48,251 (28,851) (17,929) 14,120
Preferred stock issued in exchange
for debt 12,500 - - - - - 12,500
Shares redeemed (12,500) - - - - - (12,500)
Cash dividends on preferred stock - - - - (750) - (750)
Dividend on Common Stock of
property, plant and equipment - - - - (3,047) - (3,047)
Net income - - - - 35,420 - 35,420
Change in minimum pension
liability adjustment - - - - - 2,805 2,805
Tax benefit realized by Chiquita
on exercise of stock options
by Morrell employees - - - 129 - - 129
Balance fiscal year-end 1994 $ - 1,000 $12,649 $48,380 $2,772 $(15,124) $48,677
See Notes to Financial Statements
(8)
JOHN MORRELL & CO.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
The accompanying financial statements include the accounts of John
Morrell & Co. ("Morrell"). Morrell is a wholly-owned subsidiary of
Chiquita Brands International, Inc. ("Chiquita").
During 1992 Chiquita announced plans to divest its meat business and has been
actively seeking to sell Morrell.
Financial instruments -
Financial instruments that potentially subject Morrell to significant
concentrations of credit risk consist of trade accounts receivable. Although
Morrell's customers are primarily food industry distributors and retailers,
concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising Morrell's customer base
and their geographic dispersion.
Cash equivalents consist of highly liquid investments with a maturity when
purchased of three months or less.
Inventories -
Livestock inventories are valued at lower of cost or market; meat product
inventories are valued at market. Supplies inventories are valued at average
cost. Certain livestock inventories and meat product inventories held for future
sale are hedged to reduce the effect of price fluctuations. Gains and losses on
hedging transactions are deferred as part of the inventory cost and included in
income as the related inventory is sold.
Property, plant and equipment -
Depreciation is based on the straight-line method over the estimated useful
lives of depreciable assets.
Fiscal years -
Morrell uses a standard financial reporting schedule that is based on weekly
periods rather than calendar dates. Morrell ends its fiscal year with the week
that ends on the Saturday closest to December 31.
(9)
The fiscal years ended December 31, 1994 (fiscal 1994) and January 1, 1994
(fiscal 1993) were 52 week years, while the fiscal year ended January 2, 1993
(fiscal 1992) was a 53-week year. Unless otherwise noted, references to years
relate to fiscal years.
Intangibles -
Intangibles consist principally of trademarks and goodwill which are being
amortized over 40 years. Approximately $7.4 million of intangibles outstanding
at the end of fiscal 1993 related to operations sold as part of the Specialty
Meat Division (see Note 6). Accumulated amortization was $1.3 million and $1.7
million at the end of 1994 and 1993, respectively.
Federal income taxes -
The results of operations of Morrell are included in Chiquita's consolidated
Federal income tax returns. Under Chiquita's taxsharing policy, Morrell
generally pays to or receives from Chiquita an amount equal to the Federal
income taxes it would pay or receive if it filed a separate income tax return.
Consistent with the treatment of all other intercompany transactions, no
interest is charged or credited as it relates to the timing of settlement of
taxes between Morrell and Chiquita.
Effective at the beginning of 1992, Morrell adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109
requires deferred income taxes to be recognized for temporary differences
between the financial reporting basis and income tax basis of assets and
liabilities using prevailing income tax rates. A valuation allowance has been
provided for deferred tax assets where it is more likely than not that such
assets will not be recovered through future operations.
2. PENSION AND OTHER BENEFIT PLANS
Pension and retirement benefits are provided by Morrell under non-contributory,
trustee administered, defined benefit plans for substantially all full-time
salaried employees and also hourly employees at certain plant locations. These
pensions are funded in accordance with the requirements of the Employee
Retirement Income Security Act. The salaried pension plan generally provides for
benefits based on years of service, earnings and Social Security benefits. The
hourly plan provides benefits of stated amounts for each year of service. Most
hourly plan employees have stopped accruing additional pension benefits as the
defined benefit plan has been replaced by a defined contribution plan.
(10)
Net periodic pension cost for the defined benefit plans included the following
components (in thousands):
1994 1993 1992
------ ------ -----
Service cost-benefits earned during the year $ 1,254 1,095 1,202
Interest cost on projected benefit obligation 12,428 12,504 12,546
Actual return on plan assets 1,047 (7,961) (2,532)
Net amortization and deferral (12,003) (3,501) (8,641)
------- ------ ------
Net periodic pension cost $ 2,726 2,137 2,575
======= ====== ======
Assumptions used in accounting for defined benefit plans were:
1994 1993 1992
------ ------ -----
Weighted average discount rate 9% 7.75% 9%
Expected return on assets 10% 10% 10%
Increase in compensation levels (active plan) 5% 5% 5%
The following table sets forth the defined benefit plans' funded status at the
end of each fiscal year (in thousands):
Accumulated Benefits Assets Exceed
Exceed Assets Accumulated Benefits
1994 1993 1994 1993
------- ------- ------- ------
Plan assets at fair market
value, consisting primarily
of bonds and other fixed
income securities $ 44,058 48,790 58,564 59,523
------- ------- ------- -------
Present value of benefit
obligations:
Vested 89,633 99,452 48,773 54,261
Nonvested 2,412 2,975 2,525 3,432
------- ------- ------- -------
Accumulated benefit obligation $ 92,045 102,427 51,298 57,693
======= ======= ======= =======
Projected benefit obligation $ 92,045 102,427 57,624 64,092
======= ======= ======= =======
Projected benefit obligation
(in excess of) less than
plan assets $(47,987) (53,637) 940 (4,569)
Unrecognized net loss 15,124 17,929 10,340 13,320
Adjustment required to
recognize minimum pension
liability (15,948) (18,833) - -
Unrecognized net obligation
(asset) at transition,
net of amortization 824 904 (4,368) (5,100)
------- ------- ------- -------
(Pension liability) prepaid
pension cost recognized on
the balance sheet $(47,987) (53,637) 6,912 3,651
======= ======= ======= =======
Chiquita securities comprised approximately 4% of the fair market value of plan
assets at the end of 1994.
The adjustment required to recognize the minimum pension liability is based on
the excess of the accumulated benefit obligation over the fair market value of
assets of the hourly plan.
(11)
Morrell offers a defined contribution plan to all full-time salaried employees
and full-time hourly employees at certain plant locations. Company contributions
are based on a percentage of the amount contributed by the employee up to a
specified maximum amount. Morrell's contributions and administrative costs were
$1.7 million for 1994, $1.5 million for 1993 and $1.8 million for 1992.
Hourly employees covered by collective bargaining agreements which provide for
Company contributions to union sponsored pension plans are excluded from the
defined benefit trusteed plans. Contributions to these union sponsored plans
were $1.8 million for 1994, $815,000 for 1993 and $891,000 for 1992.
Morrell has provided health care and life insurance benefits to certain retired
employees. (Such benefits are commonly referred to as Other Postretirement
Employment Benefits, or "OPEB's".) Morrell funded the cost of OPEB's as incurred
and there are no separate trust accounts or assets maintained for paying these
benefits. The level of benefit and the amount of retiree contribution depended
on several factors including the date when the employee retired or became
eligible to retire and whether the employee worked under a collective bargaining
agreement. Most of these benefits related to hourly employees. OPEB obligations
related to salaried personnel are not material.
Effective at the beginning of 1993, Morrell adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" (FAS 106) and began accruing postretirement benefits. Prior
to this change, costs were charged to expense as incurred. For recognizing the
transition obligation (actuarially calculated at $106.2 million), Morrell
elected to use the prospective recognition method and amortize the transition
obligation over 20 years using the straight-line method.
At the beginning of 1994, the accumulated postretirement benefit obligation
(APBO) increased from $110.2 million to $119.3 million. The increase in the APBO
from the prior year was due primarily to a lowering of the assumed discount rate
which gave rise to an unrecorded net loss of $11.1 million at the end of fiscal
1993. Morrell continued to accrue OPEB expenses through 1994.
A progression of the accrued other retiree benefits account and related expense
for each fiscal year is as follows (in thousands):
1994 1993
Balance at the beginning of year $ 7,250 3,961
OPEB expense 12,228 15,287
Claims incurred (10,789) (11,998)
------- -------
Balance end of year $ 8,689 7,250
======= =======
(12)
OPEB expense of $12.9 million for 1992 was recorded on a cash basis and has not
been restated.
In 1992, Morrell filed a declaratory judgement action in the U.S. District Court
for the District of South Dakota seeking confirmation of its right to
unilaterally reduce or eliminate medical benefits of retired hourly employees.
In 1993, the District Court ruled in favor of Morrell. In 1994, this ruling was
upheld by the U.S. Court of Appeals for the Eight Circuit. Morrell continued to
provide such benefits while the legal issues were being litigated and appealed.
In December 1994, the plan's governing committee approved terminating the
retiree medical benefits and, except for a transition program, hourly retiree
medical and death plan benefits were discontinued. The accrual for other retiree
benefits at December 31, 1994 is adequate to provide for the remaining cost of
the transition program. Accordingly, there will be no material continuing cost
for OPEB's.
The actuarial assumptions used in the development of periodic OPEB expense as
well as the sensitivity analysis of changes in actuarial assumptions have not
been presented since the only significant plan has been eliminated; therefore,
disclosures would not be meaningful.
3. LONG-TERM DEBT AND CREDIT FACILITY
Long-term debt at the end of each fiscal year consists of the following:
1994 1993
(in thousands)
9.375% Senior Secured notes $ - 16,700
Economic development loan forgivable over two
years if certain employment levels are
maintained, otherwise due December 1996 1,000 -
Promissory notes, interest rate of 6.625%
due in varying monthly installments to 1997 62 80
------ ------
1,062 16,780
Less: Current maturities ( 21) (4,018)
------ ------
$ 1,041 12,762
====== ======
In April 1993, Chiquita purchased the $16.7 million outstanding principal amount
of 9.375% Senior Secured notes. The notes were secured by property, plant and
equipment with an aggregate book value of approximately $38.3 million at the end
of fiscal 1993. In April 1994, Morrell issued 125 shares of new preferred stock
to Chiquita in order to retire $12.5 million of the Senior Secured notes. The
preferred stock paid annual dividends of $9,000 per share and had a liquidation
preference of $100,000 per share. No gain or loss was recorded on the exchange.
On December 30, 1994, the preferred stock was redeemed at its liquidation value
for cash and the balance outstanding on the Senior Secured notes was paid off.
(13)
Morrell has an $80 million revolving credit facility available through September
1995. Borrowings under this credit facility bear interest based on the lending
institution's prime rate plus 2% (10.5% at fiscal year-end 1994). Borrowings
under the facility are limited to an amount determined with reference to and
secured by, receivables and inventories that are available to pledge as
collateral. An annual service fee of 1/2 of 1% is assessed on the unused portion
of the facility. The weighted average interest rates on borrowings were 12.7%
and 7.5% for fiscal years 1994 and 1993, respectively. At fiscal year-end 1994
there were standby letters of credit or guarantees of approximately $9.4 million
outstanding under the facility and no cash borrowings. There was at such time
sufficient collateral capacity for Morrell to have borrowed up to the full
amount of the facility.
Under the terms of the credit facility, Morrell is required to comply with
certain covenants including the maintenance of net worth and certain financial
ratios. The facility also restricts making certain investments and transactions
that are not in the ordinary course of business.
In addition, there are certain restrictive covenants in credit agreements of
Chiquita that limit new borrowings by its subsidiaries including Morrell.
Borrowing under Morrell's existing credit facility is not currently limited by
these Chiquita covenants.
Cash payments for interest were $3.0 million in 1994, $5.6 million in 1993 and
$5.4 million in 1992.
4. COMMITMENTS AND CONTINGENCIES
Rental expense was $6.9 million in 1994, $9.1 million in 1993 and $10.5 million
in 1992.
At December 31, 1994, future minimum payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year,
principally related to equipment and vehicles, are as follows (in thousands):
1995 $3,746
1996 1,559
1997 682
1998 246
1999 17
Thereafter -
At year-end 1994, Morrell guaranteed debt obligations and certain lease
obligations of other parties amounting to $4.1 million.
(14)
A 1990 acquisition provides for Morrell to pay additional consideration up to an
aggregate amount of $12.5 million in royalties based on the sale of Dinner Bell
meat products. Morrell contends in a lawsuit recently transferred to the U.S.
District Court, Northern District of Ohio, that this entire amount is subject to
contractually allowed offsets of damages incurred from Dinner Bell's 1990
bankruptcy. This matter has tentatively been settled, subject to bankruptcy
court approval, for a Morrell payment of approximately $1.3 million which will
be recorded as part of the purchase price of the brandname when paid.
5. LEGAL MATTERS
In March 1993, Morrell brought to the attention of the United States
Environmental Protection Agency ("USEPA") certain deficiencies relating to the
wastewater treatment facility at its Sioux Falls plant. The U.S. Department of
Justice ("DOJ") has proposed that Morrell enter into a judicial civil consent
order requiring compliance with certain environmental laws, regulations and
permits and other actions. The DOJ indicated that the amount of civil penalties,
if any, to be imposed would be resolved later. In addition, the U.S. Attorney
for South Dakota and the DOJ are currently investigating the matter; two former
plant employees have entered into plea agreements with the United States.
Morrell has taken substantial steps to remedy past noncompliance and to avoid
future recurrences.
Morrell is subject to other legal proceedings and claims which arise in the
ordinary course of business. However, based on evaluation of facts which have
been ascertained, and on opinions of counsel, management does not believe such
litigation or claims will, individually or in the aggregate, have a material
adverse effect on the financial condition of Morrell.
6. DIVESTITURES
On February 28, 1994, Morrell completed the sale of its Specialty Meat Division
to a newly formed company employing the then current managers of the division,
the former president and chief executive officer of Morrell, and a private
investment group. The sale included the brands "Mosey's", "Liguria", "Scott
Petersen" and "Nathan's". The production facilities located in Bloomfield,
Connecticut, Humboldt, Iowa and Chicago, Illinois were included in the sale.
Morrell received $52.7 million in cash proceeds and recorded a pretax gain of
approximately $10.2 million.
In December 1992, Morrell sold for cash its North Carolina pork processing plant
and supplies for $4.5 million resulting in a loss on the sale of the facility of
$3 million and Morrell wrote off $2.7 million in other costs related to the
operation. At that time, Morrell also provided approximately $5.4 million to
cover costs of closing other operations.
(15)
7. SIGNIFICANT TRANSACTIONS WITH CHIQUITA
Included in accounts receivable is a receivable from Chiquita of approximately
$2.0 million at December 31, 1994, and in accounts payable is a payable to
Chiquita of $74,000 at the end of fiscal 1993. Morrell paid brokerage
commissions of $1.8 million in 1992 to a Japanese subsidiary of Chiquita. This
brokerage agreement was terminated in June 1992.
Morrell has incurred interest charges of $497,000 and $1 million to Chiquita in
1994 and 1993 respectively, related to the 9.375% Senior Secured notes which
were retired in 1994 (see Note 3).
Chiquita provides data processing services and certain other management services
to Morrell, and Morrell charges Chiquita for its use of a technical center. Net
charges from Chiquita for the services and facilities were $3.0 million in 1994,
$4.5 million in 1993 and $6.7 million in 1992. Chiquita billed Morrell $2.3
million in 1994, $4.8 million in 1993 and $6.4 million in 1992 for
transportation services.
At year-end 1994, Chiquita had outstanding performance bonds of $11.8 million
and standby letters of credit of $10.4 million that were being used to secure
Morrell insurance programs.
Morrell received capital contributions from Chiquita aggregating $900,000 in
1993 and $15,950,000 in 1992. In 1994, Morrell dividended to Chiquita a former
plant facility at its net carrying
value of $3,047,000.
8. INCOME TAXES
At the beginning of 1992 Morrell changed its method of accounting for income
taxes from the deferred method to the liability method required by FAS 109.
Prior years' financial statements were not restated. The cumulative effect of
adopting FAS 109 was to reduce net income by $21.2 million in 1992.
Income tax expense differs from income taxes computed at the U.S. Federal
statutory rate for the following reasons (in thousands):
1994 1993 1992
-------- -------- ------
Income tax expense (benefit) computed
at the U.S. Federal statutory rate $ 12,290 187 (11,458)
State income taxes, net of Federal benefit (197) (29) 15
Losses for which no tax benefit had been
recognized - - 11,488
Net operating loss carryforward utilized (12,005) (274) -
Other (394) 71 229
-------- ------- --------
Income tax (benefit) expense $ (306) (45) 274
======== ======= ========
(16)
The components of net deferred income tax benefits and liabilities included on
the balance sheet at the end of the year are as follows (in thousands):
Deferred tax assets 1994 1993
------------------- ------- ------
Employee benefits $ 19,683 22,472
Plant closing reserves 852 3,208
Other 3,334 3,601
------- -------
Total deferred assets before
valuation allowance 23,869 29,281
Valuation allowance (21,355) (25,113)
------- -------
Total deferred tax benefits $ 2,514 4,168
======= =======
Deferred tax liabilities
Depreciation and amortization $ 2,514 2,405
Other - 1,763
------- -------
Total deferred tax liabilities $ 2,514 4,168
======= =======
Net deferred taxes do not reflect the benefit of approximately $144,000 and
$765,000 that would be available to Morrell from the use of its operating loss
carryforwards and miscellaneous tax credit carryforwards, respectively. The
carryforwards expire in varying amounts through 2009.
Certain employees of Morrell exercised stock options for Chiquita common stock.
The effect of the tax deduction Chiquita will receive related to the exercise of
these options has been recorded by Morrell as a contribution to capital of
$129,000 in 1994, $0 in 1993 and $282,000 in 1992.
Cash payments, net of refunds, for income taxes were $1.2 million in 1994,
$200,000 in 1993 and $1.8 million in 1992, respectively.
9. SUBSEQUENT EVENTS
On December 20, 1995, Smithfield Foods, Inc. ("Smithfield Foods") acquired from
Chiquita all of the outstanding capital stock of the Company, for a total
purchase price of $58 million, consisting of $25 million in cash and the
issuance of 1,094,273 shares of Smithfield Foods common stock. In addition,
Smithfield Foods assumed all of John Morrell's liabilities. These historical
financial statements of John Morrell & Co. do not reflect any purchase
accounting adjustments as a result of this acquisition transaction.
On February 7, 1996, the Company reached a tentative agreement with the United
States Department of Justice relating to a pending criminal and civil
investigation of John Morrell's Sioux Fall waste water treatment facility and
agreed to pay total fines of $3.25 million, part of which is to be used to
establish an environmental fund to benefit the Big Sioux River.
(17)
JOHN MORRELL & CO.
STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
39 Weeks 39 Weeks
Ended Ended
September 30, October 1,
1995 1994
(Unaudited) (Unaudited)
Net sales $1,094,169 1,084,817
---------- ---------
Operating costs and expenses:
Cost of sales 1,013,307 992,697
Selling, general and administrative 70,618 82,278
Depreciation 6,185 5,762
Gain on sale of Specialty Meat Division - (12,101)
---------- ---------
1,090,110 1,068,636
---------- ---------
Operating income 4,059 16,181
Net interest expense 1,308 2,173
---------- ---------
Income before income taxes 2,751 14,008
Provision for income taxes 966 -
---------- ---------
Net income $ 1,785 14,008
========== =========
See accompanying notes to financial statements.
(18)
JOHN MORRELL & CO.
BALANCE SHEET
(Dollars in thousands)
September 30,
1995
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and equivalents $ 11,470
Accounts receivable, principally trade
(less allowances of $828) 73,639
Inventories:
Fresh and Processed Meats 44,115
Live Stock and Manufacturing Supplies 9,713
Prepaid expenses 710
Total current assets 139,647
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 1,330
Buildings 44,710
Machinery and equipment 134,806
Construction in progress 7,925
--------
188,771
Less accumulated depreciation 135,933
52,838
INTANGIBLES, NET 10,274
OTHER ASSETS 3,359
$206,118
(Continued)
See accompanying notes to financial statements.
(19)
JOHN MORRELL & CO.
BALANCE SHEET
(Dollars in thousands)
September 30,
1995
LIABILITIES AND SHAREHOLDER'S EQUITY (Unaudited)
CURRENT LIABILITIES:
Notes payable $ 19,489
Current maturities of long-term debt 231
Accounts payable 53,176
Accrued liabilities 33,025
--------
Total current liabilities 105,921
LONG-TERM LIABILITIES:
Long-term debt 3,627
Accrued pension liability, noncurrent 45,332
Other liabilities 776
--------
Total liabilities 155,656
SHAREHOLDER'S EQUITY:
Preferred stock, $1 par value;
1,000 shares authorized and unissued -
Common stock, no par value;
1,000 shares authorized and outstanding 12,649
Additional paid-in capital 48,380
Accumulated earnings 4,557
Minimum pension liability adjustment (15,124)
--------
Total shareholder's equity 50,462
$206,118
See accompanying notes to financial statements.
(20)
JOHN MORRELL & CO.
STATEMENT OF CASH FLOW
(Dollars in thousands)
39 Weeks 39 Weeks
Ended Ended
September 30, October 1,
CASH PROVIDED (USED) BY: 1995 1994
----------- -----------
(Unaudited) (Unaudited)
OPERATIONS
Net income $ 1,785 14,008
Depreciation and amortization 6,770 6,542
Gain on sale of Specialty Meat Division - (12,101)
Changes in current assets and liabilities:
Accounts receivable (16,973) (6,146)
Inventories (10,618) (20,507)
Accounts payable and accrued expenses 11,980 22,230
Prepaid expenses (645) (545)
Other (4,852) (5,540)
-------- -------
CASH FLOW FROM OPERATIONS (12,553) (2,059)
-------- -------
INVESTING
Capital expenditures (10,208) (8,842)
Other, net 8 1,246
-------- -------
CASH FLOW FROM INVESTING (10,200) (7,596)
-------- -------
FINANCING
Change in amount due to/from Chiquita 2,232 1,113
Increase in notes payable 19,092 30,353
Issuance of preferred stock - 12,500
Repayments of long-term debt (433) (16,514)
Cash dividends on preferred stock - (469)
-------- -------
CASH FLOW FROM FINANCING 20,891 26,983
-------- -------
Increase (decrease) in cash and equivalents (1,862) 17,328
Balance at beginning of period 13,332 -
-------- -------
Balance at end of period $ 11,470 17,328
======== =======
See accompanying notes to financial statements.
(21)
JOHN MORRELL & CO.
NOTES TO FINANCIAL STATEMENTS
(1) The Notes to Financial Statements included on pages 9 through 17 for the
fiscal year ended December 31, 1994 should be read in conjunction with the
quarterly financial statements.
(2) The financial information furnished herein is unaudited. The information
reflects all adjustments (which included only normal recurring adjustments)
which are, in the opinion of management, necessary to a fair statement of
the results of operations for the interim periods included in this report.
(3) On December 20, 1995, Smithfield Foods, Inc. ("Smithfield Foods")
acquired from Chiquita all of the outstanding capital stock of the
Company, for a total purchase price of $58 million, consisting of $25
million in cash and the issuance of 1,094,273 shares of Smithfield
Foods common stock. In addition, Smithfield Foods assumed all of John
Morrell's liabilities. These historical financial statements of John
Morrell & Co. do not reflect any purchase accounting adjustments as a
result of this acquisition transaction.
(4) On February 7, 1996, the Company reached a tentative agreement with the
United States Department of Justice relating to a pending criminal and
civil investigation of John Morrell's Sioux Fall waste water treatment
facility and agreed to pay total fines of $3.25 million, part of which is
to be used to establish an environmental fund to benefit the Big Sioux
River.
(22)
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
Historical
Smithfield John
(In thousands) Foods Morrell Pro Forma
Oct. 29, Sept. 30, Adjustments Pro Forma
1995 1995 (Note 2) Combined
ASSETS
Current assets:
Cash $ 11,800 $ 11,470 $ - $23,270
Accounts receivable, net 94,772 73,639 - 168,411
Inventories 183,563 53,828 - 237,391
Advances to joint hog production
arrangements 8,998 - - 8,998
Other current assets 16,274 710 - 16,984
Total current assets 315,407 139,647 - 455,054
Net property,plant andequipment 305,861 52,838 52,386(a) 393,953
(17,132)(b)
Other assets 50,182 13,633 (7,737)(c) 55,371
(707)(d)
$671,450 $206,118 $26,810 $904,378
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $128,600 $ 19,489 $25,000(e) $173,089
Current portion of long-term debt and capital
lease obligations 10,468 231 - 10,699
Accounts payable 62,957 53,176 - 116,133
Accrued liabilities 42,127 36,923 2,686(c) 82,026
Total current liabilities 244,442 109,819 27,686 381,947
Long-term debt and capital lease obligations 180,637 3,627 - 184,264
Other noncurrent liabilities:
Pension and post-retirement benefits 4,281 41,435 33,204(c) 78,920
Deferred income taxes 22,029 - (20,000)(g) 2,029
Other 5,711 776 10,000(f) 16,487
Total other non-current liabilities 32,021 42,211 23,204 97,436
Preferred stock 30,000 - - 30,000
Common stockholders' equity 184,350 50,461 (57,080)(h) 210,731
33,000(i)
$671,450 $206,118 $26,810 $904,378
See the accompanying Notes to Pro Forma Consolidated Financial Statements.
(23)
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Historical
Smithfield John
Foods Morrell
26 Weeks 26 Weeks
Ended Ended Pro Forma
Oct.29, Sept.30, Adjustments ProForma
(In thousands) 1995 1995 (Note 3) Combined
Sales $ 823,127 $ 740,075 $ - $1,563,202
Cost of sales 766,692(1) 688,051 - 1,454,743
Gross profit 56,435(1) 52,024 - 108,459
Selling, general and administrative expenses 32,631(1) 46,102 31 (j) 78,764
Depreciation expense 11,248 4,303 1,742 (k) 17,293
Interest expense 9,541 997 842 (l) 11,380
Income from continuing operations before taxes 3,015 622 (2,615) 1,022
Income taxes 994 - (1,036)(m) 204
246 (n)
Income from continuing operations $ 2,021 $ 622 $ (1,825) $ 818
Income from continuing operations available
to common stockholders $ 1,669 $ 466
Income from continuing operations
per common share $ 0.10 $ 0.03
Weighted average common shares outstanding 16,909 18,003
(1) Certain expenses previously classified as selling, general and
administrative have been reclassified as cost of sales.
See the accompanying Notes to Pro Forma Consolidated Financial Statements.
(24)
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Historical
Smithfield John
Foods Morrell
Year 52 Weeks
Ended Ended Pro Forma
April 30, March 31, Adjustments Pro Forma
(In thousands) 1995 1995 (Note 3) Combined
Sales $1,526,518 $1,422,908 $ - $2,949,426
Cost of sales 1,380,586(1) 1,278,971 - 2,659,557
Gross profit 145,932(1) 143,937 - 289,869
Selling, general and administrative expenses 61,723(1) 107,743 (388)(j) 169,078
Depreciation expense 19,717 12,750 3,486 (k) 35,953
Interest expense 14,054 1,661 1,754 (l) 17,469
Income from continuing operations before taxes 50,438 21,783 (4,852) 67,369
Income taxes 18,523 - (1,921)(m) 25,228
8,626 (n)
Income from continuing operations $ 31,915 $ 21,783 $ (11,557) $ 42,141
Income from continuing operations available
to common stockholders $ 31,240 $ 41,466
Income from continuing operations
per common share $ 1.83 $ 2.28
Weighted average common shares outstanding 17,059 18,153
(1) Certain expenses previously classified as selling, general and
administrative have been reclassified as cost of sales.
See the accompanying Notes to Pro Forma Consolidated Financial Statements.
(25)
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Reporting
The unaudited Pro Forma Consolidated Financial Statements of Smithfield Foods,
Inc. and subsidiaries (the "Company") are provided to give effect to the
acquisition on December 20, 1995, of all of the outstanding capital stock of
John Morrell & Co. ("John Morrell").
The purchase price of $58 million consisted of $25 million in cash (borrowed
under the Company's $200 million revolving credit facility with a group of six
banks) and the issuance of 1,094,273 shares of its common stock, par value $.50
per share.
The pro forma information is based on the historical financial statements of the
Company and John Morrell giving effect to the acquisition under the purchase
method of accounting. The pro forma information does not purport to be
indicative of the combined historical or future results of operations or
financial position that would have been or will be reported had the assumptions
and adjustments been transacted as described below.
The pro forma combined balance sheet as of October 29, 1995 (September 30, 1995
for John Morrell) presents the financial position of the Company assuming the
acquisition had been completed as of that date. The pro forma combined
statements of income for the year ended April 30, 1995 (for the fifty-two weeks
ended March 31, 1995 for John Morrell) and for the twenty-six weeks ended
October 29, 1995 (for the twenty-six weeks ended September 30, 1995 for John
Morrell) present the results of operations of the combined entities assuming
that the acquisition had been completed as of the beginning of the respective
periods.
The Pro Forma Consolidated Financial Statements should be read in conjunction
with the Company's Annual Report for the fiscal year ended April 30, 1995, the
Company's unaudited financial statements for the twenty-six weeks ended October
29, 1995, and the accompanying historical financial statements and notes of John
Morrell for the year ended December 31, 1994.
(2) Consolidated Balance Sheet Pro Forma Adjustments
The Pro Forma Consolidated Balance Sheet gives effect to the
adjustments described below.
(a) To adjust the carrying value of property, plant and equipment to an
independently appraised fair market value.
(b) To appropriately reduce the value of property, plant and equipment
to reflect the net purchase price in accordance with the purchase
method of accounting.
(c) To eliminate existing pension assets and liabilities and adjust the
long-term pension liability for John Morrell to the excess of the
projected benefit obligation over plan assets.
(26)
(d) To write-off miscellaneous intangible costs.
(e) To record the $25 million cash portion of the purchase
price borrowed under the Company's revolving credit
facility.
(f) To reflect, at fair value, certain other liabilities consistent
with the Company's accounting policies.
(g) To record deferred tax assets not previously recognized
by John Morrell.
(h) To eliminate the equity of John Morrell.
(i) To record the 1,094,273 million shares issued to
Chiquita Brands International, Inc. at $30.157
per share.
(3) Consolidated Statements of Income Pro Forma Adjustments The Pro Forma
Consolidated Statements of Income give effect to the adjustments described
below.
(j) To adjust for changes in amortization expense related to write-off
of certain intangibles and increase in trademarks and tradenames as
a result of applying the purchase method of accounting.
(k) To reflect additional depreciation for the related periods
associated with the increase in the carrying value for property,
plant and equipment.
(l) To record the interest cost related to the $25 million cash portion
of the purchase price, borrowed under the Company's revolving
credit facility.
(m) To record the tax effect of the pro forma adjustments including the
anticipated reversal of the deferred tax benefits given recognition
to in the acquisition balance sheet at the marginal tax rate of
39.6%.
(n) To reflect the marginal tax rate of 39.6% on John Morrell
historical income.
(27)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SMITHFIELD FOODS, INC.
/s/ Aaron D. Trub
Aaron D. Trub
Vice President, Secretary
and Treasurer
Date: March 4, 1996
(28)
EXHIBIT INDEX
The following exhibits are filed herewith in accordance with the
provisions of Item 601 of Regulation S-K.
EXHIBIT PAGE
2.1 Stock Purchase Agreement dated as of December 20, 1995, between
Smithfield Foods, Inc. as Purchaser and Chiquita Brands International,
Inc. as Seller, relating to all issued and outstanding shares of capital
stock of John Morrell & Co. (exhibits and schedules omitted). *
2.2 Registration Rights Agreement dated as of December 20, 1995,
between Smithfield Foods, Inc. and Chiquita Brands International, Inc. *
2.3 Indemnification Agreement dated as of December 20, 1995, between
Chiquita Brands International, Inc. and John Morrell & Co. *
23.1 Consent of Independent Public Auditors. 30
99.1 Press Release. 31
* Exhibits 2.1 through 2.3 were previously submitted with the filing dated
January 4, 1996.
(29)