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) May 7, 1999
SMITHFIELD FOODS, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 0-2258 52-0845861
(State or other (Commission (IRS Employer
jurisdiction of incorporation File Number) Identification No.)
200 COMMERCE STREET
SMITHFIELD, VIRGINIA 23430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (757) 365-3000
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
SMITHFIELD FOODS, INC. IS FILING THIS AMENDMENT TO ITS CURRENT REPORT ON FORM
8-K TO FILE CERTAIN HISTORICAL AND PRO FORMA FINANCIAL INFORMATION. THIS CURRENT
REPORT REMAINS OTHERWISE IDENTICAL.
Smithfield Foods, Inc. ("Smithfield Foods") on May 7, 1999 completed the
acquisition of Carroll's Foods, Inc. and its affiliated companies and
partnership interests ("Carroll's Foods") for 4.2 million shares of Smithfield
Foods, Inc. common stock and the assumption of approximately $231 million in
debt, plus other liabilities. Friday's closing price of Smithfield Foods, Inc.
common stock on the Nasdaq Stock Market was $26.50.
The acquisition includes 100% of the capital stock of Carroll's Foods, Inc.;
Carroll's 50% interest in Smithfield-Carroll's; Carroll's 16% interest in Circle
Four; Carroll's 50% interest in Tar Heel Turkey Hatchery, 100% of Carroll's
turkey grow-out operation, Carroll's 49% interest in Carolina Turkeys, and
certain hog production interests in Brazil and Mexico. Carroll's Foods, Inc. is
the second largest hog production company in the U.S. and is headquartered in
Warsaw, North Carolina. Smithfield-Carroll's is a hog production partnership
with Smithfield Foods, headquartered in Waverly, Virginia. Circle Four is a hog
production partnership with Smithfield Foods headquartered in Milford, Utah.
Carolina Turkeys is a turkey processing partnership with Maxwell Farms, Inc.,
headquartered in Mount Olive, North Carolina, which produces approximately 290
million pounds of fresh turkeys and approximately 110 million pounds of
processed turkey meats annually.
The final acquisition price is substantially less than the $500 million
transaction value contained in the previously disclosed Letter of Intent
executed by the parties on February 25, 1999. The revised purchase price was
mutually agreed to in negotiations between the parties subsequent to the
execution of the Letter of Intent. "The final purchase price more accurately
reflects the value of Carroll's Foods. Based on this purchase price, Carroll's
Foods production costs are as competitive as any in the hog production industry
and, based on what we expect for hog prices going forward, the acquisition will
be accretive to Smithfield Foods earnings in fiscal 2000," Joseph W. Luter, III,
Chairman and CEO of Smithfield Foods, said.
The acquisition of Carroll's Foods makes Smithfield Foods the largest hog
producer in the world, which complements its position as the largest pork
processing company in the world. In addition, the Company has taken a major step
toward achieving its long term strategic goal of becoming more vertically
integrated by increasing its level of vertical integration to approximately 30%
from its prior level of approximaetly 14%. The Company expects to produce
approximately 5.6 million hogs and process approximately 19 million hogs in
fiscal 2000.
"This single transaction accomplished what the Company had otherwise hoped to
achieve in added hog production over the next five to 10 years, assuming such
new production could even be added or developed given the current political and
environmental climate in existence today." Luter said. He went on to say that
the added hog production will further insulate the Company from the effects of
major market swings in hog prices and fresh pork margins.
"This acquisition has put Smithfield Foods at what we consider to be an optimum
and prudent level of vertical integration. As a consequence, we have no plans to
increase our level of hog production in the United States in any significant way
in the foreseeable future," Luter stated.
2
Going forward, the Carroll's Foods businesses will be conducted as a separate
operating unit of Smithfield Foods that will be managed by its present
management team which will remain substantially intact. "This is consistent with
the Company's operating philosophy that permits its separate operating units a
great deal of autonomy under their own management teams," Luter stated. He also
said that the Company has worked very closely with Carroll's over the last
decade and that he was very comfortable with Carroll's Foods management team.
Separately, the Company's Board of Directors approved the purchase by the
Company of up to 2 million shares of its common stock from time to time in the
open market or in private transactions.
Smithfield Foods, a major marketer of fresh pork and processed meats, includes
among its brands Smithfield Lean Generation Pork, Smithfield Premium, Gwaltney,
John Morrell, Patrick Cudahy, Lykes, Esskay, Kretschmar, Valleydale, Jamestown,
Dinner Bell, Realean, Patrick's Pride, Great, Tobin's First Prize, Peyton's,
Curly's, Ember Farms and others.
This news release may contain "forward-looking" information within the meaning
of the federal securities laws. The forward-looking information may include
statements concerning the Company's outlook for the future, as well as other
statements of beliefs, future plans and strategies or anticipated events, and
similar expressions concerning matters that are not historical facts.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in, or implied
by, the statements. The risks include availability and prices of raw materials,
product pricing, the competitive environment and related market conditions,
operating efficiencies, access to capital and actions of domestic and foreign
governments.
3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
The Company hereby incorporates by reference its Current Report on
Form 8-K filed July 19, 1999, which report contains the Company's
Audited Historical Financial Statements for the Fiscal Year Ended
May 2, 1999.
Page
----
(a) Combined Financial Statements of Carroll's Group
Report of Independent Certified Public Accountants 5
Combined Balance Sheets - As of December 26, 1998 6
Combined Statements of Operations - For the year ended
December 26, 1998 8
Combined Statement of Stockholders' Equity - For the year
ended December 26, 1998 9
Combined Statements of Cash Flows - For the year
ended December 26, 1998 10
Notes to Combined Financial Statements 12
(b) Pro Forma Consolidated Condensed Financial Statements
of Smithfield Foods, Inc. and Subsidiaries (Unaudited)
Pro Forma Consolidated Condensed Balance Sheet - As of
May 2, 1999 28
Pro Forma Consolidated Condensed Statement of
Operations - For the Fifty-two Weeks Ended May 2, 1999 29
Pro Forma Consolidated Condensed Statement of Operations
- For the Fifty-three Weeks Ended May 3, 1998 30
Notes to Pro Forma Consolidated Condensed
Financial Statements 31
(c) Exhibit Index
Exhibit 2.1 Acquisition Agreement among Smithfield Foods, Carroll's
Foods and certain affiliates, Carroll M. Baggett, James
O. Mathews and Jeffrey S. Matthews, dated as of May 3,
1999 (exhibits as executed are filed below as exhibits
2.2, 2.3 and 2.4) (schedules are omitted, but the
registrant hereby agrees upon request of the Commission
to furnish schedules supplementally).
Exhibit 2.2 Escrow Agreement among Smithfield Foods, Carroll M.
Baggett, James O. Matthews, Jeffrey S. Matthews and
McGuire, Woods, Battle & Boothe LLP, dated as of May 7,
1999.
Exhibit 2.3 Agreement with Shareholders by and between Smithfield
Foods and each of Jeffrey S. Matthews, Carroll M. Baggett
and James O. Matthews, dated as of May 7, 1999.
Exhibit 2.4 Registration Rights Agreement by and between Smithfield
Foods and each of Jeffrey S. Matthews, Carroll M. Baggett
and James O. Matthews, dated as of May 7, 1999.
Exhibit 23.1 Consent of Independent Public Accountants
Exhibit 23.2 Consent of Independent Public Accountants
4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Carroll's Group:
We have audited the accompanying combined balance sheet of Carroll's Group (the
Company), comprised of the companies identified in Note 1, as of December 26,
1998, and the related combined statement of operations, stockholders' equity and
cash flows for the year then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Carroll's Group at
December 26, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
As explained in Note 14 to the combined financial statements, in 1998 the
Company changed its method of accounting for start-up costs, lower of cost or
market inventory valuation and capitalizing the costs of unborn pigs.
/s/ Arthur Andersen LLP
Raleigh, North Carolina,
June 9, 1999.
5
CARROLL'S GROUP
COMBINED BALANCE SHEET -- DECEMBER 26, 1998
ASSETS
--------
CURRENT ASSETS:
Cash and cash equivalents $ 725,266
Short-term marketable equity securities (Note 16) 22,140,625
Accounts receivable:
Trade 2,092,501
Smithfield Foods, Inc. 15,633,548
Affiliate 24,769,015
Stockholders 4,960,293
Other 4,887,492
-------------
58,238,972
Inventories:
Swine 112,480,362
Turkeys 14,160,142
Feed 8,998,964
Other 1,839,167
-------------
137,478,635
Prepaid expenses and other 2,727,952
-------------
Total current assets 221,311,450
-------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 10,212,994
Feed manufacturing facilities 22,346,513
Swine facilities 87,042,824
Buildings and improvements 9,030,082
Prepaid leases and breeding stock 35,326,417
Vehicles 20,283,709
Machinery and equipment 31,566,590
Other 5,603,268
-------------
221,412,397
Less - Accumulated depreciation (90,190,111)
-------------
131,222,286
-------------
OTHER ASSETS:
Investments in affiliates 46,896,122
Marketable equity securities (Note 16) 75,705,413
Other investments 3,928,297
-------------
126,529,832
-------------
Long-term notes receivable:
Stockholders and officers 7,611,832
Affiliates 29,377,581
Growers and other 14,921,476
-------------
51,910,889
License agreement, net of accumulated amortization of $3,156,074 3,354,978
Other assets 5,118,056
-------------
$539,447,491
=============
6
CARROLL'S GROUP
COMBINED BALANCE SHEET -- DECEMBER 26, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 8,754,487
Accrued expenses and other current liabilities 7,113,558
Accrued contract grower payments 10,106,277
Current installments of notes payable 109,784,000
Current installments of capital lease obligations 201,321
-------------
Total current liabilities 135,959,643
-------------
LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable 121,255,249
Loans payable to affiliates 19,941,041
Capital lease obligations, excluding current installments 2,538,585
-------------
Total long-term debt and notes payable 143,734,875
-------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, 8, 9 and 10)
DEFERRED AND OTHER LONG-TERM LIABILITIES:
Deferred compensation and benefits 6,370,213
Other deferred liabilities 771,475
Reserve for phantom stock plan 2,709,166
-------------
9,850,854
-------------
Total liabilities 289,545,372
-------------
STOCKHOLDERS' EQUITY:
Contributed capital 45,388,191
Retained earnings 135,560,076
Accumulated other comprehensive income 68,953,852
-------------
Total stockholders' equity 249,902,119
-------------
$539,447,491
=============
The accompanying notes to combined financial statements are an integral part of
this balance sheet.
7
CARROLL'S GROUP
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 26, 1998
SALES $347,937,638
COST OF SALES 319,884,606
-------------
Gross profit 28,053,032
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 81,320,193
-------------
Total operating loss (53,267,161)
-------------
OTHER INCOME (EXPENSE):
Equity in net losses of investments in affiliates (1,170,990)
Interest income 12,813,038
Gain on sale of marketable securities 5,889,481
Interest expense (22,529,135)
Decrease in phantom stock plan liability 2,426,657
Forgiveness of debt to affiliate (1,666,427)
Miscellaneous income, net 2,258,099
-------------
(1,979,277)
-------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (55,246,438)
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (Note 14) 18,680,213
-------------
Net loss (36,566,225)
OTHER COMPREHENSIVE INCOME - Change in unrealized gains on marketable securities (2,467,325)
-------------
Comprehensive loss $(39,033,550)
=============
The accompanying notes to combined financial statements are an integral part of
this statement.
8
CARROLL'S GROUP
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 26, 1998
ACCUMULATED
OTHER TOTAL
CONTRIBUTED RETAINED COMPREHENSIVE STOCKHOLDERS'
CAPITAL EARNINGS INCOME EQUITY
----------- -------- ------------- -------------
BALANCE, December 27, 1997 $45,388,191 $181,678,673 $71,421,177 $298,488,041
Change in unrealized gain on marketable securities 0 0 (2,467,325) (2,467,325)
Dividends paid 0 (9,552,372) 0 (9,552,372)
Net loss 0 (36,566,225) 0 (36,566,225)
----------- ------------- ------------ ------------
BALANCE, December 26, 1998 $45,388,191 $135,560,076 $68,953,852 $249,902,119
=========== ============= ============ ============
The accompanying notes to combined financial statements are an integral part of
this statement.
9
CARROLL'S GROUP
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 26, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (36,566,225)
Adjustment to reconcile net income to net cash provided by operating activities:
Write-off of start-up costs 2,092,501
Depreciation and amortization 15,633,548
Gain on disposal of property, plant and equipment, excluding breeding stock (161,964)
Loss on disposal of breeding stock 10,420,320
Gain of sale of marketable equity securities (5,889,481)
Equity in net losses of subsidiaries 1,170,990
Change in assets and liabilities:
Decrease in accounts receivable 38,952,336
Increase in inventories, excluding transfers of breeding stock (25,276,288)
Increase in prepaid expenses and other (1,518,161)
Increase in accounts payable 1,347,439
Decrease in reserve for phantom stock plan (2,426,657)
Increase in other deferred and long-term liabilities 781,222
Increase in accrued expenses and contract grower payments 3,165,954
--------------
Net cash provided by operating activities 1,725,534
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (9,711,200)
Proceeds from sale of property, plant and equipment, excluding
breeding stock 301,045
Proceeds from sale of breeding stock 9,800,412
Proceeds from sale of marketable equity securities 8,712,096
Increase in other investments (601,599)
Increase in other assets (1,060,576)
Increases in notes receivable, net (9,532,470)
--------------
Net cash used in investing activities (2,092,292)
--------------
10
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and notes payable - Banks $ 310,460,176
Repayments of long-term debt and notes payable - Banks (310,358,201)
Principal payments under capital lease obligations (172,708)
Proceeds from issuance of long-term debt and notes payable - Other 16,624,484
Repayments of long-term debt and notes payable - Other (4,896,680)
Net change in borrowings with stockholders (4,600,006)
Dividends (9,552,372)
--------------
Net cash used in financing activities (2,495,307)
--------------
Net decrease in cash (2,862,065)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,587,331
--------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 725,266
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for
interest $ 27,090,053
==============
SUPPLEMENTAL DISCLOSURE OF INVESTING ACTIVITIES - During 1998, the Company
transferred raised breeding stock of $15,379,613 from inventory to fixed
assets
The accompanying notes to combined financial statements are an integral part of
this statement.
11
CARROLL'S GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 26, 1998
1. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
Carroll's Group (the Company) is the combination of several companies, which are
related through common stock ownership. The combined financial statements
include accounts of Carroll's Foods, Inc., and its consolidated subsidiaries
Carroll's Realty Partnership (a 99% owned partnership) and Carroll's Swine
Investment Partnership (a 99% owned partnership). The combined financial
statements also include the accounts of Carroll's Processing, Inc., Carroll's
Foods of Virginia, Inc., Carroll's Farms of Virginia, Inc., Carroll's Capital,
Inc., Carroll's Foods of Utah, Inc., Carroll's Realty, Inc., Carroll's Foods of
Mexico, Inc. and Carroll's Foods of Brazil, LLC. The other 1% of Carroll's
Realty Partnership and Carroll's Swine Investment Partnership are owned by
Carroll's Realty, Inc. and Carroll's Foods of Virginia, Inc., respectively. All
significant intercompany accounts and transactions have been eliminated in
combination. These entities are presented on a combined basis as they represent
the businesses acquired by Smithfield Foods, Inc. (Note 16). The Company's main
operations are the production of market hogs with operations primarily in
Eastern North Carolina and Virginia. The Company is also a turkey producer with
operations located in Eastern North Carolina. Market hog and turkey sales
represent approximately 70% and 24% of combined sales, respectively, for fiscal
year 1998. Affiliated companies (20- to 50-percent owned) are accounted for
using the equity method.
FISCAL YEAR
The Company has adopted a 52- and 53-week year that ends the last Saturday in
December. The fiscal year ended December 26, 1998, consisted of 52 weeks.
USE OF ESTIMATES
The combined financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the combined financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and income and expenses for the period presented. Actual results could
differ significantly from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
12
RECEIVABLES AND CONCENTRATION OF CREDIT RISK
The Company writes off receivables when amounts are determined to be
uncollectible. In the opinion of management, all uncollectible amounts have been
written off. Therefore, there is no reserve recorded.
The Company has credit risk due to the small number of customers. The Company
sells substantially all of its turkeys to two principal customers. Approximately
19% of the Company's turkey production is sold to a customer under a contract
where selling prices are determined primarily on a cost-plus basis. The customer
annually notifies the Company of the pounds they would like to purchase for the
year. The contract states the Company is to deliver an amount plus or minus 5%
of the amount specified. The remaining 81% of turkey production is sold to one
of its affiliates, Carolina Turkeys (Note 2). There are two customers,
Smithfield Foods, Inc. and Carolina Turkeys, who accounted for 46% and 47% of
combined accounts receivable at December 26, 1998, respectively. These same two
customers accounted for 65% and 19% of combined sales in fiscal year 1998,
respectively.
Carroll's Foods, Inc. (Foods) sells substantially all of its swine to Smithfield
Foods, Inc. under a sales agreement. The agreement specifies that Foods' swine
production will be purchased by Smithfield Foods, Inc. with no minimum level of
production required. The selling price is based on average market prices plus a
premium based on carcass value. The term of this sales agreement, as amended,
shall continue and exist through the date that is five years following the date
of termination of the agreement given by either party thereto.
Carroll's Foods of Virginia, Inc. (Foods of Virginia) sells substantially all of
its swine to Smithfield Foods, Inc. who is an affiliate of Smithfield-Carroll's
Farms. The sales agreement specifies that Foods of Virginia's swine production
will be purchased by Smithfield Foods, Inc. with no minimum level of production
required. The selling price is based on average market prices plus a premium
adjusted for carcass value as compared to the customer's standard carcass value.
In addition, profits or losses from Foods of Virginia's operations are shared
equally between Foods of Virginia and Smithfield Foods, Inc. Included in
accounts receivable at December 26, 1998, is approximately $4,800,000 of
Smithfield Foods, Inc.'s share of losses for the current year. The sales
agreement is automatically renewed for one year each January 1 unless there is
notice of termination by either party. Management does not anticipate
termination of the agreement. During the year ended December 26, 1998, Foods of
Virginia had sales of $57,362,104 to Smithfield Foods, Inc., of which $1,016,060
is included in accounts receivable at December 26, 1998. In addition, sales for
the year ended December 26, 1998, includes $9,336,783, which represents
Smithfield Foods, Inc.'s reimbursement to the Company for its pro rata share of
Foods of Virginia's loss from operations.
REVENUE RECOGNITION
The Company recognizes revenues when the goods are shipped to the customer.
Amounts received from customers prior to shipment are classified as deferred
revenues.
13
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Costs include materials, labor and overhead.
HEDGING TRANSACTIONS
The Company at times utilizes commodity futures contracts to hedge its positions
in feed commodities. Gains and losses on open and closed futures contracts are
deferred and recognized when the hedged commodities are sold or purchased. Any
realized hedging gains or losses on feed activity are included as a component of
direct cost of sales once the related hogs or turkeys are sold.
PROPERTY, PLANT AND EQUIPMENT
The Company expenses property, plant and equipment under $1,000 as incurred and
capitalizes any purchases above that amount at their historical cost.
Depreciation of property, plant and equipment is charged to operations using
either the straight-line or declining balance methods over the estimated useful
lives of the respective assets as follows:
Feed manufacturing facilities 15 - 30 years
Swine facilities 10 - 15 years
Buildings and improvements 5 - 40 years
Prepaid leases and breeding stock 2 - 3 years
Vehicles 3 - 10 years
Machinery and equipment 3 - 10 years
Combined depreciation expense for the fiscal year was approximately $15,600,000.
Included in other property, plant and equipment is construction-in-progress
totaling $1,466,745 at December 26, 1998. Construction-in-progress consisted of
construction of feed manufacturing facilities and swine facilities. Interest is
capitalized based on the Company's average borrowing rate and the construction
department cost are capitalized and allocated to projects based on their
proportionate size. The amounts capitalized during fiscal year 1998 were not
material.
BREEDING STOCK
Purchased and leased breeding animals are recorded at cost and depreciated over
their estimated useful lives. Raised breeding animals are recorded at a standard
value, which approximates salvage value.
INCOME TAXES
The companies comprising Carroll's Group operated as S corporations, with the
exception of Carroll's Foods of Brazil, LLC, a limited liability corporation,
for federal and state income tax purposes. As a result, the stockholders or
members report the earnings of the companies on their individual tax returns.
14
START-UP COSTS
During the year, the Company implemented Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." As such, the Company wrote off
costs that had previously been capitalized as incurred when initially populating
swine facilities with breeding stock (see Note 14).
MARKETABLE SECURITIES
The majority of the Company's investments consist primarily of stock in
Smithfield Foods, Inc., to which the Company sells substantially all of its
swine. The Company has classified all equity securities as available-for-sale in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." These securities are
carried at fair value based on quoted market prices with the unrealized gains
and losses reported as a separate component of stockholders' equity. The cost of
securities sold is determined using the average cost method when computing
realized gains and losses. There was a realized gain of approximately $5,900,000
on investments sold during 1998 with total proceeds of approximately $8,700,000.
At December 26, 1998, the net unrealized gain in the Company's investments was
$68,953,852.
Subsequent to year-end, the market price of stock in Smithfield Foods, Inc.
declined significantly. Through May 2, 1999, the Company sold 200,000 shares
with a gain of approximately $4.2 million. The fair market value and unrealized
gain were reduced to approximately $55.6 million and $38.3 million,
respectively. As of May 2, 1999, the shares held by the Company were distributed
to the stockholders as they were excluded from the subsequent purchase of the
Company by Smithfield Foods, Inc. (see Note 16).
CONTRACT GROWER PAYMENTS
Payments to swine and turkey growers are accrued based on the number (and size,
for pigs) of animals on hand at month-end. This entry is reversed each month as
payments are made to growers when the animals are either sold or transferred
from the grower's farm to another farm. Also included in the grower payment
accrual is a bonus to contract farrowing growers. They are paid a quarterly
bonus for the number of pigs per sow per year over budget that are transferred
live from their farm.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This statement is effective for fiscal years beginning after June 15,
1999. The Company does not expect the adoption to have a material effect on the
Company's financial statements.
15
2. INVESTMENT IN AFFILIATES:
The Company has investments in affiliates that are accounted for using the
equity method. The affiliates engage in turkey or hog production or activities
that support the Company. Equity affiliates include Tar Heel Hatchery, Inc.
(50%), Carroll's Foods do Brazil, S.A. (50%), Carolina Turkeys (49%), Granjas
Carroll de Mexico (50%), Smithfield-Carroll's Farms (50%) and Circle Four Group
(33%). The Company's share of earnings or losses of these affiliates is included
in income as earned. The Company's total investment at December 26, 1998, is as
follows:
Investment in equity $73,740,961
Equity in cumulative losses (3,929,059)
Distributions of investment (22,915,780)
---------------
Total investment in affiliates $46,896,122
===============
Summarized combined balance sheet and statement of operations of the affiliates
are as follows:
1998
(UNAUDITED)
Combined balance sheets-
Current assets $ 94,859,403
Noncurrent assets 244,701,279
-------------
Total assets $339,560,682
=============
Current liabilities 93,786,244
Noncurrent liabilities 85,581,660
-------------
Total liabilities 179,367,904
Equity 160,192,778
-------------
$339,560,682
=============
Combined statements of operations-
Net sales $377,278,446
Cost of goods sold 315,067,368
-------------
Gross profit 62,211,078
Administrative and interest expense 73,543,160
-------------
Net losses $(11,332,082)
=============
The above combined balance sheets and statements of operations excludes
Carroll's Foods do Brazil, S.A. as the information was not available and is not
material to the Company's overall financial position. Carroll's Foods do Brazil,
S.A. had net sales of approximately $2,000,000 (unaudited) and net losses of
approximately $292,000 (unaudited) for the year ended December 26, 1998.
16
3. NOTES RECEIVABLE:
Notes receivable consisted of the following:
Prime rate (7.75% at December 26, 1998), notes receivable from officers and
stockholders, due on demand $ 7,611,832
Prime rate (7.75% at December 26, 1998), notes receivable from A Taste of
Country (an affiliated company), due on demand 173,717
Note receivable from Carroll's Foods of the Midwest, Inc. (an affiliated
company) with interest at prime rate (7.75% at December 26, 1998), due on
demand 18,497,309
Note receivable from Carroll's Foods of Kentucky, LLC (an affiliated company)
with interest at Carroll's Foods, Inc.'s average borrowing rate (5.42% at
December 26, 1998), due on demand 389,000
Receivable from Cape Fear Farm Credit Association, due in varying amounts,
noninterest bearing 459,113
Prime rate (7.75% at December 26, 1998), note receivable from Circle Four Group
(an affiliated company), due on demand 3,000,000
Receivable from Carolina Turkeys (an affiliated company) with interest at the
Federal Funds Rate plus 1% (5.625% at December 26, 1998), due on demand 7,448,000
Notes receivable from growers and others with interest rates varying from prime
(7.75% at December 26, 1998), less 1/2% to prime plus 2% 14,288,646
Other notes receivable from stockholders and affiliated companies 43,272
---------------
$51,910,889
===============
The above notes receivable are reflected as noncurrent assets as no payments are
anticipated during the coming year.
Payments on the notes receivable from growers are deducted from contract
payments made to growers by the Company as either an amount or a percentage of
the gross payment agreed to by the Company and the borrower. Since the note
payments are contingent on grower production, the entire balance is classified
as noncurrent. The balance at December 26, 1998, includes receivables of
$357,043 from affiliated companies and $785,734 from a stockholder who is also a
grower.
17
4. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable to banks consisted of the following:
Advances outstanding under a $55,000,000 line of credit expiring September 24,
1999, bearing interest at variable rates (5.31% at December 26, 1998) $ 12,300,000
Advances outstanding under a $80,000,000 line of credit expiring August 28,
2000, bearing interest at variable rates (5.76% at December 26, 1998) 80,000,000
Advances outstanding under a $55,000,000 line of credit due on demand and
expiring January 27, 1999, bearing interest at variable rates (5.15% at
December 26, 1998), paid in 1999 with cash on hand and borrowings on other
existing lines 52,600,000
Advances outstanding under a $65,000,000 line of credit expiring August 28,
1999, bearing interest at variable rates (5.61% at December 26, 1998) 20,700,000
Variable rate note payable (7.025% at December 26, 1998), to Colonial Farm
Credit, ACA under a $28,000,000 revolving credit agreement; payable on
demand; interest payable monthly 24,184,000 Advances outstanding under a
$50,000,000 line of credit expiring on August 28, 2000, bearing interest at
variable rates (5.61% at December 26, 1998) 41,081,500
Other 173,749
-------------
231,039,249
Less - Current portion 109,784,000
-------------
$121,255,249
=============
These lines of credit are used by the Company to meet seasonal working capital
demands. The lines of credit are collateralized by all inventories and accounts
receivable and a guarantee from Carroll's Foods of the Midwest, Inc., a company
affiliated through common stock ownership. In addition, the banks have first
lien on all properties of the Company. Availability on the unused portions of
the above lines of credit is $51,686,610 at December 26, 1998.
The loan agreements related to the above lines of credit contain covenants and
restrictions relating to, among other things, the maintenance of certain
financial ratios and the creation of additional indebtedness, liens and
guarantees. In addition, the agreements limit the amount of dividends that may
be paid to stockholders. At December 26, 1998, the Company is in compliance with
the loan agreements.
The Company is co-borrower on the Colonial Farm Credit, ACA notes with
Smithfield-Carroll's Farms. The amount of these obligations included in the
Company's financial statements is the line of credit for which the Company is
primarily responsible. In addition, the Company is contingently liable for
mortgage notes payable totaling $24,545,349, which are recorded on
Smithfield-Carroll's Farms' books.
18
The loan agreement relating to the Colonial Farm Credit, ACA notes contains
covenants and restrictions relating to, among other things, the maintenance of
certain financial ratios, creation of additional indebtedness, liens and
guarantees, and expenditures for property and equipment. In addition, the
agreement limits the amount of dividends that may be paid to stockholders. At
December 26, 1998, the Company is in compliance with these restrictive
covenants. These notes are secured by substantially all of the Company's
accounts receivable, inventory, equipment, farm products and personal property.
At December 26, 1998, the Company had an unsecured $2,000,000 bank overdraft
line of credit bearing interest at prime rate (7.75% at December 26, 1998).
There were no borrowings against the bank overdraft line at December 26, 1998.
The aggregate principal maturities of notes payable - banks are as follows:
1999 $109,784,000
2000 121,255,249
---------------
$231,039,249
===============
5. NOTES PAYABLE TO AFFILIATES:
Notes payable to affiliates consisted of the following:
Variable rate (7.025% at December 26, 1998), unsecured note
payable to Pork Plus $ 50,000
Variable rate (7.025% at December 26, 1998), unsecured note
payable to Mathews Family Properties 1,290,000
Prime rate (7.75% at December 26, 1998), note payable to
Carroll's Foods of the Midwest, Inc., due on demand 6,761,845
Noninterest bearing unsecured note payable to Smithfield-Carroll's Farms 11,839,196
------------
$19,941,041
============
All of the above notes are classified as long-term liabilities since the holders
of these notes have agreed to waive their right of repayment during 1999, unless
the notes are refinanced with other long-term debt.
6. TRANSACTIONS WITH OFFICERS, STOCKHOLDERS AND AFFILIATES:
The Company leases swine and feed mill facilities from Smithfield-Carroll's
Farms. The lease is a noncancellable operating lease expiring January 31, 2007.
The terms of the lease allow for the rental rate to be adjusted on an annual
basis pursuant to the mutual agreement of the parties. During the year ended
December 26, 1998, the Company incurred $7,428,698 in rentals under this lease.
At December 26, 1998, the Company had $1,361,436 outstanding in accounts payable
to Smithfield-Carroll's Farms.
19
The following is a schedule of future minimum rentals to be paid under the lease
as of December 26, 1998. This schedule reflects only rentals on swine facilities
(or portions of swine facilities) and feed mill facilities in use at December
26, 1998, and does not anticipate rental from completion of future construction.
1999 $ 7,637,895
2000 7,637,895
2001 7,637,895
2002 7,637,895
2003 7,637,895
Thereafter 23,550,174
-------------
$61,739,649
=============
The Company performs construction services for Smithfield-Carroll's Farms. Total
construction sales for 1998 amounted to $97,227, which is included in sales in
the accompanying statement of operations. At December 26, 1998, accounts
receivable included $2,057 from Smithfield-Carroll's Farms for these
construction services.
During the year ended December 26, 1998, the Company had sales of approximately
$66,924,000 to Carolina Turkeys, a 49%-owned partnership interest of the
Company. The selling prices are determined using current market rates. In
connection with these transactions, the Company had accounts receivable of
$24,769,015 at December 26, 1998.
The Company purchases the majority of its turkey poults from Tar Heel Hatchery,
Inc., a 50%-owned company. Such purchases amounted to approximately $10,654,000
during the year ended December 26, 1998. The purchase price is based on each
company's proportionate cost based on the end market sales price for the bird.
In connection with these transactions, the Company had no trade accounts payable
outstanding at December 26, 1998.
The Company sold feeder pigs to Carroll's Foods of the Midwest, Inc., a company
affiliated through common stockholder ownership. The total of these sales for
the year was $1,268,783. The selling price was based on internal pricing
standards.
During 1998, the Company forgave debt in the amount of $1,666,427, which was due
from Carroll's Foods of Kentucky, LLC, a company affiliated through common
stockholder ownership. This amount is included as a component of miscellaneous
income, net.
The Company leases land and facilities from officers and stockholders. Total
rent expense to these officers and stockholders totaled approximately $1,129,000
in 1998. In addition, certain officers of the Company operate contract swine and
turkey farms for the Company. Grower payments made to these officers totaled
approximately $727,000 in 1998.
20
7. LICENSE AGREEMENT:
During 1991, the Company was assigned all rights and privileges of a license
agreement that was entered into by Smithfield-Carroll's Farms. The license
agreement is for the exclusive rights to breed and produce a line of swine
within the United States. The license is being amortized on the straight-line
method over its 25-year life. Amortization expense for fiscal year 1998 was
$530,982. Additional management fees due in quarterly installments under this
agreement, along with the breeding stock, are being amortized over 10 years, the
expected useful life of the breeding stock.
8. EMPLOYEE BENEFIT PLANS:
DEFINED BENEFIT PENSION PLAN
The Company has a profit-sharing plan and a 401(k) savings plan. Effective
January 1, 1989, these plans were frozen and a new noncontributory defined
benefit plan was created.
All eligible employees of the Company are covered by the Company's defined
benefit pension plan (the Plan) which was effective on January 1, 1989, with
benefits based on prior and future service. The Plan is available to all
employees of the Company (as defined by the Internal Revenue Code) upon
completion of a qualifying year of service (as defined) and the attainment of
age 21. Recorded plan costs are the amounts determined as necessary to meet
statutory funding requirements using the entry age actuarial cost method.
21
The Company has adopted SFAS No. 132, "Employers' Disclosures About Pensions and
Other Postretirement Benefits," which changes the disclosure requirements for
pensions and other postretirement benefits. The following tables display
information regarding the Company's retirement plan benefits in accordance with
SFAS No. 132:
Change in benefit obligation-
Benefit obligation at beginning of year $(10,885,186)
Service cost (976,815)
Interest cost (730,116)
Actuarial gain (loss) 333,528
Benefit payments 239,919
-------------
Benefit obligation at end of year $(12,018,670)
=============
Change in plan assets-
Fair value of plan assets at beginning of year $ 9,565,356
Actual return on plan assets 1,897,357
Employer contributions 300,462
Benefit payments (239,919)
-------------
Fair value of plan assets at end of year $ 11,523,256
=============
Funded status $ (495,414)
Unrecognized net gain (992,859)
Unrecognized prior service cost 163,693
-------------
Net amount recognized $ (1,324,580)
=============
Amounts recognized in the financial statements consist of-
Prepaid benefit cost $ 1,143,420
Accrued benefit liability (2,468,000)
-------------
Net amount recognized $ (1,324,580)
=============
Weighted average assumptions as of December 26, 1998-
Discount rate 7%
Long-term return on assets 8%
Rate of compensation increase 5%
=============
Components of net periodic benefit cost-
Service cost $ 976,815
Interest cost 730,116
Expected return on assets (784,398)
Amortization of unrecognized prior service cost 16,369
-------------
Net periodic cost $ 938,902
=============
DEFERRED COMPENSATION AND BENEFITS
Executives can elect to have a portion of their pay withheld and contributed to
a deferred compensation plan on a tax-deferred basis. The Company remits the
money to a trustee to be invested. As such, there is an investment of
approximately $3.2 million on the balance sheet included in other investments,
with a corresponding liability for the same amount.
22
PHANTOM STOCK PLAN
Certain executives are eligible to participate in this plan based on shares of
phantom stock of the Company which the individuals have been granted. Each year
the participants receive a portion of the loss or income of the Company based on
their number of phantom shares. The liability represents the cumulative balance
of all participants.
LIFE INSURANCE POLICIES
The Company has purchased several life insurance policies on the stockholders
and an officer with a combined face value of $29,500,000. Several of these
policies are split dollar policies. As such, the Company records an asset to the
extent of the premiums paid. Any excess cash surrender value would belong to the
individual and, thus, is not recognized by the Company. There are no
restrictions or loans outstanding on any of the policies. The asset recognized
by the Company included in other assets is approximately $4,200,000 while the
full cash surrender value of all policies combined is approximately $4,400,000.
The premiums paid during the year were approximately $720,000.
9. COMMITMENTS AND CONTINGENCIES:
Tar Heel Hatchery, Inc. has a $600,000 line of credit that has been guaranteed
by the Company. At December 26, 1998, there were no outstanding borrowings on
this line of credit.
Local farm owners have contracted to provide labor and facilities to raise swine
owned by the Company. These growers are compensated by a standard fee per pound
of marketed meat. Amounts accrued under such contracts totaled approximately
$10,106,277 at December 26, 1998, and such amounts are included in swine
inventory.
The Company has been named as a defendant in certain lawsuits. The suits are
still in the discovery stages and trial dates have not been set. The Company
does not believe that any of these actions will have a significant impact on its
financial position or results of operations.
The Company is under investigation in several EEOC claims made against the
Company. The Company does not believe that these actions will have a significant
impact on its financial position or results of operations.
As is the case with other companies in the market hog industry, the Company
could face significant exposure from potential claims and lawsuits involving
environmental matters, some of which could involve substantial amounts. In
addition, the Company could face significant future expenditures to comply with
changing environmental laws and regulations.
23
The Company is partially self-insured for workers' compensation and medical and
dental claims. The workers' compensation plan has a stop loss of $300,000 per
accident. The medical and dental plan has a stop loss of $125,000 per individual
per year with a lifetime maximum stop loss of $1,000,000. The liabilities are
determined by estimating the run-out of known claims by a third-party
administrator and adding an estimate for incurred but not reported claims based
on historical results.
At times, the Company enters into futures contracts for corn and soybean
commodities that are designated as hedges. Gains and losses on such futures
contracts are recognized in the same accounting period in which the related
hedged commodities are sold or purchased. Amounts held by brokers to cover the
Company's margin requirements amounted to $833,077 at December 26, 1998, and are
included in prepaid expenses and other. The total commitment on open contracts
at year-end, with closing dates through September 1999, was $27,833,593 with
unrealized losses of $418,738.
10. LEASES:
The Company has entered into various capital leases with a stockholder that
expire at various dates during the next 12 years. Assets held under capital
leases are included in swine facilities and amounted to $1,884,371 (net of
accumulated amortization of $1,720,011) at December 26, 1998. At December 26,
1998, the minimum rental commitments under noncancelable leases are as follows:
YEAR ENDED CAPITAL LEASES
- ------------------------------------------------------------------ ----------------
1999 $ 610,500
2000 610,500
2001 610,500
2002 610,500
2003 610,500
Thereafter 1,731,750
-------------
Total minimum lease payments 4,784,250
Less - Amount representing interest (2,044,344)
-------------
Total obligations under capital leases 2,739,906
Less - Current portion of capital lease obligations (201,321)
-------------
Long-term obligations $ 2,538,585
=============
Amortization of leased property under capital leases was $238,802 in 1998 and is
included in direct cost of sales in the accompanying statement of operations.
24
11. MARKET CONDITIONS:
The Company's costs to produce turkeys and market swine, as well as the
estimated costs to complete turkeys and market swine in inventory may
individually exceed market sales prices periodically during the year. There was
no write-down required in 1998 and there have been no significant downturns in
the market since year-end.
12. STOCKHOLDERS' EQUITY:
As discussed in Note 1, the companies comprising Carroll's Group elected S
Corporation status, with the exception of Carroll's Foods of Brazil, LLC, which
is a limited liability corporation, for federal and state income tax purposes.
All companies are incorporated in North Carolina. The Company anticipates that
it will make dividend distributions to the stockholders, subject to the
limitations of the loan agreements as described in Note 4.
Combined contributed capital is comprised of the following:
TOTAL
ADDITIONAL SHAREHOLDER CONTRIBUTED
COMPANY COMMON STOCK PAID-IN CAPITAL RECEIVABLE CAPITAL
- ---------------------------------------------------- ------------ --------------- -------------- ----------------
Carroll's Foods, Inc., $100 par value, 2,000
shares authorized, 328 issued and outstanding $32,800 $37,354,963 $ 0 $37,387,763
Carroll's Processing, Inc., $1 par value, 100
shares authorized, issued and outstanding 100 0 0 100
Carroll's Foods of Virginia, Inc., $1 par value,
100,000 shares authorized, 328 issued and
outstanding 328 7,899,672 0 7,900,000
Carroll's Farms of Virginia, Inc., $1 par value,
100,000 shares authorized, 328 issued and
outstanding 328 99,672 0 100,000
Carroll's Capital, Inc., $10 par value, 328 shares
authorized, issued and outstanding 3,280 96,720 (100,000) 0
Carroll's Foods of Utah, Inc., no par value,
100,000 shares authorized, 328 issued and
outstanding 1,000 0 (1,000) 0
Carroll's Realty, Inc., no par value, 100,000
shares authorized, 328 issued and outstanding 328 0 0 328
Carroll's Foods of Mexico, Inc., no par value,
100,000 shares authorized, 328 issued and
outstanding 1,000 0 (1,000) 0
Carroll's Foods of Brazil, LLC. contributed
capital 0 1,000 (1,000) 0
------------ --------------- ------------- ----------------
$39,164 $45,452,027 $(103,000) $45,388,191
============ =============== ============= ================
25
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments are cash and cash equivalents, marketable
equity securities, other investments, receivables, notes receivable, payables,
notes payable, capital leases, debt and futures contracts. The carrying value of
such instruments approximates market value.
14. ACCOUNTING CHANGES:
During 1998, the Company changed its method of accounting for start-up costs,
lower of cost or market valuation of inventories and capitalizing the costs of
unborn pigs. The change in start-up costs involved expensing these costs as
incurred, rather than capitalizing and subsequently amortizing such costs. The
Company feels this method is preferable given emerging accounting guidance on
these costs. The change in lower of cost or market inventory valuation method
involved adopting a policy whereby the calculation is performed using the best
available information two weeks after year-end when the books are closed. Any
material changes at the time of financial statement preparation will be
disclosed (see Note 11). The Company feels this method is preferable as it
facilitates the timely closing of the books. The change in unborn pigs involved
capitalizing the costs related to unborn pigs, rather than expensing those costs
and capitalizing pigs at birth. The Company feels this method is preferable as
it is industry practice and better matches the expenses with the related
revenues.
These changes in accounting principles resulted in the following adjustments,
which are reflected as cumulative effect of changes in accounting principles in
the accompanying statement of operations:
Write-off of start-up costs $(2,092,501)
Lower of cost or market adjustment 7,965,649
Capitalization of unborn pigs 12,807,065
-------------
Total cumulative effect $18,680,213
=============
15. OPERATING SEGMENTS:
In fiscal 1998, the Company implemented SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which changes the way the
Company reports information about its operating segments. The Company has two
main operating segments (swine and turkeys) that are managed separately because
each segment has a different product, which requires different procedures and
has unique production cycles and issues. The swine operations include breeding
and raising swine to market weight to be sold either as breeding stock or to
slaughter operations. The turkey operations involve the grow-out and sale of
turkeys. All other operations such as the sale of feed and other general and
administrative activities not directly attributable to the two segments are
shown as other in the tables below. The Company does not have significant
transactions between segments.
26
The accounting policies of the segments are the same as those described in the
significant accounting policies footnote. The Company evaluates performance
based on operating earnings of the respective business units.
Segment information for the fiscal year ended December 26, 1998, is as follows:
SWINE TURKEYS ALL OTHER TOTAL
------------- --------------- ---------------- ----------------
Condensed income statement:
Sales $258,234,894 $83,340,567 $ 6,362,177 $347,937,638
Cost of sales 246,599,328 78,748,813 (5,463,535) 319,884,606
------------- --------------- ---------------- ----------------
Gross profit 11,635,566 4,591,754 11,825,712 28,053,032
General and administrative expenses 63,465,399 4,921,576 12,933,218 81,320,193
------------- --------------- ---------------- ----------------
Operating loss (51,829,833) (329,822) (1,107,506) (53,267,161)
Other income (expense), net 0 0 (1,979,277) (1,979,277)
Cumulative effect of change in
accounting principle 18,680,213 0 0 18,680,213
------------- --------------- ----------------- ----------------
Net loss $(33,149,620) $ (329,822) $ (3,086,783) $(36,566,225)
============= =============== ================= ================
Other disclosures:
Interest income $ 0 $ 0 $ 12,813,038 $ 12,813,038
Interest expense 0 0 (22,529,135) (22,529,135)
Depreciation and amortization 9,552,123 763,914 5,317,511 15,633,548
Equity in the (loss) income of
investees (4,150,764) 2,979,774 0 (1,170,990)
Investment in affiliates 13,534,788 25,714,867 7,646,467 46,896,122
Capital expenditures 8,959,889 160,843 590,468 9,711,200
Total assets $316,683,431 $73,071,296 $ 149,692,764 $539,447,491
============= =============== ================= ================
16. SUBSEQUENT EVENTS:
On May 7, 1999, Smithfield Foods, Inc. completed the acquisition of the Company
and its interests in affiliated companies for 4.2 million shares of Smithfield
Foods, Inc. stock and the assumption of approximately $231 million in debt, plus
other liabilities. The agreement specifically excludes certain assets, as
defined, the most significant of which are the Company's shares of Smithfield
Foods, Inc. common stock.
27
Smithfield Foods, Inc. and Subsidiaries
Pro Forma Consolidated Condensed Balance Sheet (Unaudited)
Purchase Assumption
As of May 2, 1999
Historical
------------------------------
Smithfield Carroll's Foods
Foods, Inc. Inc. Pro Forma
as of as of Adjustments Pro Forma
May 2, 1999 March 27, 1999 (Note 2) Combined
----------- -------------- ------------- ------------
In thousands
Assets
Current assets:
Cash $ 30,590 $ 80 $ 24 (A) $ 30,694
Accounts receivable, net 252,332 28,338 1,323 (A) 281,993
Inventories 348,856 129,564 - 478,420
Other current assets 50,302 14,597 4 (A) 54,384
(10,519)(B)
----------- ---------- ------------- ------------
Total current assets 682,080 172,579 (9,168) 845,491
Net property, plant and equipment 790,776 126,647 49,346 (A) 1,007,640
40,871 (C)
Other assets 298,758 159,857 24 (A) 380,063
(39,022)(A)
(44,553)(B)
16,144 (C)
(11,145)(F)
----------- ---------- ------------- ------------
$1,771,614 $459,083 $ 2,497 $2,233,194
=========== ========== ============= ============
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 63,900 $ 94,322 $ - $ 158,222
Current portion of long-term debt
and capital lease obligations 25,828 201 6,322 (A) 32,351
Accounts payable 207,703 23,078 5 (A) 230,786
Accrued liabilities 168,784 15,803 434 (A) 185,021
----------- ---------- ------------- ------------
Total current liabilities 466,215 133,404 6,761 606,380
Long-term debt and capital lease
obligations 594,241 118,195 16,379 (A) 728,815
Other noncurrent liabilities 111,437 9,202 16,144 (D) 200,853
75,511 (E)
(11,441)(A)
Minority interests 57,475 - (11,145)(F) 46,330
Shareholders' equity 542,246 198,282 (55,072)(B) 650,816
(143,210)(G)
108,570 (H)
----------- ---------- ------------- ------------
$1,771,614 $459,083 $ 2,497 $2,233,194
=========== ========== ============= ============
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
28
Smithfield Foods, Inc. and Subsidiaries
Pro Forma Consolidated Condensed Statement of Operations (Unaudited)
Purchase Assumption
52 Weeks Ending May 2, 1999
Historical
-------------------------------
Smithfield Carroll's Foods
Foods, Inc. for Inc. for Pro Forma
the 52 Weeks the 52 Weeks Adjustments Pro Forma
Ending 5/2/99 Ending 3/27/99 (Note 3) Combined
------------- -------------- ----------- ---------
In thousands
Sales $3,774,989 $ 334,128 $ (216,348)(I) $ 3,892,769
Cost of sales 3,235,414 277,134 (216,348)(I) 3,296,200
---------- --------- ---------- -----------
Gross profit 539,575 56,994 - 596,569
Selling, general and administrative expenses 295,610 69,662 300 (J) 375,334
9,762 (K)
Depreciation expense 63,524 13,314 1,600 (L) 78,438
Interest expense 40,521 9,965 - 50,486
Minority interests (3,518) (3,518)
---------- --------- ---------- -----------
Income before income taxes 143,438 (35,947) (11,662) 95,829
-
Income taxes 48,554 - (4,606)(M) 29,749
(14,199)(N) -
---------- --------- ---------- -----------
Net income $ 94,884 $ (35,947) $ 7,143 $ 66,080
========== ========= ========== ===========
Net income per share
Basic $ 2.39 $ 1.51
========== ===========
Diluted $ 2.32 $ 1.46
========== ===========
Average common shares outstanding
Basic 39,628 4,200 43,828
========== ========== ===========
Diluted 40,962 4,200 45,162
========== ========== ===========
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
29
Smithfield Foods, Inc. and Subsidiaries
Pro Forma Consolidated Condensed Statement of Operations (Unaudited)
Purchase Assumption
53 Weeks Ending May 3, 1998
Historical
--------------------------------
Smithfield Carroll's Foods
Foods, Inc. for Inc. for Pro Forma
the 53 Weeks the 53 Weeks Adjustments Pro Forma
Ending 5/3/98 Ending 3/28/98 (Note 3) Combined
-------------- --------------- ----------- -----------
In thousands
Sales $3,867,442 $ 452,885 $ (325,653)(I) $ 3,994,674
Cost of sales 3,479,629 343,700 (325,653)(I) 3,497,676
---------- --------- ---------- -----------
Gross profit 387,813 109,185 - 496,998
-
Selling, general and administrative expenses 219,861 73,887 300 (J) 294,048
-
Depreciation expense 42,300 13,290 1,600 (L) 57,190
Interest expense 31,891 7,422 - 39,313
Minority interests 199 - - 199
Nonrecurring item 12,600 - - 12,600
---------- --------- ---------- -----------
-
Income before income taxes 80,962 14,586 (1,900) 93,648
-
Income taxes 27,562 - (751)(M) 32,573
5,762 (N) -
---------- --------- ---------- -----------
Net income $ 53,400 $ 14,586 $ (6,911) $ 61,075
========== ========= ========== ===========
Net income per share
Basic $ 1.42 $ 1.46
========== ===========
Diluted $ 1.34 $ 1.39
========== ===========
Average common shares outstanding
Basic 37,532 4,200 41,732
========== ========== ===========
Diluted 39,732 4,200 43,932
========== ========== ===========
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
30
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Reporting
The unaudited Pro Forma Consolidated Condensed Financial Statements of
Smithfield Foods, Inc. and subsidiaries (the "Company") are provided to give
effect to the acquisition completed May 7, 1999, of Carroll's Foods, Inc.
("CFI") and its affiliated companies and partnership interests in exchange for
4.2 million shares of the Company's common stock and the assumption of
approximately $231.0 million in debt, plus other liabilities. The acquisition
includes 100% of the capital stock of CFI, CFI's 50% interest in
Smithfield-Carroll's ("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 acquisition agreement
specifically excludes certain assets, as defined, the most significant of
which is CFI's shares of the Company's common stock.
The pro forma information is based on the historical financial statements of the
Company and CFI giving effect to the acquisition under the purchase method of
accounting. The purchase price allocations have been completed on a preliminary
basis, and as a result, post closing adjustments to the carrying value of
assets and liabilities may occur. The Company expects that any purchase price
adjustment will not result in a material change to the purchase price. 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 Consolidated Condensed Balance Sheet as of May 2, 1999
(for the period ended March 27, 1999 for CFI) presents the financial
position assuming the acquisition had been completed as of that date.
The Pro Forma Consolidated Condensed Statements of Operations for the 52
and 53 weeks ended May 2, 1999 and May 3, 1998 (for the 52 and 53 weeks
ended March 27 and March 28, 1999 and 1998 respectively for CFI) present
the results of operations for the combined entities assuming that the
acquisition had been completed as of the beginning of the respective
periods.
The Pro Forma Consolidated Condensed Financial Statements should be read in
conjunction with the Company's Annual Report for the fiscal year ended May 2,
1999 and the accompanying audited historical financial statements and notes of
CFI for the year ended December 26, 1998.
(2) Consolidated Condensed Balance Sheet Pro Forma Adjustments
The Pro Forma Consolidated Condensed Balance Sheet gives effect to the
adjustments described below.
(A) To consolidate Smithfield-Carroll's, which prior to the acquisition,
was a joint venture between the Company and CFI accounted for under the
equity method by both companies.
31
(B) To eliminate the value of marketable securities, owned by CFI, that
were excluded assets as part of the purchase agreement.
(C) To adjust the carrying value of property, plant and equipment values to
preliminary estimates of fair market value and to recognize the excess
purchase price over the fair value of assets acquired and liabilities
assumed as goodwill.
(D) To record a deferred tax liability as part of the adjustment of the
carrying value of property, plant and equipment.
(E) To record income taxes associated with a change from the cash method to
the accrual method of accounting for federal income tax purposes for
CFI. This adjustment will be recognized ratably over 10 years.
(F) To adjust for the acquisition of CFI's interest in the Company's 84%
owned Circle Four hog production operations.
(G) To eliminate the remaining equity of CFI related to the assets acquired
and liabilities assumed not eliminated by other adjustments.
(H) To record the issuance of 4.2 million shares in connection with the
acquisition of CFI at an average of $25.85 per share.
(3) Consolidated Condensed Statements of Operation Pro Forma Adjustments
The Pro Forma Consolidated Condensed Statements of Operations give effect to the
adjustments described below.
(I) To eliminate intercompany sales.
(J) To record amortization expense associated with acquisition costs.
Acquisition costs are amortized over a five-year period.
(K) To adjust for the gain realized by CFI on the sale of marketable
securities that are excluded from the assets acquired.
(L) To record additional pro forma depreciation and amortization expense
associated with the increase in the carrying value for property, plant
and equipment and goodwill over their estimated useful lives. See
adjustment C.
(M) To record the tax effect of the pro forma adjustments at the marginal
tax rate.
(N) To recognize, at the marginal tax rate, CFI's reported results that
would have been realized as part of the consolidated group.
32
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 thereunto duly authorized.
SMITHFIELD FOODS, INC.
(Registrant)
By: /s/ Aaron D. Trub
-------------------------
(Signature)
Aaron D. Trub
Dated: July 20, 1999
33