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) January 20, 2000
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
ACQUISITION OF MURPHY FAMILY FARMS
SMITHFIELD FOODS, INC. IS FILING THIS AMENDMENT TO ITS CURRENT REPORT
ON FORM 8-K TO FILE CERTAIN HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
RELATING TO THE COMPANY'S ACQUISITION OF MURPHY FAMILY FARMS, WHICH WAS
COMPLETED ON JANUARY 28, 2000 AND WAS EFFECTIVE JANUARY 5, 2000. THIS CURRENT
REPORT REMAINS OTHERWISE IDENTICAL.
Smithfield Foods, Inc. ( the "Company" or "Smithfield Foods") on
January 28, 2000 completed the acquisition of Murphy Farms, Inc. and its
affiliated companies (collectively "Murphy Family Farms" or "Murphy Family
Farms Group") for 11.1 million shares of Smithfield Foods, Inc. common
stock and the assumption of approximately $203 million in debt, plus other
liabilities. On January 28, 2000, the closing price of Smithfield Foods
common stock on the New York Stock Exchange was $17-3/8. Certain assets
were divested to third parties in connection with the acquisition.
As previously announced, Murphy Family Farms will join the Company's
other domestic hog production subsidiaries, Brown's of Carolina, Inc. and
Carroll's Foods, Inc., and together the three operations will produce
approximately 12 million high quality market hogs per year.
Going forward, Murphy Family Farms will be conducted as a separate
operating unit of Smithfield Foods that will be managed by its present
management team, which remains substantially intact. "We have worked very
closely with Murphy's for many years and are very comfortable with their
management team," Joseph W. Luter, III, Chairman and CEO of Smithfield Foods,
said.
He also noted that "Given the current outlook for hog prices over the
next 12 months and our anticipated raising costs, we expect this acquisition to
be immediately accretive to earnings." He further stated that this
"substantially completes our long-term goal of vertical integration and allows
us to continue producing the most consistent and leanest pork on the market
today."
DESCRIPTION OF COMPANY
Smithfield Foods is the largest vertically integrated producer and
marketer of fresh pork and processed meats in the United States. The Company's
brands include Smithfield Lean Generation, Smithfield Premium, Gwaltney, John
Morrell, Patrick Cudahy, Schneiders, Krakus, Lykes, Esskay, Kretschmar,
Valleydale, Jamestown, Dinner Bell, Sunnyland, ReaLean, Patrick's Pride, Great,
Tobin's First Prize, Peyton's, Rodeo, IQM, Curly's, Ember Farms and others.
In addition, the Company has operating subsidiaries in Canada, France
and Poland and participates in joint ventures in Canada, Brazil and Mexico. The
French subsidiaries produce and sell processed meats while the Canadian and
Polish subsidiaries have slaughter operations and sell fresh pork, processed
meats and other related food products. The joint ventures are involved in all
aspects of the pork business including hog production and slaughter as well as
the sale of fresh and processed meats.
FORWARD LOOKING INFORMATION
This filing may contain "forward-looking" information within the
meaning of the federal securities laws. The forward-looking information may
include statements concerning the Company's future earnings and 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. The forward-looking information and 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 and
uncertainties include availability and prices of live hogs and raw materials,
product pricing, the competitive environment and related market conditions,
operating efficiencies, access to capital and actions of domestic and foreign
governments.
REORGANIZATION OF THE BOARD OF DIRECTORS
At its meeting on January 20, 2000 the Board of Directors of Smithfield
Foods elected two new outside directors to its Board, reduced the Board size to
9 and established a separate Management Board and an Environmental Compliance
Committee. These changes implement the plan, announced at the 1999 Annual
Meeting of Shareholders, to establish a new Board structure reflecting current
trends in corporate governance. A majority of the new Board consists of outside,
independent directors.
Newly elected to the Board were Carol T. Crawford and Melvin O. Wright.
Ms. Crawford is a Distinguished Visiting Professor of Law at George Mason
University School of Law in Arlington, Virginia. Prior to joining the GMU Law
faculty, she served for eight years as a Commissioner of the U.S. International
Trade Commission, a position President Bush appointed her to in 1991. Previously
Ms. Crawford served in several other important governmental positions including
Assistant Attorney General of the United States, Associate Director of the
Office of Management and Budget (OMB) and Director of the Federal Trade
Commission's Bureau of Consumer Protection.
Mr. Wright currently serves as an advisor to Primco, a Paris merchant
bank, and as a director of several charitable organizations. His background
includes extensive experience in the securities industry, including a long
involvement with the Securities Industry Institute at the Wharton School of
Business where he is currently a Trustee Emeritus, having previously served as
Chairman. Until his retirement in 1992, Mr. Wright was a Senior Vice President
and Director of Dean Witter Reynolds (now Morgan Stanley Dean Witter).
In addition to Ms. Crawford and Mr. Wright, the new Board continues to
include the following persons, all of whom were most recently elected to the
Board of Directors at the 1999 Annual Meeting of Shareholders: Joseph W. Luter,
III, Chairman and Chief Executive Officer of Smithfield Foods; Lewis R. Little,
President and Chief Operating Officer of Smithfield Foods; Robert L. Burrus,
Jr., Chairman of McGuire, Woods, Battle & Boothe LLP; Ray A. Goldberg, Moffett
Professor of Agriculture and Business, Emeritus, Harvard Business School; George
E. Hamilton, Jr., retired former President and Chief Operating Officer of The
Smithfield Packing Company, Incorporated; Richard J. Holland, Chairman of the
Board of The Farmers Bank; and William H. Prestage, Chairman of the Board,
President and Chief Executive Officer of Prestage Farms, Inc. Mr. Wright joins
Messrs. Burrus, Goldberg and Holland on the Audit Committee, and Ms. Crawford
joins Messrs. Burrus, Goldberg and Holland on the Compensation Committee.
Six other persons who were serving as Directors on January 20, 2000,
each of whom is the senior manager at one of the Company's operations, resigned
from the Board of Directors, and were appointed to the newly created Management
Board. They are Douglas W. Dodds, Chairman and Chief Executive Officer of
Schneider Corporation, F. J. Faison, Jr., President and Chief Operating Officer
of Carroll's Foods, Inc., Robert G. Hofmann, II, President and Chief Executive
Officer of North Side Foods Corp., Roger R. Kapella, President and Chief
Operating Officer of Patrick Cudahy Incorporated, Joseph B. Sebring, President
and Chief Operating Officer of John Morrell & Co. and Timothy A. Seely,
President and Chief Operating Officer of Gwaltney of Smithfield, Ltd.
The Management Board also includes the following other officers: C.
Larry Pope, Vice President and Chief Financial Officer, and Richard J.M.
Poulson, Vice President and Senior Advisor to the Chairman, of Smithfield Foods;
Robert Zulewski, President of the Management Board of Animex S.A. (Poland); and
Jean A. Quentin, Managing Director of Smithfield France, S.A., as well as
Messrs. Luter and Little.
In addition to his other duties, Mr. Little also serves as the
President and Chief Operating Officer of The Smithfield Packing Company,
Incorporated and the Lykes Meat Group, Inc. In addition to his other duties, Mr.
Poulson also serves as Chairman of the Supervisory Board of Animex S.A. Mr.
Quentin also serves as President and Chief Executive Officer of the Company's
operating subsidiaries in France. Smithfield Packing, Lykes and Animex are all
operating subsidiaries of Smithfield Foods, while Smithfield France S.A.S. is a
wholly owned subsidiary responsible for the Company's operations in France.
The Board of Directors also established a senior management level
Environmental Compliance Committee which will be chaired by Mr. Little and
vice-chaired by Robert F. Urell, Vice President, Engineering of Smithfield
Foods. This Committee will be responsible for developing and monitoring the
environmental policies of the Company and for continued development and
implementation of the Company's Environmental Management System. The Committee
will focus initially on hog production operations in the State of North
Carolina, especially those located in areas adversely impacted by recent
hurricanes, and will provide assistance to the Company's operating subsidiaries
and their families of contract growers in the development of alternative animal
waste management systems.
INCREASE OF STOCK REPURCHASE PROGRAM
In addition, the Board on January 20, 2000 approved an increase, from 3
million to 4 million aggregate shares, in the number of shares of common stock
that the Company may purchase from time to time in the open market or in private
transactions. The Company had purchased approximately 2.8 million shares in open
market and private transactions from September 1999 to January 20, 2000 pursuant
to the share repurchase program previously authorized by the Board.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
Page
(a) Audited Combined Financial Statements of Murphy Family Farms Group
Report of Independent Auditors 5
Combined Balance Sheets At October 30, 1999 and October 31, 1998 6
Combined Statements of Operations For The Three Years Ended 7
October 30, 1999, October 31, 1998 and November 1, 1997
Combined Statements of Stockholders' Equity For The Three Years 8
Ended October 30, 1999, October 31, 1998 and November 1, 1997
Combined Statements of Cash Flows For The Three Years Ended 9
October 30, 1999, October 31, 1998 and November 1, 1997
Notes to Combined Financial Statements 10
(b) Pro Forma Consolidated Condensed Statements of Operations of
Smithfield Foods, Inc. and Subsidiaries (Unaudited)
Pro Forma Consolidated Condensed Statement of Operations -
For the Thirty-nine Weeks Ended January 30, 2000 (Unaudited) 21
Pro Forma Consolidated Condensed Statement of Operations -
For the Fifty-two Weeks Ended May 2, 1999 22
Notes to Pro Forma Consolidated Condensed Statement of Operations 23
(c) Exhibit Index
4
Report of Independent Auditors
The Board of Directors
Smithfield Foods, Inc.
We have audited the accompanying combined balance sheets of Murphy Family Farms
Group as of October 30, 1999 and October 31, 1998 and the related combined
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended October 30, 1999. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Murphy
Family Farms Group at October 30, 1999 and October 31, 1998, and the combined
results of their operations and their cash flows for each of the three years in
the period ended October 30, 1999 in conformity with accounting principles
generally accepted in the United States.
Raleigh, North Carolina
March 17, 2000
5
Murphy Family Farms Group
Combined Balance Sheets
(IN THOUSANDS)
OCTOBER 30 OCTOBER 31
1999 1998
-------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,984 $ 8,771
Trade accounts receivable 51,598 59,378
Accounts receivable - related party 1,492 2,859
Notes receivable 2,372 9,260
Notes receivable - related party 2,023 360
Inventories 189,714 200,750
Other current assets 2,503 1,712
-------------------------------------
Total current assets 257,686 283,090
Fixed assets 146,616 166,213
Notes receivable --noncurrent 6,447 4,846
Notes receivable - related party--noncurrent 16,793 31,240
Investments in equity securities 25,306 21,720
Other assets 1,625 897
-------------------------------------
Total assets $454,473 $508,006
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - related party $ 13,256 $ 7,918
Line of credit 15,102 9,488
Accrued compensation 21,163 17,541
Accounts payable 7,831 5,958
Accrued grower fees 12,468 14,770
Other accrued expenses 12,228 5,666
Due to stockholders 5,000 -
Current portion of long-term debt 9,946 8,607
-------------------------------------
Total current liabilities 96,994 69,948
Long-term debt 183,473 211,261
Notes payable - related party - 10,274
Stockholders' equity:
Common stock 1,061 61
Additional paid-in capital 1,384 1,384
Unrealized gains on investments 14,991 11,666
Retained earnings 156,570 203,412
-------------------------------------
Total stockholders' equity 174,006 216,523
-------------------------------------
Total liabilities and stockholders' equity $454,473 $508,006
=====================================
SEE ACCOMPANYING NOTES.
6
Murphy Family Farms Group
Combined Statements of Operations
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 30 OCTOBER 31 NOVEMBER 1
1999 1998 1997
-----------------------------------------------------
Net sales $453,904 $ 492,324 $602,120
Cost of goods sold 443,043 553,004 456,430
-----------------------------------------------------
Gross margin 10,861 (60,680) 145,690
General and administrative expense 37,260 38,741 50,525
-----------------------------------------------------
Operating (loss) income (26,399) (99,421) 95,165
Provision for uncollectible notes receivable (5,183) (2,888) (600)
Loss on sale of investment - (4,600) -
Loss from fixed asset writedown - (4,742) -
Loss from investment writedown - - (1,684)
Interest expense (22,940) (8,130) (3,945)
Interest income 9,544 8,294 6,804
-----------------------------------------------------
Net (loss) income $(44,978) $(111,487) $ 95,740
=====================================================
SEE ACCOMPANYING NOTES.
7
Murphy Family Farms Group
Combined Statements of Stockholders' Equity
(IN THOUSANDS)
ACCUMULATED
COMMON ADDITIONAL OTHER RETAINED
STOCK PAID-IN CAPITAL COMPREHENSIVE INCOME EARNINGS TOTAL
------------------------------------------------------------------------------------
Balance at November 1, 1997 $ 61 $1,384 $21,307 $ 330,811 $ 353,563
Net loss - - - (111,487) (111,487)
Changes in unrealized gains
on investments - - (9,641) - (9,641)
------------------------------------------------------------------------------------
Comprehensive income (121,128)
Dividends paid - - - (15,912) (15,912)
------------------------------------------------------------------------------------
Balance at October 31, 1998 61 1,384 11,666 203,412 216,523
Net loss - - - (44,978) (44,978)
Changes in unrealized gains
on investments - - 3,325 - 3,325
------------------------------------------------------------------------------------
Comprehensive income (41,653)
Equity of Chief Milling Partners, Inc.
(NOTE 1) 1,000 - - (1,735) (735)
Dividends paid - - - (129) (129)
------------------------------------------------------------------------------------
Balance at October 30, 1999 $1,061 $1,384 $14,991 $ 156,570 $ 174,006
====================================================================================
SEE ACCOMPANYING NOTES.
8
Murphy Family Farms Group
Combined Statements of Cash Flows
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 30 OCTOBER 31 NOVEMBER 1
1999 1998 1997
-------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $(44,978) $(111,487) $ 95,740
Depreciation 29,027 25,769 20,610
Loss on sale of investment - 4,600 -
Loss on sale of assets 570 - -
Lower of cost or market inventory provision - 49,000 -
Notes receivable provision 5,183 2,888 600
Changes in operating assets and liabilities:
Trade accounts receivable 9,147 (9,294) (25,887)
Inventories 11,036 33,321 (50,325)
Other investments and assets (791) (571) (528)
Accounts payable and accrued expenses 9,756 (13,015) 18,443
-------------------------------------------------
Cash provided by (used in) operating activities 18,950 (18,789) 58,653
INVESTING ACTIVITIES
Purchases of fixed assets-net of proceeds from sale of assets (net
of write downs) (5,370) (27,682) (71,148)
Other long term investments (net of write downs) (236) - (599)
Net receipts (disbursements) relating to notes receivable 12,889 20,592 (10,716)
Other, net (103) - -
-------------------------------------------------
Cash provided by (used in) investing activities 7,180 (7,090) (82,463)
FINANCING ACTIVITIES
Net (repayments) proceeds of revolving credit agreement (166,000) 25,500 161,500
Net (repayments) proceeds of notes payable to related parties (4,937) 11,454 (2,092)
Net proceeds (repayments) of long-term debt 134,142 (9,122) (3,041)
Proceeds of short-term borrowings 56,652 37,528 145,916
Repayments of short-term borrowings (51,038) (28,040) (270,903)
Payment of financing fee (607) - -
Dividends paid (129) (15,912) (9,739)
Proceeds from Smithfield Foods, Inc. 5,000 - -
-------------------------------------------------
Cash (used in) provided by financing activities (26,917) 21,408 21,641
-------------------------------------------------
Decrease in cash and cash equivalents (787) (4,471) (2,169)
Cash and cash equivalents at beginning of period 8,771 13,242 15,411
-------------------------------------------------
Cash and cash equivalents at end of period $ 7,984 $ 8,771 $ 13,242
=================================================
SEE ACCOMPANYING NOTES.
9
Murphy Family Farms Group
Notes to Combined Financial Statements
October 30, 1999
1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES AND OTHER INFORMATION
BASIS OF PRESENTATION
Murphy Family Farms Group (the "Company") is the combination of several
companies, which are related through common family ownership. The combined
financial statements include accounts of Murphy Farms, Inc. ("Murphy"), Quarter
M Farms, Inc. ("Quarter M"), Chief Milling Partners, Inc. ("Chief"), and Murphy
Funding, Inc. ("Funding"). All of the companies combined are referred to as the
"Companies." All significant intercompany accounts and transactions have been
eliminated in combination. These entities are presented on a combined basis as
they represent the historical financial statements of the businesses which were
acquired by Smithfield Foods, Inc. on January 28, 2000 (Note 11). Financial
information for the years ended October 31, 1998 and November 1, 1997 do not
include Chief due to the immaterial impact of its exclusion. The year ended
October 30, 1999 does, however, include Chief's financial information. The
Company is engaged in the breeding and finishing of swine for sale primarily to
domestic pork processors with Funding facilitating the financing of swine
facilities and Chief providing the feed milling facilities.
FISCAL YEAR
Murphy and Quarter M have adopted a 52 and 53 week year that ends the Saturday
closest to October 31. The fiscal year ended October 30, 1999, October 31, 1998
and November 1, 1997 consisted of 52 weeks. Funding and Chief are on calendar
year ends. The two month difference has an immaterial impact on the combined
financial statements.
USE OF ESTIMATES
The preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Highly liquid, short-term investments with a maturity of three months or less
when purchased are considered to be cash equivalents.
10
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES AND OTHER INFORMATION (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when the swine are shipped to processors.
INVESTMENTS
Investments in equity securities are classified as available-for-sale and
carried at fair market value, which is determined from publicly quoted market
prices. Unrealized holding gains and losses are carried as a separate component
of stockholders' equity. There were no realized gains or losses on equity
securities during 1999, 1998 and 1997.
During 1996 and 1997, Quarter M acquired, for $1.7 million, a related party's
interest in a partnership that owns a restaurant. In August of 1997, the
partnership was dissolved and the investment in the restaurant commercial
venture was written off.
NOTES RECEIVABLE AND PAYABLE
Certain notes are due on demand but classified as long-term due to management's
expectations that these loans will not be collected or paid within one year.
As of October 30, 1999 and October 31, 1998, the balance of a related party note
receivable was $27.1 million and $24.0 million, respectively, including accrued
interest. An allowance of $18.1 million and $13.1 million exists as of October
30, 1999 and October 31, 1998, respectively.
During 1998, Murphy Farms sold its portion of a pork production commercial
venture to Smithfield Foods, Inc. resulting in cash proceeds from the
transaction of approximately $15 million. Prior to the transaction, Murphy Farms
had an investment in and advances for the commercial venture totaling $19.6
million. The advances and investment were written off resulting in a loss of
$4.6 million.
11
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES AND OTHER INFORMATION (CONTINUED)
INVENTORIES
Swine and grain inventories are stated at the lower of cost or market value.
Swine inventory cost includes the cost of feed, medication, and overhead.
Pre-purchased grain and feed ingredients are stated at the lower of cost (moving
average) or market value. The remaining inventory, which consists of feed,
medication and supplies, is stated at the lower of cost (first-in, first-out) or
market.
FIXED ASSETS
Fixed assets are recorded at cost and consist of property, equipment and
purchased breeding stock. Depreciation is computed primarily by the declining
balance method. The cost of internally raising stock for breeding purposes is
charged to expense as incurred.
Impairment losses relating to fixed assets are recognized when expected future
cash flows are less than the assets carrying value. Accordingly, when indicators
of impairment are present, the Company evaluates the carrying value of fixed
assets in relation to the operating performance and expected future undiscounted
cash flows of the underlying business. In 1998, a $4.7 million impairment charge
related to computer software was recorded.
FUTURES CONTRACTS
In connection with the purchase of grain for anticipated feed manufacturing
requirements, commodity futures contracts are utilized to reduce the effect of
grain market price fluctuations. The futures contracts are accounted for as
hedges and related gains and losses are deferred and recognized as a component
of cost of goods sold when the swine are sold. Net deferred gains totaled $.6
million at October 30, 1999 consisting of a $.4 million deferred loss related to
closed positions and a $1 million deferred gain related to open positions. The
net deferred gain at October 31, 1998 was $3 million. There were no significant
open positions at October 30, 1998. As of December 15, 1999, all open positions
at October 30, 1999 were closed resulting in losses of $3.5 million.
12
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES AND OTHER INFORMATION (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of all financial instruments is estimated to approximate their
carrying amounts. Because of the short-term maturity of cash and cash
equivalents and accounts receivable, their carrying amounts approximate fair
value. The fair value of notes receivable is based on the underlying interest
rate and terms, maturities, collateral, and credit status of the receivables.
The fair value of debt is based upon the Company's current incremental borrowing
rates for similar borrowing arrangements.
NEW ACCOUNTING PRONOUNCEMENTS
As of November 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. Comprehensive income consists of net loss and unrealized gains
or losses on the Company's available-for-sale securities, and is reported
separately in the statements of stockholders' equity. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
In June 1998, the FASB issued FAS No. 133 "Accounting for Derivatives
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 recognizes those items as assets or
liabilities in the combined statement of financial position and measure them at
fair value. This statement is effective for fiscal years beginning after June
15, 2000. The Company does not expect the adoption to have a material effect on
the Company's combined financial statements.
RECLASSIFICATION
Certain amounts in the October 31, 1998 and November 1, 1997 financial
statements have been reclassified to conform to the October 30, 1999
presentation. These reclassifications had no effect on net loss or equity as
previously reported.
INCOME TAXES
The Companies have elected to be taxed as S Corporation under the Internal
Revenue Code and various states' tax codes. The income of an S Corporation are
taxed directly to the stockholders and no federal or state income taxes are paid
by the Companies.
13
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
2. INVENTORIES
OCTOBER 30 OCTOBER 31
1999 1998
------------------------------------
(IN THOUSANDS)
Prepurchased grain and feed ingredients $ 29,636 $ 90,416
Swine, less reserve for lower of cost or
market valuation at October 31, 1998 149,472 95,538
Grain 8,180 11,626
Medication and other supplies 2,426 3,170
------------------------------------
$ 189,714 $ 200,750
====================================
Depressed hog market prices required a 1998 write down of swine inventory cost
to estimated net realizable value. The loss provision amounted to $49 million
and was included in cost of goods sold in the combined statements of operations.
The provision was calculated by estimating costs to complete the current
inventory and comparing that amount to the expected revenues over the period the
inventory was estimated to be sold. At October 30, 1999, the hog market prices
had improved and no lower of cost or market provision was considered necessary.
3. FIXED ASSETS
Fixed assets include the following categories with the estimated depreciable
lives.
DEPRECIABLE OCTOBER 30 OCTOBER 31
LIVES 1999 1998
----------------------------------------------------------
Land - $ 33,188 $ 34,156
Buildings 20-39 9,465 7,172
Farm facilities 5-10 145,546 147,558
Breeding stock 3 9,245 9,743
Machinery and equipment 3-10 83,016 75,141
Storage bins 7 2,279 -
Leasehold improvement 7-15 810 810
Construction in progress - 6,436 4,985
---------------------------------------
289,985 279,565
Less accumulated depreciation (143,369) (113,352)
---------------------------------------
$146,616 $166,213
=======================================
14
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
4. FINANCING ARRANGEMENTS
NOTES RECEIVABLE
In late 1997, Murphy and Funding entered into a loan securitization agreement
providing for the sale of loans associated with the financing of swine growing
facilities for contract producers and affiliate parties. Under the loan
securitization agreement, the maximum balance on loans outstanding cannot not
exceed $50 million. The balance on loans outstanding was approximately $45
million and $38 million at October 30, 1999 and October 31, 1998, respectively.
The proceeds from these sales were included under notes receivable financing
activities in the statement of cash flows.
SHORT-TERM BORROWINGS
The Company supports its seasonal working capital requirements by maintaining
revolving lines of credit totaling $30 million with commercial banks. At October
30, 1999 and October 31, 1998, $15.1 and $9.5 million was outstanding and $14.9
and $20.5 million were available for borrowing, respectively. Borrowings bear
interest at a calculated rate (7% and 5.7% weighted average rate in 1999 and
1998, respectively) and are secured by inventories and certain fixed assets.
LONG-TERM DEBT
At October 31, 1998, Murphy was not in compliance with certain financial
covenants of its unsecured revolving credit agreement. The outstanding balance
under the agreement was $187 million. As of March 2, 1999, the Company resolved
these non-compliance issues and replaced outstanding borrowings under the
revolving credit agreement with $125 million of term debt. Additionally, the
revolving credit agreement was modified to provide for total unsecured
borrowings of up to $75 million, with interest at LIBOR plus an amount ranging
from 1.25% to 2.25%, based on the ratio of liabilities to tangible net worth. At
October 30, 1999, the Company had $54 million available for borrowing. The term
of the revised unsecured revolving credit agreement is for a three year period
ending in 2002.
15
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
4. FINANCING ARRANGEMENTS (CONTINUED)
Long-term debt, as restated to reflect the refinancing and modification of
revolving credit terms, consists of the following:
OCTOBER 30 OCTOBER 31
1999 1998
-------------------------------------
(In Thousands)
Revolving credit agreement $ 21,000 $ 62,000
Unsecured note payable to bank, with interest payable monthly at a
calculated LIBOR rate; monthly principal payments of $521 are payable
2002-2006. 25,000 25,000
Unsecured note payable to an insurance company, with interest payable
quarterly at 8.5%, annual principal payments of $15,000 are payable
2002-2006. 75,000 75,000
Unsecured note payable to an insurance company, due 2002, with interest
payable quarterly at LIBOR plus 2.5%. 25,000 25,000
Note payable to bank, secured by certain land and farm facilities, due in
2002, with monthly payments of $595 plus interest at a calculated rate
(6.4% at October 30, 1999). 21,429 28,571
Note payable to bank, secured by certain land, equipment and fixtures,
with interest payable monthly at LIBOR plus 0.85%. - 3,733
Note payable to bank, secured by certain accounts, inventory and farm
products, due in 2005,with monthly principal payments of $373 beginning
September 2000. Interest is payable monthly at calculated LIBOR rate or
fixed rate per year (7% at October 30, 1999). 22,000 -
Note payable to bank, secured by certain feedmill and equipment, due in 2001,
with monthly principal payments approximating $136. Interest is payable
monthly at LIBOR plus 1.3%. 2,107 -
Note payable to bank, secured by certain feedmill and equipment, due on 2002,
with monthly principal payments approximating $32. Interest is payable
monthly at LIBOR plus 1.3%. 1,089 -
Other 794 564
-------------------------------------
193,419 219,868
Less current portion 9,946 8,607
-------------------------------------
$183,473 $211,261
-------------------------------------
16
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
4. FINANCING ARRANGEMENTS (CONTINUED)
Excluding the revolving credit agreement, future principal payments required for
long-term debt at October 30, 1999 are as follows (in thousands):
2000 $ 9,946
2001 12,400
2002 55,700
2003 25,800
2004 25,800
Thereafter 42,773
--------------------
$172,419
====================
The various debt agreements described above contain restrictive financial and
other covenants including working capital, minimum net worth and limitations on
leverage. Other covenants include, but are not limited to, restrictions on the
distribution of assets, redemption of capital and payment of dividends as set
forth in the loan agreement.
Murphy has guaranteed payments to lending institutions totaling $7.5 million
relating to three pools of contract growers that have aggregate borrowings from
the lending institutions up to $54 million. The proceeds were provided to
finance swine facilities for contract growers.
Quarter M has guaranteed repayment of $11.6 million in contract grower financing
under a letter of credit with commercial banks. The contract grower financing
matures from 2004 to 2008.
Interest expense is capitalized as a component of the construction cost of
property and equipment. During 1999, 1998, and 1997, total interest incurred was
$22.9 million, $8.8 million and $4.5 million of which $5 thousand, $700 thousand
and $600 thousand was capitalized, respectively. Interest paid for 1999, 1998,
and 1997 was $17 million, $8.8 million and $4.3 million, respectively.
17
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
5. EMPLOYEE BENEFIT AND PROFIT SHARING PLAN
Murphy sponsors a profit sharing and 401(k) plan that requires participants to
have attained the age of twenty-one years and have one year of service with the
Company. Accrued contributions to the plan, which are determined at the
discretion of the Board of Directors, were approximately $1.2 million, $1.0
million and $2.7 million in 1999, 1998, and 1997, respectively.
6. RELATED PARTY TRANSACTIONS
Business is routinely transacted with various companies and individuals that are
related to the Murphy Family Farms Group because they share the same
stockholders, are owned by immediate stockholders, family members, or are
stockholders or executive officers of the Company. All related party
transactions are conducted at current market prices.
Certain property is leased from related parties at specified annual rentals plus
$3.50 to $4.50 for each swine grown on the leased property. In addition, the
Company leases land from related parties at specified annual rentals. These
leases are cancelable with a 15-day notice. Payments under these agreements
amounted to $2.6 million, $2.8 million and $2.9 million for 1999, 1998, and
1997, respectively.
7. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's swine is sold to two principal customers,
Smithfield Foods, Inc. and IBP, Inc. Annual sales to these customers were
approximately $443 million, $480 million and $586 million in 1999, 1998, and
1997, respectively. Receivables from these customers, which are unsecured, were
$50.4 million and $43.2 million at October 30, 1999 and October 31, 1998,
respectively.
The Company performs periodic credit evaluations of its customers' financial
condition and closely monitors collections. There have been no significant
credit losses relating to customers. The Company also performs evaluations of
the relative credit standing of those financial institutions that are considered
in the Company's investment and funding strategies.
18
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
The Company has a commitment to a financial institution to purchase a livestock
breeding facility upon default of the related loan on such property by a related
party. The estimated cost of the property as of October 30, 1999 was
approximately $2.3 million.
The Company, like others engaged in agricultural production, is subject to
federal, state and local environmental laws and regulations. The Company's
environmental policies and practices are designed to ensure compliance with
these laws and regulations. Management does not believe that costs of such
compliance will have a material effect on the Company's financial position,
results of operations or liquidity.
Various claims and lawsuits arising in the normal course of business are being
pursued by and are pending against the Company. In the opinion of management,
the ultimate resolution of these items will not have a material adverse effect
on the operations and financial position of the Company.
9. YEAR 2000 (UNAUDITED)
The Company has not experienced any immediate adverse impact from the transition
to the Year 2000. In addition, the Company has obtained assurances regarding the
Year 2000 readiness from its major customers and suppliers. As a result, the
Company continues to monitor Year 2000 compliance and the Year 2000 compliance
of its suppliers and customers.
19
Murphy Family Farms Group
Notes to Combined Financial Statements (continued)
10. STOCKHOLDERS' EQUITY
As discussed in Note 1, the companies comprising Murphy Family Farms Group
elected S Corporation status for federal and state income tax purposes. All
companies are incorporated in North Carolina.
Common stock is comprised of the following:
COMMON
COMPANY STOCK
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Murphy Farms, Inc., $0.10 par value, 100,000 shares authorized, 408,000 shares issued
and outstanding $ 41
Quarter M Farms, Inc., $1 par value, 100,000 shares authorized, 19,784 shares issued
and outstanding 20
Murphy Funding, Inc., $1 par value, 100 shares authorized, 100 shares issued and
outstanding -
Chief Milling Partners, Inc., $1 par value, 5,000,000 shares authorized, 1,000,000
issued and outstanding 1,000
--------------------
$1,061
====================
11. SUBSEQUENT EVENTS
On January 28, 2000, Smithfield Foods, Inc. completed the acquisition of the
Company for 11.1 million shares of Smithfield Foods, Inc.'s common stock and the
assumption of approximately $203 million of the Company's debt and other
liabilities.
20
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
39 Weeks Ending January 30, 2000
Historical
---------------------------------
Smithfield Murphy Family
Foods, Inc. for Farms for the Pro Forma
the 39 Weeks 35 Weeks Adjustments Pro Forma
Ended 1/30/00 Ended 1/30/00 (Note 2) Combined
---------------- -------------- -------------- ------------
IN THOUSANDS
Sales $3,749,710 $ 371,527 $(192,922)(A) $ 3,928,315
Cost of sales 3,253,391 323,327 (192,922)(A) 3,385,098
1,302 (B)
---------- --------- --------- -----------
Gross profit 496,319 48,200 (1,302) 543,217
Selling, general and administrative expenses 290,521 18,128 100 (C) 311,189
2,440 (D)
Depreciation expense 79,104 18,850 (8,678)(E) 89,276
Interest expense 51,663 10,231 61,894
Minority interests 2,807 - 2,807
---------- -------- --------- ----------
-
Income before income taxes 72,224 991 4,836 78,051
Income taxes 25,592 - 2,910 (F) 28,898
396 (G)
---------- --------- ---------- -----------
Net income $ 46,632 $ 991 $ 1,530 $ 49,153
========== ========= ========== ===========
Net income per share
Basic $ 1.00 $ .87
========== ===========
Diluted $ .98 $ .86
========== ===========
Average common shares outstanding
Basic 46,570 9,961 56,531
========== ========= ===========
Diluted 47,366 9,961 57,327
========== ========= ===========
See the accompanying Notes to Pro Forma Consolidated Condensed Statements of Operations.
21
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
52 Weeks Ending May 2, 1999
Historical
---------------------------------------------------
Smithfield Carroll's Foods, Murphy Family
Foods, Inc. for Inc. for Farms for
the 52 Weeks the 52 Weeks the 52 Weeks Pro Forma
Ending 5/2/99 Ending 3/27/99 Ending 5/1/99 Adjustments Pro Forma
IN THOUSANDS (Audited) (Unaudited) (Unaudited) (Note 2) Combined
---------------- ---------------- -------------- -------------- ------------
Sales $3,774,989 $334,128 $433,161 $(456,534)(A) $4,085,744
Cost of sales 3,235,414 277,134 474,712 (456,534)(A) 3,532,462
1,736 (B)
---------------- ---------------- -------------- ------------ -------------
Gross profit 539,575 56,994 (41,551) (1,736) 553,282
Selling, general and administrative expenses 295,610 69,662 39,468 600 (C) 419,286
4,184 (D)
9,762 (H)
Depreciation expense 63,524 13,314 29,255 (9,978)(E) 96,115
Interest expense 40,521 9,965 3,855 - 54,341
Loss on sale of investment - - 4,600 (4,600)(I) -
Minority interests (3,518) - - - (3,518)
---------------- ---------------- -------------- ----------- -------------
Income before income taxes 143,438 (35,947) (118,729) (1,704) (12,942)
Income taxes 48,554 - - 992 (F) (12,350)
(61,896)(G)
---------------- ---------------- -------------- ----------- -------------
Net income $ 94,884 $(35,947) $(118,729) $ 59,200 $ (592)
================ ================ ============== =========== =============
Net income per share
Basic $ 2.39 $ (.01)
================ =============
Diluted $ 2.32 $ (.01)
================ =============
Average common shares outstanding
Basic 39,628 15,392 55,020
================ =========== =============
Diluted 40,962 15,392 55,020
================ =========== =============
See the accompanying Notes to Pro Forma Consolidated Condensed Statements of Operations.
22
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(1) BASIS OF REPORTING
The unaudited Pro Forma Consolidated Condensed Statements of Operations of
Smithfield Foods, Inc. and subsidiaries (the "Company") are provided to
recognize the acquisition effective January 5, 2000, of all the capital stock of
Murphy Farms, Inc., Quarter M Farms, Inc., Murphy Funding, Inc. and Chief
Milling Partners, Inc. (collectively "Murphy Family Farms") in exchange for 11.1
million shares of the Company's common stock and the assumption of approximately
$203 million in debt, plus other liabilities. The purchase price is subject to
post-closing adjustments made on the January 5, 2000 closing balance sheet. The
Company expects that any post-closing adjustments will not result in a material
change to the purchase price.
The pro forma information is based on the historical financial statements
of the Company and Murphy Family Farms giving effect to the acquisition under
the purchase method of accounting. The purchase price has been estimated on a
preliminary basis and, as a result, there may be adjustments to the carrying
value of assets and liabilities. The pro forma information does not purport to
be indicative of the combined historical or future results of operation 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 Statements of Operations for the 39
and 52 weeks ended January 30, 2000 and May 2, 1999 (for the 35 and 52 weeks
ended January 3, 2000 and May 1, 1999, respectively, for Murphy Family Farms)
present the results of operations for the combined entities assuming that the
acquisition had been completed as of the beginning of the respective periods. In
addition, the results of operations for Carroll's Foods, Inc ("CFI") are
included for the 52 week period ended March 27, 1999. CFI was acquired effective
May 3, 1999, after the most recent fiscal year ending May 2, 1999, and is an
individually significant transaction. Details on the CFI acquisition are
available on Form 8-K/A filed July 21, 1999. The results of operations for CFI
are included in the results of operations of the Company for the 39 weeks ended
January 30, 2000. The financial position of Murphy Family Farms was consolidated
in the most recent balance sheet filed by the Company (Form 10-Q filed March 14,
2000).
The Pro Forma Consolidated Condensed Statements of Operations should be
read in conjunction with the Company's Annual Report for the fiscal year ended
May 2, 1999 (filed on Form 10-K dated July 16, 1999), the Company's unaudited
financial statements for the 13 weeks and 39 weeks ended January 30, 2000
23
(filed on Form 10-Q dated March 14, 2000), the historical financial statements
and notes of Murphy Family Farms for the fiscal year ended October 30, 1999 and
Form 8-K/A filed July 21, 1999.
(2) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS PRO FORMA ADJUSTMENTS
The Pro Forma Consolidated Condensed Statements of Operations give effect
to the adjustments described below.
(A) To eliminate intercompany sales.
(B) To record estimated incremental costs to purchase animals from the
farms excluded from the acquisition.
(C) To record amortization expense associated with acquisition
costs. Acquisition costs are amortized over a 5-year period.
(D) To record additional pro forma amortization expense associated
with goodwill based on preliminary estimates of fair market
value of assets acquired and liabilities assumed.
(E) To record the change in depreciation expense for adjustments
to effect assets excluded according to the terms of the purchase
agreement, the adoption of the Company's depreciation policy and
adjustments to the carrying value of property, plant and equipment
based on preliminary estimates of fair market value.
(F) To record the tax effect of the pro forma adjustments at the
Company's marginal tax rate.
(G) To recognize, at the Company's marginal tax rate, CFI's
and Murphy Family Farms' reported results that
would have been realized as part of the consolidated group.
(H) To adjust for the gain realized by CFI in the sale of
Smithfield Food's common stock.
(I) To reverse the loss associated with the sale of Murphy Family
Farms' interest in a hog production joint venture to the
Company.
24
(c) Exhibits.
2.1 Acquisition Agreement and Plan of Reorganization among Smithfield
Foods, Inc., Wendell H. Murphy, Harry D. Murphy, Joyce M. Norman,
Wendell H. Murphy, Jr., Wendy Murphy Crumpler, Stratton K. Murphy, Marc
D. Murphy and Angela Brown (excluding Smithfield Foods, Inc., the
"Murphy Selling Shareholders"), dated as of November 15, 1999, as
amended as of January 1, 2000 (schedules and exhibits omitted, but the
registrant hereby agrees upon request of the Commission to furnish the
same supplementally).
2.2 Registration Rights Agreement between Smithfield Foods, Inc. and the
Murphy Selling Shareholders.
2.3 Agreement with Shareholders between Smithfield Foods, Inc. and the
Murphy Selling Shareholders.
3.1 Bylaws of Smithfield Foods, Inc. as amended through January 20, 2000.
99.1 Consent of Ernst & Young LLP
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/ Michael H. Cole
---------------------
(Signature)
Michael H. Cole
Secretary
Dated: April 12, 2000