SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X / Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 31, 2001
// Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to
Commission file number : 0-16567
SANDERSON FARMS, INC.
(Exact name of registrant as specified in its charter)
Mississippi 64-0615843
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
225 North 13th Avenue
Laurel, Mississippi 39440
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601) 649-4030 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, $1.00 per share par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Aggregate market value (based on the closing sales price in the NASDAQ
National Market System) of the voting stock held by non-affiliates of the
Registrant as of November 30, 2001: approximately $78,297,776.
Number of Shares outstanding of the Registrant's common stock as of
November 30, 2001: 13,566,205 shares of common stock, $1.00 per share par value.
Portions of the Registrant's definitive proxy statement filed or to be
filed in connection with its 2001 Annual Meeting of Stockholders are
incorporated by reference into Part III.
INTRODUCTORY
Definitions. Except where the context indicates otherwise, the following
terms have the following respective meanings when used in this Annual Report.
"Registrant" and "Company" mean Sanderson Farms, Inc. and its subsidiaries and
predecessor organizations. "Fiscal year" means the fiscal year ended October
31, 2001, which is the year for which this Annual Report is filed.
Presentation and Dates of Information. Except for Item 4A herein, the
Item numbers and letters appearing in this Annual Report correspond with those
used in Securities and Exchange Commission Form 10-K (and, to the extent that it
is incorporated into Form 10-K, the letters used in the Commission's Regulation
S-K) as effective on the date hereof, which specifies the information required
to be included in Annual Reports to the Commission. Item 4A ("Executive Officers
of the Registrant") has been included by the Registrant in accordance with
General Instruction G(3) of Form 10-K and Instruction 3 of Item 401(b) of
Regulation S-K. The information contained in this Annual Report is, unless
indicated to be given as of a specified date or for the specified period, given
as of the date of this Report, which is December 27, 2001.
PART I
Item 1. Business
(a) GENERAL DEVELOPMENT OF THE REGISTRANT'S BUSINESS
The Registrant was incorporated in Mississippi in 1955, and is a
fully-integrated poultry processing company engaged in the production,
processing, marketing and distribution of fresh and frozen chicken products. In
addition, through its wholly-owned subsidiary, Sanderson Farms, Inc. (Foods
Division), the Registrant is engaged in the processing, marketing and
distribution of processed and prepared food items.
The Registrant sells ice pack, chill pack and frozen chicken, in whole,
cut-up and boneless form, primarily under the Sanderson Farms(R) brand name to
retailers, distributors, and fast food operators principally in the
southeastern, southwestern and western United States. During its fiscal year
ended October 31, 2001 the Registrant processed 261.1 million chickens, or
approximately 1.2 billion dressed pounds. According to 2001 industry statistics,
the Registrant was the 7th largest processor of dressed chickens in the United
States based on estimated average weekly processing.
The Registrant's chicken operations presently encompass five
hatcheries, four feed mills, six processing plants and one by-products plant.
The Registrant has contracts with operators of approximately 472 grow-out farms
that provide it with sufficient housing capacity for its current operations. The
Registrant also has contracts with operators of 146 breeder farms.
The Registrant sells over 200 processed and prepared food items
nationally and regionally, primarily to distributors, national food service
accounts, retailers and club stores. These food items include frozen entrees,
such as chicken and dumplings, lasagna, seafood gumbo, and shrimp creole and
specialty products, such as corn dogs.
Since the Registrant completed the initial public offering of its
common stock through the sale of 1,150,000 shares to an underwriting syndicate
managed by Smith Barney, Harris Upham & Co. Incorporated and Morgan Keegan & Co.
Inc. in May 1987, the Registrant has significantly expanded its operations to
increase production capacity, product lines and marketing flexibility. Through
1995, this expansion included the expansion of the Registrant's Hammond,
Louisiana processing facility, the construction of new waste water facilities at
the Hammond, Louisiana and Collins and Hazlehurst, Mississippi processing
facilities, the addition of second shifts at the Hammond, Louisiana, Laurel,
Mississippi, Hazlehurst, Mississippi, and Collins, Mississippi processing
facilities, expansion of freezer and production capacity at its prepared foods
facility in Jackson, Mississippi, the expansion of freezer capacity at its
Laurel, Mississippi, Hammond, Louisiana and Collins, Mississippi processing
facilities, the addition of deboning capabilities at all of the Registrant's
poultry processing facilities, and the construction and start-up of its Pike
County, Mississippi, production and processing facilities, including a hatchery,
a feed mill, a processing plant, a waste water treatment facility and a water
treatment facility. During 1997, the Registrant completed the construction and
start-up of its Brazos County, Texas production and processing facilities,
including a hatchery, a feed mill located in Robertson County, Texas, a
processing plant, a waste water treatment facility and a water treatment
facility. In addition, since 1987, the Registrant completed the expansion and
renovation of the hatchery at its Hazlehurst, Mississippi production facilities,
and completed the renovation and expansion of its Collins, Mississippi
by-products facility, allowing for the elimination of a smaller by-products
facility at the Laurel, Mississippi plant.
Capital expenditures for fiscal 2001 were funded by working capital.
Effective July 2, 2001, the Registrant amended its revolving credit agreement
to, among other things, decrease the revolving credit available to the
Registrant thereunder from $100.0 million to $90.0 million. On June 15, 1999,
the Registrant entered into a Note Purchase Agreement with the Lincoln National
Life Insurance Company pursuant to which the Company issued $20 million, 6.65%
senior notes due July 7, 2007. The proceeds of such notes were used to pay a
portion of the debt outstanding under the revolving credit agreement. The
Registrant anticipates that capital expenditures for fiscal 2002 will be funded
by internally generated working capital and borrowings under the revolving
credit agreement.
During fiscal 1997, the Registrant completed the start-up of its Brazos
County, Texas processing facility. During October 1998, the Registrant began
operating one line of its Brazos County, Texas processing facility on a double
shift basis, and during fiscal 2000 completed the double shifting of the plant,
which is now operating at full capacity. The Registrant currently has additional
processing capacity available to it through the double shifting of the second
line at its Collins, Mississippi processing facility. In addition, the
Registrant continually evaluates internal and external expansion opportunities
to continue its growth in poultry and/or related food products.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Not applicable.
(c) NARRATIVE DESCRIPTION OF BUSINESS
REGISTRANT'S BUSINESS
General
The Registrant is engaged in the production, processing, marketing and
distribution of fresh and frozen chicken and the preparation, processing,
marketing and distribution of processed and prepared food items.
The Registrant sells chill pack, ice pack and frozen chicken, both
whole and cut-up, primarily under the Sanderson Farms(R) brand name to
retailers, distributors and fast food operators principally in the southeastern,
southwestern and western United States. During its fiscal year ended October 31,
2001, the Registrant processed approximately 261.1 million chickens, or
approximately 1.2 billion dressed pounds. In addition, the Registrant purchased
and further processed 19.0 million pounds of poultry products during fiscal
2001. According to 2001 industry statistics, the Registrant was the 7th largest
processor of dressed chicken in the United States based on estimated average
weekly processing.
The Registrant conducts its chicken operations through Sanderson Farms,
Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), both
of which are wholly-owned subsidiaries of Sanderson Farms, Inc. ___ The
production subsidiary, Sanderson Farms, Inc. (Production Division), which has
facilities in Laurel, Collins, Hazlehurst and Pike County, Mississippi, and
Bryan, Texas, is engaged in the production of chickens to the broiler stage.
Sanderson Farms, Inc. (Processing Division), which has facilities in Laurel,
Collins, Hazlehurst and Pike County, Mississippi, Hammond, Louisiana, and Bryan,
Texas, is engaged in the processing, sale and distribution of chickens.
The Registrant conducts its processed and prepared foods business
through its wholly-owned subsidiary, Sanderson Farms, Inc. (Foods Division),
which has a facility in Jackson, Mississippi. The Foods Division is engaged in
the processing, marketing and distribution of over 200 processed and prepared
food items, which it sells nationally and regionally, principally to
distributors, national food service accounts, retailers and club stores.
Products
The Registrant has the ability to produce a wide range of processed
chicken products and processed and prepared food items thereby allowing it to
take advantage of marketing opportunities as they arise.
Processed chicken is first saleable as an ice packed whole chicken. The
Registrant adds value to its ice packed whole chickens by removing the giblets,
weighing, packaging and labeling the product to specific customer requirements
and cutting the product based on customer specifications. The additional
processing steps of giblet removal, close tolerance weighing and cutting
increase the value of the product to the customer over whole chickens by
reducing customer handling and cutting labor and capital costs, reducing the
shrinkage associated with cutting, and ensuring consistently sized portions.
With respect to chill pack products, additional value can be achieved
by deep chilling and packaging whole chickens in bags or combinations of fresh
chicken parts in various sized individual trays under the Registrant's brand
name, which then may be weighed and prepriced, based on each customer's needs.
The chill pack process increases the value of the product by extending shelf
life, reducing customer weighing and packaging labor, and providing the customer
with a wide variety of products with uniform, well designed packaging, all of
which enhance the customer's ability to merchandise chicken products.
To satisfy some customers' merchandising needs, the Registrant quick
freezes the chicken product, which adds value by meeting the customers'
handling, storage, distribution and marketing needs and by permitting shipment
of product overseas where transportation time may be as long as 25 days.
Value added products usually generate higher sale prices per pound,
exhibit less finished price volatility and generally result in higher and more
consistent profit margins over the long-term than non-value added product forms.
Selling fresh chickens as a prepackaged brand name product has been a
significant step in the development of the value added, higher margin consumer
business. The Registrant evaluates daily the potential profitability of all
product lines and attempts to maximize its profits on a short-term basis by
making strategic changes in its product mix to meet customer demand.
The following table sets forth, for the periods indicated, the
contribution, as a percentage of sales of chicken products, of value added and
non-value added chicken products.
Fiscal Year Ended October 31,
1997 1998 1999 2000 2001
---- ---- ---- ----- ----
Value added 98.1% 98.6% 99.2% 99.5% 99.5%
Non-value added 1.9% 1.4% .8% .5 % .5%
----- ----- ----- ----- -----
Total Registrant
chicken sales 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
The following table sets forth, for the years indicated, the contribution, as a
percentage of net sales, of each of the Registrant's major product lines.
Fiscal Year Ended October 31,
1997 1998 1999 2000 2001
----- ----- ---- ---- ----
Registrant processed
chicken:
Value added:
Chill pack 20.8% 24.4% 33.2% 36.4% 40.3%
Fresh bulk pack 45.9 46.6 46.5 43.3 39.6
Frozen 15.7 11.6 8.0 7.5 9.2
----- ----- ----- ----- -----
Subtotal 82.4 82.6 87.7 87.2 89.1
----- ----- ----- ----- -----
Non-value added:
Ice pack 0.9 0.7 .5 .3 .2
Frozen 0.7 0.5 .2 .1 .2
----- ----- ----- ----- -----
Subtotal 1.6 1.2 .7 .4 .4
----- ----- ----- ----- -----
Total Company
processed chicken 84.0 83.8 88.4 87.6 89.5
Processed and
prepared foods 16.0 16.2 11.6 12.4 10.5
---- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Sales and Marketing
The Registrant's chicken products are sold primarily to retailers
(including national and regional supermarket chains and local supermarkets),
distributors located principally in the southeastern, southwestern and western
United States. The Registrant also sells its chicken products to governmental
agencies, fast food operators and to customers who resell the products outside
of the continental United States. This wide range of customers, together with
the Registrant's broad product mix, provides the Registrant with flexibility in
responding to changing market conditions in its effort to maximize profits. This
flexibility also assists the Registrant in its efforts to reduce its exposure to
market volatility.
Sales and distribution of the Registrant's chicken products are
conducted primarily by sales personnel at the Registrant's general corporate
offices in Laurel, Mississippi and by customer service representatives at each
of its six processing complexes and through independent food brokers. Each
complex has individual on-site distribution centers and uses the Registrant's
truck fleet, as well as contract carriers, for distribution of its products.
Generally, the Registrant prices much of its chicken products based
upon weekly market prices reported by the United States Department of
Agriculture. Consistent with the industry, the Registrant's profitability is
impacted by such market prices, which may fluctuate substantially and exhibit
cyclical characteristics. The Registrant adds a markup to base prices, which
depends upon value added, volume, product mix and other factors. While base
prices may change weekly, the Registrant's markup is generally negotiated from
time to time with the Registrant's customers. The Registrant's sales are
generally made on an as-ordered basis, and the Registrant maintains few
long-term sales contracts with its customers.
The Registrant uses television, radio and newspaper advertising, coupon
promotion, point of purchase material and other marketing techniques to develop
consumer awareness of and brand recognition for its Sanderson Farms(R) products.
The Registrant has achieved a high level of public awareness and acceptance of
its products through television advertising featuring a celebrity as the
Registrant's spokesperson. Brand awareness is an important element of the
Registrant's marketing philosophy, and it intends to continue brand name
merchandising of its products.
The Registrant's processed and prepared food items are sold nationally
and regionally, primarily to distributors, national food service accounts,
retailers and club stores. Sales of such products are handled by independent
food brokers located throughout the United States, primarily in the southeast
and southwest United States, and by sales personnel of the Registrant. Processed
and prepared food items are distributed from the Registrant's plant in Jackson,
Mississippi, through arrangements with contract carriers.
Production and Facilities
General. The Registrant is a vertically-integrated producer of fresh
and frozen chicken products, controlling the production of hatching eggs,
hatching, feed manufacturing, growing, processing and packaging of its product
lines.
Breeding and Hatching. The Registrant maintains its own breeder flocks
for the production of hatching eggs. The Registrant's breeder flocks are
acquired as one-day old chicks (known as pullets or cockerels) from primary
breeding companies that specialize in the production of genetically designed
breeder stock. As of October 31, 2001, the Registrant maintained contracts with
30 pullet farm operators for the grow-out of pullets (growing the pullet to the
point at which it is capable of egg production, which takes approximately six
months). Thereafter, the mature breeder flocks are transported by Registrant
vehicles to breeder farms that are maintained, as of October 31, 2001, by 116
independent contractors under the Registrant's supervision. Eggs produced by
independent contract breeders are transported to Registrant's hatcheries in
Registrant's vehicles.
The Registrant owns and operates five hatcheries located in Mississippi
and Texas where eggs are incubated and hatched in a process requiring 21 days.
Once hatched, the day-old chicks are vaccinated against common poultry diseases
and are transported by Registrant's vehicles to independent contract grow-out
farms. As of October 31, 2001, the Registrant's hatcheries were capable of
producing an aggregate of approximately 5.6 million chicks per week.
Grow-out. The Registrant places its chicks on 472 grow-out farms, as of
October 31, 2001, located in Mississippi, Louisiana and Texas where broilers are
grown to an age of approximately six to eight weeks. The farms provide the
Registrant with sufficient housing capacity for its operations, and are
typically family-owned farms operated under contract with the Registrant. The
farm owners provide facilities, utilities and labor; the Registrant supplies the
day-old chicks, feed and veterinary and technical services. The farm owner is
compensated pursuant to an incentive formula designed to promote production cost
efficiency.
Historically, the Registrant has been able to accommodate expansion in
grow-out facilities through additional contract arrangements with independent
growers.
Feed Mills. An important factor in the grow-out of chickens is the rate
at which chickens convert feed into body weight. The Registrant purchases on the
open market the primary feed ingredients, including corn and soybean meal, which
historically have been the largest cost components of the Registrant's total
feed costs. The quality and composition of the feed are critical to the
conversion rate, and accordingly, the Registrant formulates and produces its own
feed. As of October 31, 2001, the Registrant operated four feed mills, three of
which are located in Mississippi and one in Texas. The Registrant's annual feed
requirements for fiscal 2001 were (approximately) 1,836,000 tons, and it has the
capacity to produce approximately 1,900,000 tons of finished feed annually under
current configurations.
Feed grains are commodities subject to volatile price changes caused by
weather, size of harvest, transportation and storage costs and the agricultural
policies of the United States and foreign governments. On October 31, 2001, the
Registrant had approximately 739,000 bushels of corn storage capacity at its
feed mills, which was sufficient to store all of its weekly requirements for
corn. Generally, the Registrant purchases its corn and other feed supplies at
current prices from suppliers and, to a limited extent, direct from farmers.
Feed grains are available from an adequate number of sources. Although the
Registrant has not experienced and does not anticipate problems in securing
adequate supplies of feed grains, price fluctuations of feed grains can be
expected to have a direct and material effect upon the Registrant's
profitability. Although the Registrant sometimes purchases grains in forward
markets, it cannot eliminate the potentially adverse effect of grain price
increases.
Processing. Once the chicks reach processing weight, they are
transported to the Registrant's processing plants. These plants use modern,
highly automated equipment to process and package the chickens. The Registrant's
Pike County, Mississippi processing plant, which currently operates two
processing lines on a double shift basis, is currently processing approximately
1,250,000 chickens per week. The Registrant's Collins, Mississippi
processing plant, which is currently operating one of its two lines on a double
shift basis and one line on a single shift basis, is currently processing
approximately 950,000 chickens per week. The Registrant's Brazos County, Texas
processing plant, which is currently operating one line on a single shift basis
and one line on a double shift basis, is currently processing approximately
1,250,000 chickens per week. The Registrant's Laurel and Hazlehurst, Mississippi
and Hammond, Louisiana processing plants currently operate on a double shift
basis, are currently processing approximately 1,875,000 chickens per week. The
Registrant also has the capabilities to produce deboned product at six
processing facilities. At October 31, 2001, these deboning facilities were
operating on a double shifted basis resulting in a combined capacity to process
approximately 9.0 million pounds of product per week.
Sanderson Farms, Inc. (Foods Division). The facilities of Sanderson
Farms, Inc. (Foods Division) are located in Jackson, Mississippi in a plant with
approximately 75,000 square feet of refrigerated manufacturing and storage
space. The plant uses highly automated equipment to prepare, process and freeze
food items. The Registrant could increase significantly its production of
processed and prepared food items without incurring significant capital
expenditures or delays.
Executive Offices; Other Facilities. The Registrant's corporate offices
are located in Laurel, Mississippi. As of October 31, 2001, the Registrant
operated one by-products plant, and six automotive maintenance shops which
service approximately 489 Registrant over-the-road and farm vehicles. In
addition, the Registrant has one child care facility located near its Collins,
Mississippi, processing plant currently serving over 240 children.
Quality Control
The Registrant believes that quality control is important to its
business and conducts quality control activities throughout all aspects of its
operations. The Registrant believes these activities are beneficial to efficient
production and in assuring its customers wholesome, high quality products.
From the corporate offices, the Director of Technical Services
supervises the operation of a modern, well-equipped laboratory which, among
other things, monitors sanitation at the hatcheries, quality and purity of the
Registrant's feed ingredients and feed, the health of the Registrant's breeder
flocks and broilers, and conducts microbiological tests of live chickens,
facilities and finished products. The Registrant conducts on-site quality
control activities at each of the five processing plants and the processed and
prepared food plant.
Regulation
The Registrant's facilities and operations are subject to regulation by
various federal and state agencies, including, but not limited to, the federal
Food and Drug Administration ("F.D.A."), the United States Department of
Agriculture ("U.S.D.A."), the Environmental Protection Agency, the Occupational
Safety and Health Administration and corresponding state agencies. The
Registrant's chicken processing plants are subject to continuous on-site
inspection by the U.S.D.A. The Sanderson Farms, Inc. (Foods Division) processing
plant operates under the U.S.D.A.'s Total Quality Control Program which is a
strict self-inspection plan written in cooperation with and monitored by the
U.S.D.A. The F.D.A. inspects the production of the Registrant's feed mills.
Compliance with existing regulations has not had a material adverse
effect upon the Registrant's earnings or competitive position in the past and is
not anticipated to have a materially adverse effect in the future. Management
believes that the Registrant is in substantial compliance with existing laws and
regulations relating to the operation of its facilities and does not know of any
major capital expenditures necessary to comply with such statutes and
regulations.
The Registrant takes extensive precautions to ensure that its flocks
are healthy and that its processing plants and other facilities operate in a
healthy and environmentally sound manner. Events beyond the control of the
Registrant, however, such as an outbreak of disease in its flocks or the
adoption by governmental agencies of more stringent regulations, could
materially and adversely affect its operations.
Competition
The Registrant is subject to significant competition from regional and
national firms in all markets in which it competes. Some of the Registrant's
competitors have greater financial and marketing resources than the Registrant.
The primary methods of competition are price, product quality, number
of products offered, brand awareness and customer service. The Registrant has
emphasized product quality and brand awareness through its advertising strategy.
See "Business - Sales and Marketing". Although poultry is relatively inexpensive
in comparison with other meats, the Registrant competes indirectly with the
producers of other meats and fish, since changes in the relative prices of these
foods may alter consumer buying patterns.
Sources of Supply
During fiscal 2001, the Registrant purchased its pullets and its
cockerels from two (2) major breeders. The Registrant has found the genetic
cross of the breeds supplied by these companies to produce chickens most
suitable to the Registrant's purposes. The Registrant has no written contracts
with these breeders for the supply of breeder stock. Other sources of breeder
stock are available, and the Registrant continually evaluates these sources of
supply. Should breeder stock from its present suppliers not be available for any
reason, the Registrant believes that it could obtain adequate breeder stock from
other suppliers.
Other major raw materials used by the Registrant include feed grains,
cooking ingredients and packaging materials. The Registrant purchases these
materials from a number of different vendors and believes that its sources of
supply are adequate for its present needs. The Registrant does not anticipate
any difficulty in obtaining these materials in the future.
Seasonality
The demand for the Registrant's chicken products generally is greatest
during the spring and summer months and lowest during the winter months.
Trademarks
The Registrant has registered with the United States Patent and
Trademark Office the trademark Sanderson Farms(R) which it uses in connection
with the distribution of its premium grade chill pack products. The Registrant
considers the protection of this trademark to be important to its marketing
efforts due to consumer awareness of and loyalty to the Sanderson Farms(R)
label. The Registrant also has registered with the United States Patent and
Trademark Office seven other trademarks which are used in connection with the
distribution of chicken and other products and for other competitive purposes.
The Registrant has registered with the United States Patent and
Trademark Office the trademark Sanderson Farms(R) which it uses in connection
with the distribution of its prepared foods and two pound frozen entree
products, as well as in connection with the distribution of its premium grade
chill pack chicken products.
The Registrant, over the years, has developed important non-public
proprietary information regarding product related matters. While the Registrant
has internal safeguards and procedures to protect the confidentiality of such
information, it does not generally seek patent protection for its technology.
Employees and Labor Relations
As of October 31, 2001, the Registrant had 7,727 employees, including
773 salaried and 6,954 hourly employees. A collective bargaining agreement with
the United Food and Commercial Workers International Union covering 552 hourly
employees who work at the Registrant's processing plant in Hammond, Louisiana
expired on November 30, 2001. That contract was renegotiated and executed on
November 1, 2001, and has been extended to November 30, 2004. The collective
bargaining agreement has a grievance procedure and no strike-no lockout clauses
that should assist in maintaining stable labor relations at the Hammond plant.
A collective bargaining agreement with the Laborers' International
Union of North America, Professional Employees Local Union #693, AFL-CIO,
covering 475 hourly employees who work at the Registrant's processing plant in
Hazlehurst, Mississippi was negotiated and signed by the union and the
Registrant effective July 15, 1995. DThis Agreement expired on June 30, 1999,
and was renegotiated and executed on July 26, 1999, and has a expiration date of
December 31, 2002. This collective bargaining agreement has a grievance
procedure and no strike-no lockout clauses that should assist in maintaining
stable labor relations at the Hazlehurst plant.
A collective bargaining agreement with the Laborers' International
Union of North America, Professional Employees Local Union #693, AFL-CIO,
covering 1,178 hourly employees who work at the Registrant's processing plant in
Collins, Mississippi was negotiated and signed by the union and the Registrant
effective September 9, 1995, and expired on December 30, 1999. Negotiations were
completed and an agreement was reached on January 13, 2000. The agreement has a
termination date of December 31, 2003.
On June 9, 1999, the production, maintenance and clean-up employees at
the Company's Brazos County, Texas poultry processing facility voted to be
represented by the United Food and Commercial Workers Union Local #408, AFL-CIO.
A collective bargaining agreement was negotiated and signed on October 7, 1999,
and will expire on December 31, 2002. This collective bargaining agreement has a
grievance procedure and no strike - no lockout clauses that should assist in
maintaining stable labor relations at the Brazos County, Texas processing
facility.
On May 28, 1999, truck drivers at the Company's Brazos County, Texas
processing and production facilities voted to be represented in collective
bargaining by the Teamsters International Local #968. Negotiations with this
union were completed in December 1999, and a collective bargaining agreement
effective January 1, 2000 was signed, which agreement will expire on December
31, 2002. Although this agreement includes a provision allowing re-opening of
bargaining during January 2000 on certain economic issues, no changes have been
made to the Agreement, with the last meeting on this matter being held August
21, 2000. No further meetings have been scheduled in this matter.
On November 30, 2001, live haul drivers at the Company's McComb,
Mississippi production division voted to be represented by United Food and
Commercial Workers' Union Local #1529 AFL-CIO in collective bargaining. It is
the Company's legal position that the live haul drivers are agricultural
employees exempt from the National Labor Relations Act. The Company is pursing
its legal position before the National Labor Relations Board and the Federal
Courts.
On September 13, 2001, production, maintenance and truck driver
employees at the Company's McComb, Mississippi Feed Mill facility voted to be
represented in collective bargaining by United Food and Commercial Workers'
Union Local #1529 AFL-CIO. Negotiations toward a collective bargaining agreement
will commence when requested by the union.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES
The Registrant engages in no material foreign operations, and no
material portion of its revenues was derived from customers in foreign
countries.
Item 2. Properties.
The Registrant's principal properties are as follows:
Use Location (City, State)
--- ---------------------
Poultry complex, including Laurel, Mississippi
poultry processing plant,
hatchery and feedmill
Poultry complex, including Pike County, Mississippi
poultry processing plant,
hatchery and feedmill
Poultry complex, including Hazlehurst, Mississippi
poultry processing plant,
hatchery and feedmill
Poultry complex, including Brazos and Robertson Counties,
poultry processing plant, Texas
hatchery and feedmill
Poultry processing plant Hammond, Louisiana
Poultry processing plant, Collins, Mississippi
hatchery and by-products
plant
Prepared food plant Jackson, Mississippi
Corporate general offices Laurel, Mississippi
The Registrant owns substantially all of its major operating facilities
with the following exceptions: one processing plant and feed mill complex is
leased on an annual renewal basis through 2063 with an option to purchase at a
nominal amount, at the end of the lease term. One processing plant complex is
leased under four leases, which are renewable annually through 2061, 2063, 2075
and 2073, respectively. Certain infrastructure improvements associated with a
processing plant are leased under a lease which expires in 2012 and is
thereafter renewable annually through 2091. All of the foregoing leases are
capital leases.
There are no material encumbrances on the major operating facilities
owned by the Registrant, except that the plant of Sanderson Farms, Inc. (Foods
Division) is encumbered by a mortgage which collateralizes a note with an
outstanding principal balance of $1.0 million on December 31, 2001, which bears
interest at the rate of 5% per annum and is payable in equal annual installments
through 2009. In addition, under the terms of the revolving credit agreement
effective July 29, 1996, as amended, and under the $20 million long-term fixed
rate loan agreements effective in February 1993 and June 1999, the Registrant
may not pledge any additional assets as collateral other than fixed assets up to
15% of its tangible assets.
Management believes that the Company's facilities are suitable for its
current purposes, and believes that current renovations and expansions will
enhance present operations and allow for future internal growth.
Item 3. Legal Proceedings.
On April 5, 2000, thirteen individuals claiming to be former hourly
employees of the Company filed a lawsuit in the United States District Court for
the Southern District of Texas claiming that the Company violated requirements
of the Fair Labor Standards Act. The Plaintiffs' lawsuit also purported to
represent similarly situated workers who have filed or will file consents to
join the suit. At filing, 109 individuals had consented to join the lawsuit.
The lawsuit alleges that the Company (1) failed to pay its hourly
employees "for time spent donning and doffing sanitary and safety equipment,
obtaining and sharpening knives and scissors, working in the plant and elsewhere
before and after the scheduled end of the shift, cleaning safety equipment and
sanitary equipment, and walktime," and (2) altered employee time records by
using an automated time keeping system. Plaintiffs further claim that the
Company concealed the alteration of time records and seek on that account an
equitable tolling of the statute of limitations beyond the three-year limitation
period back to the date the automated time-keeping system was allegedly
implemented.
Plaintiffs seek an unspecified amount of unpaid hourly and overtime
wages plus an equal amount as liquidated damages, for present and former hourly
employees who file consents to join the lawsuit. There were 6,954 hourly workers
employed at the Company's processing plants as of October 31, 2001.
On April 24, 2001, the Court entered a final judgement in favor of the
Company on the Company's summary judgement motion. Plaintiffs appealed that
decision to the United States Fifth Circuit Court of Appeals where it is
currently pending.
On May 15, 2000, an employee of the Company filed suit against the
Company in the United States District Court for the Southern District of Texas
on behalf of live-haul drivers to recover an unspecified amount of overtime
compensation and liquidated damages. Approximately 18 employees have filed
consents to this lawsuit as of October 31, 2001.
Previously, the United States Department of Labor ("DOL") filed suit
against the Company in the United States District Court for the Southern
District of Mississippi, Hattiesburg Division. The lawsuit was brought under the
Fair Labor Standards Act and seeks recovery of overtime compensation, together
with an equal amount as liquidated damages, for thirty-two live-haul employees
(i.e., live-haul drivers, chicken catchers, and loader-operators) employed by
the Company. The lawsuit asserted that additional overtime compensation and
liquidated damages may be owed to certain employees. The lawsuit also seeks an
injunction to prevent the withholding of overtime compensation to live-haul
employees in the future.
The Company is vigorously defending both suits, and has denied any and
all liability. Numerous affirmative defenses have been asserted against the
plaintiff(s) in these matters, including the Company's reliance upon, and
compliance with, the DOL's longstanding policy and practice of treating
live-haul workers as exempt under the Fair Labor Standards Act. Both cases are
in the early stages of discovery.
Substantially similar lawsuits have been filed against other integrated
poultry companies. In addition, organizing activity conducted by the
representatives or affiliates of the United Food and Commercial Workers Union
against the poultry industry has encouraged worker participation in this and the
other lawsuits. The Company believes it has substantial defenses and is
vigorously defending these lawsuits.
On September 26, 2000, three current and former contract growers filed
suit against the Company in the Chancery Court of Lawrence County, Mississippi.
The plaintiffs filed suit on behalf of "all Mississippi residents to whom,
between, on or about November 1981 and the present, the Company induced into
growing chickens for it and paid compensation under the so called `ranking
system'." Plaintiffs allege that the Company "has defrauded plaintiffs by
unilaterally imposing and utilizing the so called `ranking system' which
wrongfully places each grower into a competitive posture against other growers
and arbitrarily penalizes each less successful grower based upon criteria which
were never revealed, explained or discussed with plaintiffs." Plaintiffs further
allege that they are required to accept chicks which are genetically different
and with varying degrees of healthiness, and feed of dissimilar quantity and
quality. Finally, plaintiffs allege that they are ranked against each other
although they possess dissimilar facilities, equipment and technology.
Plaintiffs seek an unspecified amount in compensatory and punitive damages, as
well as varying forms of equitable relief.
The Company is vigorously defending this action, and removed the case
to the United States District Court for the Southern District of Mississippi.
The plaintiffs filed a motion to remand, which was granted by the Court on
August 2, 2001. The Company has invoked the arbitration provision present in the
contracts signed by each of the plaintiffs. The Company's motion to compel
arbitration is currently pending before the Court. The Company has also
challenged subject matter jurisdiction of the Chancery Court. This case has a
current trial setting of January 8, 2002.
The Company is also involved in various claims and litigation
incidental to its business. Although the outcome of such matters cannot be
determined with certainty, management, upon the advice of counsel, is of the
opinion that the final outcome should not have a material effect on the
Company's consolidated results of operation or financial position.
Item 4. Submission of Matters to
a Vote of Security Holders.
No matters were submitted to a vote of the Registrant's security
holders, through the solicitation of proxies or otherwise, during the fourth
quarter of the Fiscal Year.
Item 4A. Executive Officers of the Registrant.
Executive
Name Age Office Officer Since
Joe F. Sanderson, Jr. 55 Chairman of the Board, 1984 (1)
President and
Chief Executive
Officer
D. Michael Cockrell 44 Treasurer and Chief 1993 (2)
Financial Officer,
Board Member
James A. Grimes 53 Secretary and 1993 (3)
Chief Accounting Officer
Lampkin Butts 50 Vice President - Sales, 1996 (4)
Board Member
(1) Joe F. Sanderson, Jr. has served as President and Chief Executive
Officer of the Registrant since November 1, 1989, and as Chairman of
the Board since January 8, 1998. From January 1984, to November
1989, Mr. Sanderson served as Vice-President, Processing and Marketing
of the Registrant.
(2) D. Michael Cockrell became Treasurer and Chief Financial Officer
of the Registrant effective November 1, 1993, and was elected to the
Board of Directors on February 19, 1998. Prior to that time, for more
than five years, Mr. Cockrell was a member and shareholder of the
Jackson, Mississippi law firm of Wise Carter Child & Caraway,
Professional Association.
(3) James A. Grimes became Secretary of the Registrant effective November
1, 1993. Mr. Grimes also serves as Chief Accounting Officer, which
position he has held since 1985.
(4) Lampkin Butts became Vice President - Sales of the Registrant
effective November 1, 1996, and was elected to the Board of Directors
on February 19, 1998. Prior to that time, Mr. Butts served the
Registrant in various capacities since 1973.
Executive officers of the Company serve at the pleasure of the Board of
Directors. There are no understandings or agreements relating to any person's
service or prospective service as an executive officer of the Registrant.
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters.
The Company's common stock is traded on the NASDAQ National Market
System under the symbol SAFM. The number of stockholders as of November 30,
2001, was 1,938.
The following table shows quarterly cash dividends and quarterly high
and low prices for the common stock for the past two fiscal years. National
Market System quotations are based on actual sales prices.
Stock Price
----------------------
Fiscal Year 2001 High Low Dividends
-----------------------------------------------------------------------
First Quarter $10.44 $ 6.75 $.05
Second Quarter $11.50 $ 7.62 $.05
Third Quarter $13.89 $10.62 $.05
Fourth Quarter $14.26 $11.25 $.05
Stock Price
-----------------------
Fiscal Year 2000 High Low Dividends
-----------------------------------------------------------------------
First Quarter $11.25 $7.44 $.05
Second Quarter $ 8.94 $6.56 $.05
Third Quarter $ 9.06 $6.00 $.05
Fourth Quarter $ 8.12 $5.94 $.05
On December 19, 2001 the closing sales price for the common stock was $19.77 per
share.
Item 6. Selected Financial Data.
Year Ended October 31
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net sales $706,002 $605,911 $559,031 $521,394 $481,789
Operating income (loss) 51,094 (588) 23,008 31,822 7,467
Income (loss) before
extraordinary gain and cumulative
effect of accounting change 27,784 (5,337) 10,546 15,256 558
Net income (loss) 27,784 (5,571) 10,546 15,256 1,234
Basic and diluted earnings (loss)
per share before extraordinary gain
and cumulative effect of accounting
change 2.04 (.39) .75 1.06 .04
Basic and diluted earnings (loss)
per share) 2.04 (.41) .75 1.06 .09
Working capital 76,969 71,334 67,272 59,665 66,751
Total assets 288,971 281,856 283,510 265,671 264,893
Long-term debt, less
current maturities 77,212 107,491 104,651 95,695 118,782
Stockholders' equity 144,339 120,015 130,844 129,482 116,771
Cash dividends declared
per share $ .20 $ .20 $ .20 $ .20 $ .20
QUARTERLY FINANCIAL DATA
Fiscal Year 2001
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
(Unaudited)
Net sales $152,081 $163,583 $183,692 $206,646
Operating income 2,339 10,068 16,668 22,019
Net income 384 5,018 9,559 12,823
Basic and diluted earnings
per share $ .03 $ .37 $ .70 $ .94
Fiscal Year 2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
(Unaudited)
Net sales $137,008 $ 139,781 $ 158,422 $ 170,700
Operating income (345) (5,172) (6,558) 11,487
Net income (1,416) (4,497) (5,628) 5,970
Basic and diluted
earnings per share $ (.10) $ (.33) $ (.41) $ .44
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT
FUTURE PERFORMANCE
This Annual Report contains certain forward-looking statements about the
business, financial condition and prospects of the Company. The actual
performance of the Company could differ materially from that indicated by the
forward-looking statements because of various risks and uncertainties,
including, without limitation, changes in the market price for the Company's
finished products and for feed grains, both of which may fluctuate substantially
and exhibit cyclical characteristics typically associated with commodity
markets, as described below; changes in competition and economic conditions;
various inventory risks due to changes in market conditions; changes in
governmental rules and regulations applicable to the Company and the poultry
industry; and other risks described below. These risks and uncertainties can not
be controlled by the Company. When used in this Annual Report, the words
"believes," "estimates," "plans," "expects," "should," "outlook," and
"anticipates," and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
GENERAL
The Company's poultry operations are integrated through its control of all
functions relative to the production of its chicken products, including hatching
egg production, hatching, feed manufacturing, raising chickens to marketable age
("grow-out"), processing and marketing. Consistent with the poultry industry,
the Company's profitability is substantially impacted by the market price for
its finished products and feed grains, both of which may fluctuate substantially
and exhibit cyclical characteristics typically associated with commodity
markets. Other costs, excluding feed grains, related to the profitability of the
Company's poultry operations, including hatching egg production, hatching,
growing, and processing cost, are responsive to efficient cost containment
programs and management practices. Over the past three fiscal years, these other
production costs have averaged approximately 65.4% of the Company's total
production costs.
The Company believes that value-added products are subject to less price
volatility and generate higher, more consistent profit margin than whole
chickens ice packed and shipped in bulk form. To reduce its exposure to market
cyclicality that has historically characterized commodity chicken market prices,
the Company has increasingly concentrated on the production and marketing of
value-added product lines with emphasis on product quality, customer service,
and brand recognition. The Company adds value to its poultry products by
performing one or more processing steps beyond the stage where the whole chicken
is first saleable as a finished product, such as cutting, deep chilling,
packaging and labeling the product. The Company believes that one of its major
strengths is its ability to change its product mix to meet customer demands.
The Company's processed and prepared foods product line includes approximately
200 institutional and consumer packaged food items that it sells nationally,
primarily to distributors, food service establishments and retailers. A majority
of the prepared food items are made to the specifications of food service users.
Poultry prices per pound, as measured by the Georgia dock price, fluctuated
during the three years ended October 31, 2001 as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Fiscal 2001
High $.6150* $.6200 $.6250 $.6650*
Low $.6150* $.6175 $.6450 $.6500
Fiscal 2000
High $.5850 $.5800 $.5975 $.6200*
Low $.5800 $.5725* $.5725 $.6000
Fiscal 1999
High $.6825* $.6275 $.6150 $.6150
Low $.6275 $.5750* $.5825 $.5850
*Year High/Low
During fiscal 2000 compared to fiscal 1999, the average market prices for whole
chickens and boneless breast meat decreased approximately 4.0% and 15.0%
respectively. In addition, slightly higher average feed grain costs and bad debt
expense of $1.2 million during fiscal 2000 from the bankruptcy filing by
AmeriServe Food Distribution, Inc. ("AmeriServe") reduced the Company's
operating margin. Fiscal 2001 brought significant increases in the average sales
price of whole birds, wings and leg quarters with only modest decreases in
market prices for boneless breast meat. In addition, the average cost of feed
grains, while higher than the fiscal 2000 average, remained at relatively
favorable levels during fiscal 2001. The overall favorable market conditions
during fiscal 2001 were enhanced by the ongoing improvements to the Company's
operations and marketing changes implemented over the past several years.
RESULTS OF OPERATIONS
Fiscal 2001 Compared to Fiscal 2000
The Company's net sales during fiscal 2001 were $706.0 million, an increase of
$100.1million or 16.5% over fiscal 2000 net sales of $605.9 million. This
increase in the Company's net sales resulted from an increase in pounds of
poultry products sold of 9.6% and an increase in the average sales price of
poultry products of 8.9%. The increase in the pounds of poultry products sold
resulted from an increase in the number of chickens processed primarily from the
expansion of the Brazos, Texas processing plant during the second half of fiscal
2000 and an increase in the average live weight of chickens processed. During
fiscal 2001 the Company benefited from improved market prices for wings and leg
quarters of 66.8% and 27.9%, respectively. In addition, a simple average of the
Georgia Dock prices for whole birds for fiscal 2001 increased 7.3% as compared
to fiscal 2000. These improvements were partially offset by lower average market
prices for boneless breast meat. Net sales of prepared food products
decreased $1.6 million or 2.0%, which is the net result of a decrease in the
pounds of prepared food products sold of 4.5% partially offset by an increase in
the average sale price of prepared food products of 2.6%.
During fiscal 2001 as compared to fiscal 2000, cost of sales increased $46.6 or
8.0%. Cost of sales of poultry products increased $47.5 million or 9.2% during
fiscal 2001 as compared to fiscal 2000. The increase in the Company's cost of
sales resulted from the increase in the pounds of poultry products sold of 9.6%,
and to a lesser extent, increases in the average cost of feed grains. Corn and
soybean meal cash market prices for fiscal 2001 as compared to fiscal 2000
increased 3.0% and 2.2%, respectively. Cost of sales of prepared food products
during the fiscal year ended October 31, 2001 as compared to the fiscal year
ended October 31, 2000 decreased approximately $900,000 or 1.4% as the Company
eliminated less profitable prepared food sales.
Selling, general and administrative expenses for fiscal 2001 increased $1.9
million, or 7.0%, as compared to fiscal 2000. This increase resulted from
contributions during fiscal 2001 to the Company's Employee Stock Ownership Plan
and increased contributions to the Company's 401(k) Plan. The Company did not
make contributions to the Employee Stock Ownership Plan in fiscal 2000 because
of operating losses. Also, the increase reflects a charge during fiscal 2001 for
the employee incentive program. These increases were partially offset by a
planned reduction in the Company's advertising expenditures during fiscal 2001
as compared to fiscal 2000 and a nonrecurring bad debt expense of $1.2 million
during the second quarter of fiscal 2000 resulting from the bankruptcy filing by
AmeriServe Food Distribution, Inc. on February 1, 2000.
The Company's operating income for fiscal 2001 was $51.1 million as compared to
an operating loss for fiscal 2000 of 600,000, an improvement of $52.5 million.
The improvement in the Company's operating income reflects a continued strong
performance by our prepared foods division, a significant increase in market
prices for leg quarters and wings, and marketing changes the Company implemented
over the past several years as well as ongoing improvements to the Company's
operations.
During fiscal 2001 the Company was able to reduce its outstanding debt by
approximately $31.2 million. As a result, interest expense for fiscal 2001 was
$6.8 million as compared to $8.2 million for fiscal 2000, a decrease of $1.4
million, most of which decrease came in the fourth fiscal quarter. During the
fourth quarter of fiscal 2001 as compared to the fourth quarter of fiscal 2000
the Company's interest expense decreased $1.0 million. The Company expects
interest expense to be significantly lower during the first quarter of fiscal
2002 as compared to the first quarter of fiscal 2001.
The Company's effective tax rate for fiscal 2001 and fiscal 2000 were 37.9% and
37.2%, respectively.
Fiscal 2000 Compared to Fiscal 1999
The Company's net sales for fiscal 2000 were $605.9 million compared to $559.0
million during fiscal 1999, an increase of $46.9 million. A majority of the
increase in net sales was derived from an increase in pounds of poultry products
sold of 10.0%. The additional pounds of poultry products sold resulted primarily
from an increase in the average live weight of chickens processed. However, the
effect of the increase in pounds of poultry products sold on net sales was
partially offset by a decrease in the average sales price per pound of poultry
products of 2.3%. During fiscal 2000 as compared to fiscal 1999, a simple
average of the Georgia dock whole bird prices reflected a decrease of 4.0%. In
addition to the price decrease for whole birds, average boneless breast meat
prices were approximately 15.0% lower during fiscal 2000 as compared to fiscal
1999. Net sales of prepared food products during fiscal 2000 increased $10.0
million or 14.7% as compared to net sales during fiscal 1999. This increase
resulted from an increase in the pounds of prepared food products sold of 8.8%
and an increase in the average sales price of prepared food products of 5.4%.
Cost of sales for fiscal 2000 as compared to fiscal 1999 increased $66.0 million
or 12.8%. Cost of sales of poultry products increased $58.3 million or 12.8%.
This increase in the cost of sales of poultry products was the result of an
increase in the pounds of poultry products sold of 10.0%, an increase in the
processing cost of poultry products related to the Company's increased presence
in the chill pack market and higher cost of soybean meal. Corn and soybean meal
cash market prices reflected a decrease of 3.1% and an increase of 17.9%,
respectively. Cost of sales of prepared food products during fiscal 2000 as
compared to fiscal 1999 increased $7.7 million or 13.2% due primarily to the
increase in the pounds of prepared food products sold.
Selling, general and administrative expenses for the year ended October 31, 2000
increased $4.5 million as compared to the year ended October 31, 1999. This
increase reflects the additional advertising and marketing costs related to the
Company's change of certain of its production from the fast food market to the
chill pack market. In addition, the Company recorded additional bad debt expense
of $1.2 million during the second quarter of fiscal 2000 resulting from the
bankruptcy filing by AmeriServe on February 1, 2000.
The Company's operating loss for fiscal 2000 was $588,000 as compared to
operating income during fiscal 1999 of $23.0 million. The Company's operating
margin during fiscal 2000 as compared to fiscal 1999 was adversely affected by
lower prices for poultry products and the additional bad debt expense from the
bankruptcy filing by AmeriServe. The Company expects the current weakness in the
poultry market to continue through the first quarter of fiscal 2001.
Interest expense for the year ended October 31, 2000 was $8.2 million as
compared to the year ended October 31, 1999 of $6.4 million, an increase of $1.8
million.
The Company adopted the AICPA Statement of Position 98-5, "Reporting the Costs
of Start-up Activities" in the first quarter of fiscal 2000. The effect of
adopting SOP 98-5 was to record a charge for the cumulative effect of an
accounting change of $234,000 (net of income taxes of $140,000).
The effective tax rate for the years ended October 31, 2000 and October 31, 1999
were 37.2% and 37.8%, respectively.
Liquidity and Capital Resources
The Company's working capital at October 31, 2001 was $77.0 million and its
current ratio was 2.6 to 1. This compares to working capital of $71.3 million
and a current ratio of 2.9 to 1 as of October 31, 2000. During fiscal 2001 the
Company spent approximately $14.6 million on planned capital projects and
$739,000 to repurchase 68,000 shares of its common stock under its existing
stock repurchase plan.
The Company's capital budget for fiscal 2002 is approximately $19.4 million. The
fiscal 2002 capital budget includes cost of renovations, changes and additions
to existing processing facilities to allow better product flows and product mix
for more product flexibility. The Company expects that working capital and cash
flows from operations will be sufficient in fiscal 2002 to fund the anticipated
capital expenditures. However, if needed the Company has available $46.0 million
under its revolving credit agreement as of October 31, 2001.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Market Risk
The Company's interest expense is sensitive to changes in the general level of
U.S. interest rates. The Company maintains certain of its debt as fixed rate in
nature to mitigate the impact of fluctuations in interest rates. The fair value
of the Company's fixed rate debt approximates the carrying amount at October 31,
2001. Management believes the potential effects of near-term changes in interest
rates on the Company's fixed rate debt is not material.
The Company is a party to no other market risk sensitive instruments requiring
disclosure.
Item 8. Financial Statements and Supplementary Data.
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
October 31
2001 2000
- ----------------------------------------------------------------------------------------------------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 24,175 $ 8,643
Accounts receivable, less allowance of $303,000 in
2001 and $460,000 in 2000 40,187 37,038
Inventories 52,350 50,262
Refundable income taxes 0 3,783
Prepaid expenses 9,452 8,308
------------------------
Total current assets 126,164 108,034
Property, plant and equipment:
Land and buildings 130,366 128,738
Machinery and equipment 248,621 240,106
------- -------
378,987 368,844
Accumulated depreciation (216,801) (195,689)
-------------------------
162,186 173,155
Other assets 621 667
-------------------------
Total assets $ 288,971 $281,856
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 20,309 $ 17,507
Accrued expenses 25,708 15,135
Current maturities of long-term debt 3,178 4,058
--------- ---------
Total current liabilities 49,195 36,700
Long-term debt, less current maturities 77,212 107,491
Claims payable 2,400 1,800
Deferred income taxes 15,825 15,850
Stockholders' equity:
Preferred Stock:
Series A Junior Participating Preferred Stock, $100
par value: authorized shares-500,000; none issued
Par value to be determined by the Board of Directors:
authorized shares-4,500,000; none issued
Common Stock, $1 par value: authorized shares-100,000,000;
issued and outstanding shares-13,564,955 in 2001 and
13,632,955 in 2000 13,565 13,633
Paid-in capital 2,945 3,616
Retained earnings 127,829 102,766
-------------------------
Total stockholders' equity 144,339 120,015
------- -------
Total liabilities and stockholders' equity $ 288,971 $281,856
======= =======
See accompanying notes.
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended October 31
2001 2000 1999
---- ---- ----
(In thousands, except per share data)
Net sales $706,002 $605,911 $559,031
Cost and expenses:
Cost of sales 626,693 580,136 514,162
Selling, general and administrative 28,215 26,363 21,861
--------------------------------------
654,908 606,499 536,023
-------- -------- -------
Operating income(loss) 51,094 (588) 23,008
Other income (expense):
Interest income 377 213 266
Interest expense (6,753) (8,195) (6,384)
Other 54 69 56
--------------------------------------
(6,322) (7,913) (6,062)
Income (loss) before income taxes and
cumulative effect of accounting change 44,772 (8,501) 16,946
Income tax expense (benefit) 16,988 (3,164) 6,400
--------------------------------------
Income (loss) before cumulative effect of
accounting change 27,784 (5,337) 10,546
Cumulative effect of accounting change (net of income
taxes of $140,000) 0 (234) 0
Net income (loss) $ 27,784 $ (5,571) $ 10,546
======== ======== ========
Basic and diluted net income (loss) per share:
Income (loss) before cumulative
effect of accounting change $ 2.04 $ (.39) $ .75
Cumulative effect of accounting change 0 (.02) 0
Net income (loss) per share $ 2.04 $ (.41) $ .75
--- ======== ========= ========
Weighted average shares outstanding:
Basic 13,596 13,726 14,068
======== ========= ========
Diluted 13,640 13,726 14,121
======== ========= ========
See accompanying notes.
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Total
Common Stock Paid-In Retained Stockholders
Shares Amount Capital Earnings Equity
(In thousands, except shares and per share amounts)
Balance at November 1, 1998 14,373,580 $ 14,374 $11,770 $103,338 $129,482
Net income for year 10,546 10,546
Cash dividends ($.20 per share) (2,807) (2,807)
Issuance of common stock 36,875 36 378 414
Purchase and retirement of
common stock (478,000) (478) (6,438) (6,916)
Principal payments received on note
receivable from ESOP 125 125
---------------------------------------------------------------
Balance at October 31, 1999 13,932,455 13,932 5,835 111,077 130,844
Net loss for year (5,571) (5,571)
Cash dividends ($.20 per share) (2,740) (2,740)
Purchase and retirement of
common stock (299,500) (299) (2,219) (2,518)
Balance at October 31, 2000 13,632,955 13,633 3,616 102,766 120,015
Net income for year 27,784 27,784
Cash dividends ($.20 per share) (2,721) (2,721)
Purchase and retirement of
common stock (68,000) (68) (671) (739)
---------------------------------------------------------------
Balance at October 31, 2001 13,564,955 $ 13,565 $ 2,945 $127,829 $144,339
================================================================
See accompanying notes.
SANDERSON FARMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31
2001 2000 1999
(In thousands)
Operating activities
Net income (loss) $27,784 $(5,571) $10,546
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change 0 374 0
Depreciation and amortization 25,722 26,432 24,736
Provision for losses on accounts receivable 44 1,413 124
Deferred income taxes (178) 340 600
Change in assets and liabilities:
Increase in accounts receivable (3,193) (1,874) (5,678)
Increase in inventories (2,088) (2,628) (4,755)
(Increase) decrease in prepaid expenses 2,791 (3,647) 263
(Increase) decrease in other assets (205) 30 (422)
Increase in accounts payable 2,802 5,002 6,612
Increase (decrease) in accrued expenses and claims
payable 11,173 463 (234)
------ ------ ------
Total adjustments 36,868 25,905 21,246
------ ------ ------
Net cash provided by operating activities 64,652 20,334 31,792
Investing activities
Capital expenditures (14,587) (16,557) (28,627)
Net proceeds from sale of property and equipment 86 217 474
------- ------- -------
Net cash used in investing activities (14,501) (16,340) (28,153)
Financing activities
Long-term borrowings 0 0 20,000
Net change in revolving credit (28,000) 6,000 (7,000)
Principal payments on long-term debt (2,954) (2,950) (3,844)
Principal payments on capital lease obligation (205) (195) (185)
Principal payments received on note
receivable from ESOP 0 0 125
(2,721) (2,740) (2,807)
Purchase and retirement of common stock (739) (2,518) (6,916)
Net proceeds from common stock issued 0 0 414
------ ----- -----
Net cash used in financing activities (34,619) (2,403) (213)
Net increase in cash and cash equivalents 15,532 1,591 3,426
Cash and cash equivalents
at beginning of year 8,643 7,052 3,626
------ ------ ------
Cash and cash equivalents
at end of year $24,175 $8,643 $7,052
====== ====== ======
Supplemental disclosure of cash flow information:
Income taxes paid (refunded), net $12,372 $ (67) $10,459
====== ====== =======
Interest paid $ 6,920 $8,728 $ 5,844
====== ====== =======
See accompanying notes.
Sanderson Farms, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of Sanderson Farms, Inc. (the "Company") and its wholly-owned
subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation.
Business: The Company is engaged in the production, processing, marketing and
distribution of fresh and frozen chicken and other prepared food items. The
Company's net sales and cost of sales are significantly affected by market price
fluctuations of its principal products sold and of its principal feed
ingredients, corn and other grains.
The Company sells to retailers, distributors and fast food operators primarily
in the southern and western United States. Revenue is recognized when product is
shipped to customers. Revenue on certain international sales is recognized upon
transfer of title, which may occur after shipment. Management periodically
performs credit evaluations of its customers' financial condition and generally
does not require collateral. Shipping and handling costs are included as a
component of cost of sales.
Use of Estimates: The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with
maturities of ninety days or less when purchased to be cash equivalents.
Inventories: Processed food and poultry inventories and inventories of feed,
eggs, medication and packaging supplies are stated at the lower of cost
(first-in, first-out method) or market.
Live poultry inventories of broilers are stated at the lower of cost or market
and breeders at cost less accumulated amortization. The costs associated with
breeders, including breeder chicks, feed, medicine and grower pay, are
accumulated up to the production stage and amortized over nine months using the
straight-line method.
Property, Plant and Equipment: Property, plant and equipment is stated at cost.
Depreciation of property, plant and equipment is provided by the straight-line
and units of production methods over the estimated useful lives of 19 to 39
years for buildings and 3 to 7 years for machinery and equipment.
Impairment of Long-Lived Assets: The Company continually reevaluates the
carrying value of its long-lived assets for events or changes in circumstances
which indicate that the carrying value may not be recoverable. As part of this
reevaluation, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposal. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized through a charge
to operations.
Income Taxes: Deferred income taxes are accounted for using the liability method
and relate principally to cash basis temporary differences and depreciation
expense accounted for differently for financial and income tax purposes.
Effective November 1, 1988, the Company changed from the cash to the accrual
basis of accounting for its farming subsidiary. The Taxpayer Relief Act of 1997
(the "Act") provides that the taxes on the cash basis temporary differences as
of that date are payable over 20 years beginning in fiscal 1998 or in full in
the first fiscal year in which the Company fails to qualify as a "Family Farming
Corporation." The Company will continue to qualify as a "Family Farming
Corporation" provided there are no changes in ownership control, which
management does not anticipate during fiscal 2002.
Stock Based Compensation: The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Earnings Per Share: Basic earnings per share is based upon the weighted
average number of common shares outstanding during the year. Diluted earnings
per share includes any dilutive effects of options, warrants, and convertible
securities.
Fair Value of Financial Instruments: The carrying amounts for cash and temporary
cash investments approximate their fair values. The carrying amounts of the
Company's borrowings under its credit facilities and long-term debt also
approximate the fair values based on current rates for similar debt.
Impact of Recently Issued Accounting Standards: Effective in fiscal 2001,
The Company adopted FASB No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which required all derivatives to be recorded on the
balance sheet at fair value. The adoption of this statement had no effect on the
consolidated earnings and financial position of the Company.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities," which
requires that costs related to start-up activities be expensed as incurred.
Prior to October 31, 1999, the Company capitalized its start-up costs. The
Company adopted the provisions of the Statement of Position 98-5, "Reporting the
Costs of Start-Up Activities," which required that costs related to start-up
activities be expensed as incurred in its consolidated financial statements in
the first quarter of fiscal 2000. The effect of adoption of SOP 98-5 during
fiscal 2000 was to record a charge for the cumulative effect of an accounting
change of $234,000 (net of income taxes of $140,000) or $.02 per basic and
diluted earnings per share.
2. Inventories
Inventories consisted of the following:
October 31
2001 2000
(In thousands)
Live poultry-broilers and breeders $30,649 $30,004
Feed, eggs and other 6,597 6,651
Processed poultry 5,894 5,924
Processed food 4,918 3,785
Packaging materials 4,292 3,898
------ ------
$52,350 $50,262
====== ======
3. Long-term Credit Facilities and Debt
Long-term debt consisted of the following:
October 31
2001 2000
---------------------
(In thousands)
Revolving credit agreement with banks
(weighted average rate of 5.1% at
October 31, 2001) $44,000 $ 72,000
Term loan with an insurance company,
accruing interest at 7.49%; due in
annual principal installments of $2,850,000 5,750 8,600
Term loan with an insurance company,
accruing interest at 6.65%; due in annual
principal installments of $2,857,000,
beginning in July 2004 20,000 20,000
Note payable, accruing interest at 5%;
due in annual installments of $161,400,
including interest, maturing in 2009 1,065 1,169
6% Mississippi Business Investment Act
bond-capital lease obligation, due November
1, 2012 3,275 3,480
Robertson County, Texas, Industrial
Revenue Bonds accruing interest
at a variable rate, 2.4% at October
31, 2001; with optional annual principal
installments of $900,000, due November 1, 2005 6,300 6,300
------- --------
80,390 111,549
Less current maturities of long-term debt 3,178 4,058
------- --------
$77,212 $107,491
======= ========
The Company has a $90.0 million ($46.0 million available at October 31, 2001)
revolving credit agreement with five banks, which extends to fiscal 2004.
Borrowings are at prime or below and may be prepaid without penalty. A
commitment fee of .25% is payable quarterly on the unused portion of the
revolver. Covenants related to the revolving credit and the term loan agreements
include requirements for maintenance of minimum consolidated net working
capital, tangible net worth, debt to total capitalization and current ratio. The
agreements also establish limits on dividends, assets that can be pledged and
capital expenditures.
Property, plant and equipment with a carrying value of approximately $4,704,035
million is pledged as collateral to a note payable and the capital lease
obligation.
The aggregate annual maturities of long-term debt at October 31, 2001 are as
follows (in thousands):
Fiscal Year Amount
2002 $ 3,178
2003 4,144
2004 50,264
2005 6,285
2006 6,306
Thereafter 10,213
-------
$ 80,390
=======
4. Income Taxes
Income tax expense (benefit) consisted of the following:
Years Ended October 31
2001 2000 1999
(In thousands)
Current:
Federal $15,518 $(3,600) $5,200
State 1,450 (44) 600
------ ------- ------
16,968 (3,644) 5,800
Deferred:
Federal (264) 325 486
State 284 15 114
----- ------- ------
20 340 600
16,988 (3,304) 6,400
Less income tax expense applicable
to cumulative effect of accounting
change 0 140 0
------ ------- ------
Income tax expense (benefit) applicable
to income (loss) before cumulative
effect of accounting change $16,988 $(3,164) $6,400
======= ======== ======
Significant components of the Company's deferred tax assets and liabilities were
as follows:
October 31,
2001 2000
---- ----
(In thousands)
Deferred tax liabilities:
Cash basis temporary differences $ 3,193 $ 3,309
Property, plant and equipment 13,937 13,694
Prepaid and other assets 278 143
Total deferred tax liabilities 17,408 17,146
Deferred tax assets:
Accrued expenses and accounts receivable 3,156 2,921
State net operating loss and
credit carryforwards 282 275
Total deferred tax assets 3,438 3,196
Net deferred tax liabilities $13,970 $13,950
======= =======
Current deferred tax assets
(included in prepaid expenses) $ 1,855 $ 1,900
Long-term deferred tax liabilities 15,825 15,850
Net deferred tax liabilities $13,970 $ 13,950
======= =======
The differences between the consolidated effective income tax rate and the
federal statutory rate are as follows:
Years Ended October 31
2001 2000 1999
(In thousands)
Income taxes (benefit) at statutory rate $15,670 $(3,018) $5,762
State income taxes (benefit) 1,754 (19) 731
State income tax credit (627) 0 (260)
Increase in deferred taxes
for change in income tax rate 367 0 0
Other, net (176) (267) 167
------- ------- ------
Income tax expense (benefit) $16,988 $(3,304) $6,400
======= ======== ======
5. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan ("ESOP") covering substantially
all employees. Contributions to the ESOP are determined at the discretion of the
Company's Board of Directors. Total contributions to the ESOP were
$2,300,000 and $840,000 in fiscal 2001 and 1999, respectively. The Company did
not make a contribution to the ESOP in fiscal 2000.
The Company has a 401(k) Plan which covers substantially all employees after six
months of service. Participants in the Plan may contribute up to the maximum
allowed by IRS regulations. Effective July 1, 2000, the Company matches 100% of
employee contributions to the 401(k) Plan up to 3% of each employee's
compensation and 50% of employee contributions between 3% and 5% of each
employee's compensation. The Company's contributions to the 401(k) Plan totaled
$1,411,000 in fiscal 2001 and $457,000 in fiscal 2000.
6. Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options.
Under the Company's Stock Option Plan, 750,000 shares of Common Stock have been
reserved for grant to key management personnel. Options granted in fiscal 2001
and fiscal 2000 have ten-year terms and vest over four years beginning one year
after the date of grant. No options were granted in fiscal 1999.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.0% in fiscal 2001 and 6.6% in fiscal
2000; dividend yields of 2.0% for fiscal 2001 and 2.7% for fiscal 2000;
volatility factors of the expected market price of the Company's Common Stock of
.350 for fiscal 2001 and .302 for fiscal 2000; and a weighted-average expected
life of the options of four years.
The weighted-average fair value of options granted was $3.24 in fiscal 2001 and
$1.94 in fiscal 2000. The pro forma effect of the estimated fair value of the
options granted was insignificant to the Company's net income (loss) and net
income (loss) per share in fiscal 2001, 2000, and 1999.
A summary of the Company's stock option activity and related information is as
follows:
Weighted-Average
Shares Exercise Price
Outstanding at November 1, 1998 696,000 $12.64
Exercised (69,375) 10.82
Forfeited (44,625) 12.92
-------
Outstanding at October 31, 1999 582,000 12.90
Granted 141,000 7.47
Forfeited (84,000) 11.60
-------
Outstanding at October 31, 2000 639,000 11.83
Granted 71,500 11.10
Forfeited (87,500) 11.11
-------
Outstanding at October 31, 2001 623,000 11.81
======= ======
The exercise price of the options outstanding as of October 31, 2001 ranged from
$7.19 to $15.00 per share. At October 31, 2001, the weighted average remaining
contractual life of the options outstanding was 7 years and 409,750 options were
exercisable.
In fiscal 2000, the Company granted 141,000 "phantom shares" to certain key
management personnel. Upon exercise of a phantom share, the holder will receive
a cash payment or an equivalent number of shares of the Company's Common Stock,
at the Company's option, equal to the excess of the fair market value of the
Company's Common Stock over the phantom share award value of $7.47 per share.
The phantom shares have a ten-year term and vest over four years beginning one
year after the date of grant. Compensation expense of $555,000 is included in
selling, general and administrative expense in the accompanying consolidated
statement of income for fiscal 2001. No compensation expense was recognized
applicable to the phantom shares in fiscal 2000 because the award value exceeded
the fair market value of the Company's Common Stock.
7. Shareholder Rights Agreement
On April 22, 1999, the Company adopted a shareholder rights agreement (the
"Agreement") with similar terms as the previous one. Under the terms of the
Agreement a one share purchase ("right") was declared as a dividend for each
share of the Company's Common Stock outstanding on May 4, 1999. The rights do
not become exercisable and certificates for the rights will not be issued until
ten business days after a person or group acquires or announces a tender offer
for the beneficial ownership of 20% or more of the Company's Common Stock.
Special rules set forth in the Agreement apply to determine beneficial ownership
for members of the Sanderson family. Under these rules, such a member will not
be considered to beneficially own certain shares of Common Stock, the economic
benefit of which is received by any member of the Sanderson family, and certain
shares of Common Stock acquired pursuant to employee benefit plans of the
Company.
The exercise price of a right has been established at $75. Once exercisable,
each right would entitle the holder to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $100 per share. The
rights may be redeemed by the Board of Directors at $.01 per right prior to an
acquisition, through open market purchases, a tender offer or otherwise, of the
beneficial ownership of 20% or more of the Company's Common Stock, or by
two-thirds of the Directors who are not the acquirer, or an affiliate of the
acquirer prior to the acquisition of 50% or more of the Company's Common Stock
by such acquirer. The rights expire on May 4, 2009.
8. Other Matters
The Company self-insures for losses related to workers' compensation claims with
excess coverage by underwriters on a per claim and aggregate basis. Claims
payable are based upon estimates of the ultimate cost of reported claims by the
Company's claims administrator and totaled $6,154,000 at October 31, 2001 and
$5,193,000 at October 31, 2000, respectively. Claims payable of$3,754,000 at
October 31, 2001 and $3,393,000 at October 31, 2000, respectively, are included
in accrued expenses in the accompanying consolidated balance sheets because the
amounts are expected to be paid within one year from the respective balance
sheet dates. The ultimate cost for outstanding claims may vary significantly
from current estimates.
No customer accounted for more than 10% of consolidated sales for the years
ended October 31, 2001, 2000 and 1999. Export sales were less than 10% of
consolidated sales in each year presented.
On April 5, 2000, thirteen individuals claiming to be former hourly employees of
the Company filed a lawsuit in the United States District Court for the Southern
District of Texas claiming that the Company violated requirements of the Fair
Labor Standards Act. The Plaintiffs' lawsuit also purported to represent
similarly situated workers who have filed or will file consents to join the
suit. At filing, 109 individuals had consented to join the lawsuit.
The lawsuit alleges that the Company (1) failed to pay its hourly employees "for
time spent donning and doffing sanitary and safety equipment, obtaining and
sharpening knives and scissors, working in the plant and elsewhere before and
after the scheduled end of the shift, cleaning safety equipment and sanitary
equipment, and walktime," and (2) altered employee time records by using an
automated time keeping system. Plaintiffs further claim that the Company
concealed the alteration of time records and seek on that account an equitable
tolling of the statute of limitations beyond the three-year limitation period
back to the date the automated time-keeping system was allegedly implemented.
Plaintiffs seek an unspecified amount of unpaid hourly and overtime wages plus
an equal amount as liquidated damages, for present and former hourly employees
who file consents to join the lawsuit. There were 6,954 hourly workers employed
at the Company's processing plants as of October 31, 2001.
On April 24, 2001, the Court entered a final judgement in favor of the Company
on the Company's summary judgement motion. Plaintiffs appealed that decision to
the United States Fifth Circuit Court of Appeals where it is currently pending.
On May 15, 2000, an employee of the Company filed suit against the Company in
the United States District Court for the Southern District of Texas on behalf of
live-haul drivers to recover an unspecified amount of overtime compensation and
liquidated damages. Approximately 18 employees have filed consents to this
lawsuit as of October 31, 2001.
Previously, the United States Department of Labor ("DOL") filed suit against the
Company in the United States District Court for the Southern District of
Mississippi, Hattiesburg Division. The lawsuit was brought under the Fair Labor
Standards Act and seeks recovery of overtime compensation, together with an
equal amount as liquidated damages, for thirty-two live-haul employees (i.e.,
live-haul drivers, chicken catchers, and loader-operators) employed by the
Company. The lawsuit asserted that additional overtime compensation and
liquidated damages may be owed to certain employees. The lawsuit also seeks an
injunction to prevent the withholding of overtime compensation to live-haul
employees in the future.
The Company is vigorously defending both suits, and has denied any and all
liability. Numerous affirmative defenses have been asserted against the
plaintiff(s) in these matters, including the Company's reliance upon, and
compliance with, the DOL's longstanding policy and practice of treating
live-haul workers as exempt under the Fair Labor Standards Act. Both cases are
in the early stages of discovery.
Substantially similar lawsuits have been filed against other integrated poultry
companies. In addition, organizing activity conducted by the representatives or
affiliates of the United Food and Commercial Workers Union against the poultry
industry has encouraged worker participation in this and the other lawsuits. The
Company believes it has substantial defenses and is vigorously defending these
lawsuits.
On September 26, 2000, three current and former contract growers filed suit
against the Company in the Chancery Court of Lawrence County, Mississippi. The
plaintiffs filed suit on behalf of "all Mississippi residents to whom, between,
on or about November 1981 and the present, the Company induced into growing
chickens for it and paid compensation under the so called `ranking system'."
Plaintiffs allege that the Company "has defrauded plaintiffs by unilaterally
imposing and utilizing the so called `ranking system' which wrongfully places
each grower into a competitive posture against other growers and arbitrarily
penalizes each less successful grower based upon criteria which were never
revealed, explained or discussed with plaintiffs." Plaintiffs further allege
that they are required to accept chicks which are genetically different and with
varying degrees of healthiness, and feed of dissimilar quantity and quality.
Finally, plaintiffs allege that they are ranked against each other although they
possess dissimilar facilities, equipment and technology. Plaintiffs seek an
unspecified amount in compensatory and punitive damages, as well as varying
forms of equitable relief.
The Company is vigorously defending this action, and removed the case to the
United States District Court for the Southern District of Mississippi. The
plaintiffs filed a motion to remand, which was granted by the Court on August 2,
2001. The Company has invoked the arbitration provision present in the contracts
signed by each of the plaintiffs. The Company's motion to compel arbitration is
currently pending before the Court. The Company has also challenged subject
matter jurisdiction of the Chancery Court. This case has a current trial setting
of January 8, 2002.
The Company is also involved in various claims and litigation incidental to its
business. Although the outcome of such matters cannot be determined with
certainty, management, upon the advice of counsel, is of the opinion that the
final outcome should not have a material effect on the Company's consolidated
results of operation or financial position.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive
Officers of the Registrant.
As permitted by General Instruction G(3) to Form 10-K, reference is made to the
information concerning the Directors of the Registrant and the nominees for
election as Directors appearing in the Registrant's definitive proxy statement
filed or to be filed with the Commission pursuant to Rule 14a-6(b). Such
information is incorporated herein by reference to the definitive proxy
statement.
Information concerning the executive officers of the
Registrant is set forth in Item 4A of Part I of this Annual Report.
Item 11. Executive Compensation.
As permitted by General Instruction G(3) to Form 10-K, reference is made to the
information concerning remuneration of Directors and executive officers of the
Registrant appearing in the Registrant's definitive proxy statement filed or to
be filed with the Commission pursuant to Rule 14a-6(b). Such information is
incorporated herein by reference to the definitive proxy statement.
Item 12. Security Ownership of Certain
Beneficial Owners and Management.
As permitted by General Instruction G(3) to Form 10-K, reference is made to the
information concerning beneficial ownership of the Registrant's Common Stock,
which is the only class of the Registrant's voting securities, appearing in the
Registrant's definitive proxy statement filed or to be filed with the Commission
pursuant to Rule 14a-6(b). Such information is incorporated herein by reference
to the definitive proxy statement.
Item 13. Certain Relationships
and Related Transactions.
As permitted by General Instruction G(3) to Form 10-K, information, if any,
required to be reported by Item 13 of Form 10-K, with respect to transactions
with management and others, certain business relationships, indebtedness of
management, and transactions with promoters, is set forth in the Registrant's
definitive proxy statement filed or to be filed with the Commission pursuant to
Rule 14a-6(b). Such information, if any, is incorporated herein by references to
the definitive proxy statement.
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K.
(a)1. FINANCIAL STATEMENTS:
- ----- --------- -----------
The following consolidated financial statements of the Registrant are included
in Item 8:
Consolidated Balance Sheets - October 31, 2001 and 2000
Consolidated Statements of Income - Years ended October 31, 2001, 2000
and 1999
Consolidated Statements of Stockholders' Equity -Years ended October 31,
2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended October 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements - October 31, 2001
(a)2. FINANCIAL STATEMENT SCHEDULES:
- ----- --------- --------- ----------
The following consolidated financial statement schedules of the Registrant are
included in Item 8:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted as they are not applicable or the required
information is set forth in the Financial Statements or notes thereto.
(a)3. EXHIBITS:
The following exhibits are filed with this Annual Report or are incorporated
herein by reference:
Exhibit Brief
Number Description
(1) 3-A - Copy of Articles of Incorporation of the Registrant, as amended.
3-B - Copy of Restated By-Laws of the Registrant as of January 8, 1998.
3-B-1 - Copy of Restated By-Laws of the Registrant as of October 23, 2000.
(1) 4 - Copy of Certificate of Designations of Series A Junior Participating
Preferred Stock of the Registrant
(2) 10-A - Copy of Agreement of Purchase and Sale of Assets dated March 10, 1986 among
the Registrant, National Prepared Foods, Inc., Trend Line Corporation,
Business Advisors and Investor, Inc., W. T. Hogg, Jr., W. T. Hogg, Jr. Trust
for Grandchildren, Noreen Mary Hogg Case Trust Under Agreement December 20,
1972 and Sherrie Ann Hogg Ford Trust Under Agreement December 20, 1972.
(2) 10-B - Copy of Contract dated July 31, 1964 between the Registrant and the City of
Laurel, Mississippi.
(2) 10-B-1 - Copy of Contract Amendment dated December 1, 1970 between the Registrant and the City of
Laurel, Mississippi.
(2) 10-B-2 - Copy of Contract Amendment dated June 11, 1985 between the Registrant and the City of
Laurel, Mississippi.
(2) 10-B-3 - Copy of Contract Amendment dated October 7, 1986 between the Registrant and the City of
Laurel, Mississippi.
(8) 10-B-4 - Copy of Contract Amendment dated August 16, 1994 between the Registrant and the City of
Laurel, Mississippi.
(2) 10-C - Copy of Lease Agreement dated May 19, 1964 among the Town of Collins,
Covington County, Mississippi and Mississippi Federated Cooperatives ALL.
(2) 10-C-1 - Copy of Assignment of Lease and Leasehold Estate, and Conveyance of Leaseholder
Improvements and Other Properties, Reserving a Purchase Money Security
Interest, dated December 21, 1981 between M.C. Services (ALL) and Sanderson
Farms, Inc. (Processing Division).
(2) 10-D - Copy of Lease Agreement dated November 28, 1962 between the Board of
Supervisors of Covington County, Mississippi acting for and on behalf of
Supervisors Districts 1, 2, 3 and 5 of Covington County, Mississippi and
Mississippi Federated Cooperatives, ALL.
(2) 10-D-1 - Copy of Contract dated October 2, 1972 between the Board of Supervisors of Covington
County, Mississippi,
acting for and on behalf
of Covington County,
Mississippi and M.C.
Services (ALL).
(2) 10-D-2 - Copy of Lease Agreement dated May 1, 1976 between Supervisors Districts One, Two, Three
and Five of Covington County, Mississippi and M.C. Services (ALL).
(2) 10-D-3 - Copy of Assignment of Leases and Leasehold Estate, and Conveyance of Leasehold
Improvements and Other Properties, Reserving a Purchase Money Security
Interest, dated December 21, 1981 between M.C. Services (ALL) and Sanderson
Farms, Inc. (Processing Division).
(2) 10-E - Copy of Agreement dated December 1, 1986, between Sanderson Farms, Inc.
(Hammond Processing
Division) and United Food
and Commercial Workers
Local Union 210
affiliated with the
United Food and
Commercial Workers
International Union.
(5) 10-E-1 - Copy of Agreement dated February 14, 1990 between Sanderson Farms, Inc. (Hammond
Processing Division) and United Food and Commercial Workers Local Union 210,
affiliated with the United Food and Commercial Workers International Union.
(8) 10-E-2 - Copy of Agreement effective November 6, 1994 between Sanderson Farms, Inc. (Hammond
Processing Division) and United Food and Commercial Workers Local Union 210,
affiliated with the United Food and Commercial Workers International Union.
(9) 10-E-3 - Copy of Agreement effective July 15, 1995 between Sanderson Farms, Inc. (Hazlehurst
Processing Division) and Laborers' International Union of North America,
Professional Employees Local Union #697, AFL-CIO.
(9) 10-E-4 - Copy of Agreement effective September 9, 1995 between Sanderson Farms, Inc. (Collins
Processing Division) and Laborers' International Union of North America,
Professional Employees Local Union #697, AFL-CIO.
(10) 10-E-5 - Copy of Agreement effective November 1, 1998 between Sanderson Farms, Inc. (Hammond
Processing Division) and United Food and Commercial Workers Local Union #210
affiliated with the United Food and Commercial Workers International Union.
(10) 10-E-6 - Copy of Agreement effective July 26, 1999 between Sanderson Farms, Inc. (Hazlehurst
Processing Division) and Laborers' International Union of North America,
Professional Employees Local Union #697, AFL-CIO.
(10) 10-E-7 - Copy of Agreement effective January 13, 2000 between Sanderson Farms, Inc. (Collins
Processing Division) and Laborers' International Union of North America,
Professional Employees Local Union #697, AFL-CIO.
(10) 10-E-8 - Copy of Agreement effective October 7, 1999 between Sanderson Farms, Inc. (Brazos
Processing Division) and
the United Food and
Commercial Workers Local
Union #408, AFL-CIO.
(10) 10-E-9 - Copy of Agreement effective January 1, 2001 between Sanderson Farms, Inc. (Brazos
Production Division) and the Teamsters International Local #968.
(2) 10-F - Copy of Employee Stock Ownership Plan and Trust Agreement of Sanderson
Farms, Inc. and Affiliates.
(2) 10-F-1 - Copy of Amendment One to the Employee Stock Ownership Plan and Trust Agreement of
Sanderson Farms, Inc. and Affiliates.
(3) 10-F-2 - Copy of Amendment Two to the Employee Stock Ownership Plan and Trust Agreement of
Sanderson Farms, Inc. and Affiliates.
(2) 10-G - Copy of General Employee's Profit Sharing-Retirement Trust Agreement of
Sanderson Farms, Inc. and Affiliates.
(6) 10-H - Copy of Sanderson Farms, Inc. Performance Incentive Program effective
January 1, 1991.
10-H-4 - Copy of Sanderson Farms, Inc. Bonus Award Program effective
November 1, 1997.
(6) 10-H-1 - Copy of Sanderson Farms, Inc. Performance Incentive Program for Sanderson Farms, Inc.
(Foods Division) effective November 1, 1990.
(6) 10-H-2 - Copy of Sanderson Farms, Inc. Performance Incentive Program for Sanderson Farms, Inc.
(Foods Division) Retail Entree effective November 1, 1990.
(8) 10-H-3 - Copy of Sanderson Farms, Inc. Bonus Award Program effective November 1, 1993.
(10) 10-I - Copy of Sanderson Farms, Inc. and Affiliates Stock Option Plan.
(5) 10-J - Copy of Memorandum of Agreement dated as of June 13, 1989, between Pike
County, Mississippi and the Registrant.
(6) 10-K - Copy of Wastewater Treatment Agreement between the City of Magnolia,
Mississippi and the Registrant dated August 19, 1991.
(6) 10-L - Copy of Memorandum of Agreement and Purchase Option between Pike County,
Mississippi and the Registrant dated May, 1991.
(7) 10-M - Copy of Lease Agreement between Pike County, Mississippi and the Registrant
dated as of November 1, 1992.
21 - List of subsidiaries of the Registrant.
23 - Consent of Independent Auditors
(2) 28-A - Copy of Certificate of Registration of Trademark "Miss Goldy".
(2) 28-B - Copy of Certificate of Registration of Trademark "Wise Choice".
(2) 28-C - Copy of Certificate of Registration of Trademark "Buttercup Farms".
(2) 28-D - Copy of Certificate of Registration of Trademark "Collinswood".
(2) 28-E - Copy of Certificate of Registration of Trademark "Covington Farms".
(2) 28-F - Copy of Certificate of Registration of Trademark "Smart Cuts".
(4) 28-G - Copy of Certificate of Registration of Trademark "Kettle Classics".
(5) 28-H - Copy of Certificate of Registration of Trademark "Sanderson Farms".
(1) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1989, and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Commission File No. 33-13141) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1987, and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1988, and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1990, and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1991, and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1992, and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1994 and incorporated herein by reference.
(9) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrants' Annual Report on Form 10-K for the
fiscal year ended October 31, 2000 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
- --- ------- -- ---- ----
No reports on From 8-K were filed during the fourth quarter of the Fiscal Year
ended October 31, 1999.
(c) Agreements Available Upon Request by the Commission.
The Registrant is a party to various agreements defining the rights of holders
of long-term debt of the Registrant, but no single agreement authorizes
securities in an amount which exceeds 10% of the total assets of the Company.
Upon request of the Commission, the Registrant will furnish a copy of any such
agreement to the Commission. Accordingly, such agreements are omitted as
exhibits as permitted by Item 601(b)(4)(iii) of Regulation S-K.
QUALIFICATION BY REFERENCE
Information contained in this Annual Report as to the contents of any contract
or other document referred to or evidencing a transaction referred to is
necessarily not complete, and in each document filed as an exhibit to this
Annual Report or incorporated herein by reference, all such information being
qualified in its entirety by such reference.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sanderson Farms, Inc.
We have audited the accompanying consolidated balance sheets of Sanderson Farms,
Inc. and subsidiaries as of October 31, 2001 and 2000 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended October 31, 2001. Our audit also included
the financial statement schedule listed in the index under item 14(a).These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 accessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sanderson Farms,
Inc. and subsidiaries at October 31, 2001 and 2000, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended October 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also in our opinion the related
financial statement schedule when considered in relation to the basic financial
statements as a whole, presents fairly in all material respects the information
set forth therein.
/s/ Ernst & Young LLP
Jackson, Mississippi
December 12, 2001
Sanderson Farms, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Schedule II
[GRAPHIC OMITTED]
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Cost and Other Deductions End of
Classification of Period Expenses Accounts Describe(1) Period
- ---------------------------------------------------------------------------------------------
(In Thousands)
Year ended October 31, 2001
Deducted from accounts receivable:
Allowance for doubtful
accounts
Totals $460 $44 $201 $303
Year ended October 31, 2000
Deducted from accounts receivable:
Allowance for doubtful
accounts
Totals $249 $1,413 $1,202 $460
Year ended October 31, 1999
Deducted from accounts
receivable:
Allowance for doubtful
accounts $249 $124 $124 $249
Totals
(1) Uncollectible accounts written off, net of recoveries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SANDERSON FARMS, INC.
Joe F. Sanderson, Jr.
Chairman of the Board
Date: December 27, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities as of the dates indicated.
/s/ Joe F. Sanderson, Jr. 12/27/01 /s/ John H. Baker, III 12/27/01
Joe F. Sanderson, Jr., John H. Baker, III,
Chairman of the Board, President Director
Chief Executive Officer
/s/ William R. Sanderson 12/27/01 /s/ Charles W. Ritter, Jr. 12/27/01
William R. Sanderson, Director, Charles W. Ritter, Jr.,
Director of Marketing Director
/s/Hugh V. Sanderson 12/27/01 /s/ Rowan H. Taylor 12/27/01
Hugh V. Sanderson, Director, Rowan H. Taylor,
Manager of Customer Relations Director
/s/ Donald W. Zacharias 12/27/01 /s/ Robert Buck Sanderson 12/27/01
Donald W. Zacharias, Robert Buck Sanderson, Director,
Director Corporate Live Production Assistant
/s/ Phil K. Livingston 12/27/01 /s/ Lampkin Butts 12/27/01
Phil K. Livingston, Lampkin Butts, Director,
Director Vice President - Sales
/s/ D. Michael Cockrell 12/27/01 /s/James A. Grimes 12/27/01
D. Michael Cockrell, James A. Grimes, Secretary
Director, Treasurer and Chief and Chief Accounting Officer
Financial Officer
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in Post Effective Amendment
No. 1 to Registration Statement (Form S-8 No. 33-67474)pertaining to the
Sanderson Farms, Inc. and Affiliates Stock Option Plan of our report dated
December 12, 2001 with respect to the consolidated financial statements and
schedule of Sanderson Farms, Inc. included in the Annual Report (Form 10-K)
for the year ended October 31, 2001.
/s/Ernst & Young LLP
Jackson, Mississippi
December 27, 2001