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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended April 27, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-2258
SMITHFIELD FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
999 Waterside Drive
Suite 900
Norfolk, Virginia 23510
(Address of principal executive offices) (Zip Code)
(757) 365-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of Registrant's Common Stock
held by non-affiliates as of July 11, 1997 was approximately $679,269,961. This
figure was calculated by multiplying (i) the $52-1/8 last sales price of
Registrant's Common Stock as reported on The Nasdaq National Market on July 11,
1997 by (ii) the number of shares of Registrant's Common Stock not held by any
officer or director of the Registrant or any person known to the Registrant to
own more than five percent of the outstanding Common Stock of the Registrant.
Such calculation does not constitute an admission or determination that any such
officer, director or holder of more than five percent of the outstanding shares
of Common Stock of the Registrant is in fact an affiliate of the Registrant.
At July 11, 1997, 18,763,681 shares of the Registrant's Common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement to be filed with respect to its Annual
Meeting of Stockholders to be held on August 27, 1997.
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TABLE OF CONTENTS
ITEM
NUMBER PAGE
PART I
1. Business............................................................. 3
General............................................................ 3
Business Strategy.................................................. 3
Revenue by Source...................................................4
Fresh Pork Products ............................................... 5
Processed Meat Products............................................ 5
Raw Materials ..................................................... 5
Customers and Marketing ........................................... 6
Distribution....................................................... 7
Competition ....................................................... 7
Regulation ........................................................ 7
Employees ......................................................... 9
Other .............................................................9
2. Properties ..........................................................10
3. Legal Proceedings .................................................. 11
4. Submission of Matters to a Vote
of Security Holders .................................... 11
4A. Executive Officers of the Company ...................................12
PART II
5. Market for Company's Common Equity
and Related Stockholder Matters ..................................14
6. Selected Financial Data .............................................15
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................16
8. Financial Statements and Supplementary Data .........................19
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...........................19
PART III
10. Directors and Executive Officers of the Company .....................20
11. Executive Compensation ..............................................20
12. Security Ownership of Certain Beneficial Owners
and Management ...................................................20
13. Certain Relationships and Related Transactions ......................20
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...........................................21
SIGNATURES ...............................................................S-1
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ...........F-1
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PART I
ITEM 1. BUSINESS
General
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Smithfield Foods, Inc. (the "Company"), as a holding company, conducts
its pork processing operations through five principal subsidiaries: Gwaltney of
Smithfield, Ltd. ("Gwaltney") and The Smithfield Packing Company, Incorporated
("Smithfield Packing"), both based in Smithfield, Virginia; John Morrell & Co.
("John Morrell"), based in Cincinnati, Ohio; Patrick Cudahy Incorporated
("Patrick Cudahy"), based in Cudahy, Wisconsin; and Lykes Meat Group, Inc.
("Lykes"), based in Plant City, Florida. The Company also conducts hog
production operations through its Brown's of Carolina, Inc. subsidiary
("Brown's") and through Smithfield-Carroll's, a joint hog production arrangement
between the Company and Carroll's Foods of Virginia, Inc., an affiliate of
Carroll's Foods, Inc. of Warsaw, North Carolina. Both Brown's and
Smithfield-Carroll's produce hogs for the Company's pork processing plants in
Bladen County, North Carolina and Smithfield, Virginia. The Company is also a
participant in the Circle Four joint hog production arrangement with Carroll's
Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc., all large North
Carolina hog producers, which conducts hog production operations in Milford,
Utah. In this report, references to "Smithfield Foods" or the "Company" are to
Smithfield Foods, Inc. together with all of its subsidiaries, unless the context
otherwise indicates.
The Company is one of the largest combined pork slaughterers and
further processors in the United States, producing a wide variety of fresh pork
and processed meat products which it markets domestically and to selected
foreign markets, including Japan, Russia, Mexico and other countries.
As consumers have become more health conscious, pork producers and
processors, including the Company, have focused on providing leaner fresh pork
products as well as fat-free, lower-fat and lower-salt processed meats.
Management believes that leaner pork products combined with the industry's
efforts to heighten public awareness of pork as an attractive protein source
have led to increased consumer demand for pork products. The Company has
developed and is marketing a line of extremely lean, premium fresh pork products
under the Smithfield Lean Generation Pork trademark to selected retail chains
and institutional foodservice customers.
Business Strategy
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Since 1975, when current management assumed control, Smithfield Foods
has expanded both its production capacity and its markets through a combination
of strong internal growth and the acquisition of regional and multi-regional
companies with well-recognized brand identities. In fiscal 1982, the Company
acquired Gwaltney, then Smithfield Packing's principal Mid-Atlantic competitor.
This acquisition doubled the Company's sales and slaughter capacity and added
several popular lines of branded products along with a state-of-the-art hot dog
and lunch meats production facility. The proximity of Gwaltney to Smithfield
Packing allowed for synergies and cost savings in manufacturing, purchasing,
engineering and transportation.
This combination set the stage for a series of acquisitions of smaller
regional processors with widely-recognized brands. In fiscal 1985, the Company
acquired Patrick Cudahy, which added a prominent line of dry sausage products to
the Company's existing line of processed meats. In fiscal 1986, the Company
acquired Esskay, Inc., a firm with a broad line of deli products having
substantial brand loyalty in the Baltimore-Washington, D.C. metropolitan area.
In fiscal 1991, the Company acquired the Mash's brand name and a ham processing
plant in Landover, Maryland. In fiscal 1993, the Company acquired the Valleydale
brand name and a bacon processing plant in Salem, Virginia.
- 3 -
In December 1995, the Company acquired John Morrell & Co., a major
Midwestern pork processor with primary markets in the Midwest, Northeast and
Western United States. This acquisition changed the Company's character from a
large multi-regional pork processor to one with national distribution. It also
doubled the Company's sales and slaughter capacity, added several popular lines
of branded processed meat products along with four efficient processing
facilities and more than doubled the Company's international sales. The Company
believes that John Morrell's strength in smoked sausage, hot dogs, lunch meats,
bacon and smoked hams complements the strong smoked meats, hot dog and bacon
business of the Company's Eastern operations. The acquisition of John Morrell
also presented substantial opportunities for cost savings in the areas of
processing, marketing, purchasing and distribution.
In November 1996, the Company acquired the assets and businesses of the
Lykes Meat Group of Lykes Bros. Inc. of Plant City, Florida. The Lykes Meat
Group is a pork processor with primary markets in the South and Southeast. Lykes
produces branded processed meats, including bacon, hot dogs, and breakfast and
dinner sausages, under the Lykes and Sunnyland brands.
In June 1997, the Company acquired the assets and business of Curly's
Foods, Inc., which operates a meat processing plant in Sioux City, Iowa. Curly's
Foods, Inc. produces a variety of further processed meat products for customers,
primarily food service, throughout the United States and internationally.
The Company's business is based around five strategic initiatives: (i)
capitalizing on the Company's new status as a major national pork processor;
(ii) use of the leanest genetics commercially available to enable the Company to
market highly differentiated pork products; (iii) vertical integration into
state-of-the-art hog production through Company-owned hog production operations
and long-term partnerships and alliances with large and efficient hog producers;
(iv) continued growth through selective acquisitions of regional pork processors
and brands; and (v) a heightened emphasis on expansion into international
markets.
As a complement to the Company's hog processing operations, the Company
has vertically integrated into state-of-the-art hog production through Brown's
and Smithfield-Carroll's. In addition, the Company is supplementing the hogs it
obtains from these hog production operations with market-indexed, multi-year
agreements with several of the nation's largest suppliers of high quality hogs,
strategically located in North Carolina, including Carroll's Foods, Inc.,
Maxwell Foods, Inc., Murphy Family Farms, Inc., and Prestage Farms, Inc.
In May 1991, Smithfield-Carroll's acquired from National Pig
Development Company ("NPD"), a British firm, the exclusive United States
franchise rights for genetic lines of specialized breeding stock. The NPD hogs
produced by these superior genetic lines are significantly leaner than almost
any other animals available in commercial volume in the United States.
Management believes that the leanness and increased meat yields of these hogs
will, over time, improve the Company's profitability with respect to both fresh
pork and processed meat products and provide a competitive advantage over other
domestic pork processors. In fiscal 1997, the Company processed 1.6 million NPD
hogs and expects to increase that number substantially in future years.
Revenues by Source
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The Company's sales are in one industry segment, meat processing. The
following table shows for the fiscal periods indicated the percentages of the
Company's revenues derived from fresh pork, processed meats, and other products.
1997 1996 1995 1994 1993
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Fresh Pork................. 59% 59% 51% 48% 41%
Processed Meats............ 37% 37% 45% 49% 55%
Other Products............. 4% 4% 4% 3% 4%
--- ---- ---- ---- ----
100% 100% 100% 100% 100%
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The increase in percentage of revenues derived from fresh pork since
fiscal 1992 resulted principally from an increase in the number of hogs
slaughtered at its Bladen County, North Carolina plant. The meat industry is
generally characterized by narrow margins; however, profit margins on processed
meats are greater than profit margins on fresh pork and on other products.
Fresh Pork Products
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The Company is the largest fresh pork processor in the United States.
The Company slaughters hogs at five of its plants (three in the Southeast and
two in the Midwest), with a current aggregate slaughter capacity of 73,000 per
day. The Company is currently seeking permit authority to increase the slaughter
capacity at its Bladen County plant by an additional 8,000 hogs per day. The
Company owns a fourth plant in the Southeast not currently in operation, which
has the capacity to slaughter an additional 6,500 hogs per day. The Company
currently slaughters approximately 62,000 hogs daily. A substantial portion of
the Company's fresh pork is sold to retail customers as unprocessed, trimmed
cuts such as loins (including roasts and chops), butts, picnics and ribs. The
Company also sells hams, bellies and trimmings to other further processors. The
Company is putting greater emphasis on the sale of value-added, higher margin
fresh pork products, such as boneless loins, hams, butts and picnics. In
addition, the Company provides its own processing operations with raw material
of much higher quality and freshness than that generally available through open
market purchases.
The Company is marketing an extensive product line of NPD fresh pork
cuts (including boneless loins, shoulder cuts, chops, ribs and processed and
cubed pork) under the Smithfield Lean Generation Pork trademark to selected
retail chains and institutional foodservice customers. Smithfield Packing has
also developed a case-ready pork program designed to supply supermarket chains
with pre-packaged, weighed, labeled and priced fresh pork, ready for immediate
sale to the consumer. Management believes that these initiatives, over time,
will result in greater brand identification and higher margins for the Company's
fresh pork products.
Processed Meat Products
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The Company manufactures a wide variety of processed meats, including
smoked and boiled hams, bacon, sausage, hot dogs (pork, beef and chicken), deli
and lunch meats and specialty products such as pepperoni and dry salami. The
Company markets its processed meat products under labels that include, among
others, Smithfield, Smithfield Premium, Gwaltney, Patrick Cudahy and John
Morrell, as well as Dinner Bell, Esskay, Great, Jamestown, Kretschmar, Luter's,
Lykes, Peyton's, Tobin's First Prize and Valleydale. The Company also sells a
substantial quantity of processed meats as private label products. The Company
believes it is one of the largest producers of smoked hams and picnics in the
United States.
In response to growing consumer preference for more nutritious and
healthy meats, the Company has for several years emphasized production of more
closely-trimmed, leaner and lower-salt processed meats, such as 40
percent-lower-fat bacon. The Company markets a lower-fat line of value-priced
lunch meats, smoked sausage and hot dogs, as well as fat-free hot dogs and
fat-free deli hams.
Raw Materials
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The Company's primary raw material is live hogs. Historically, hog
prices have been subject to substantial fluctuations. In addition, hog prices
tend to rise seasonally as hog supplies decrease during the hot summer months
and tend to decline as supplies increase during the fall. This is due to lower
farrowing performance during the winter months and slower animal growth rates
during the hot summer months. Hog supplies, and consequently prices, are also
affected by factors such as corn and soybean prices, weather and interest rates.
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The Company produces its own hogs through Brown's and
Smithfield-Carroll's and purchases hogs from several of the nation's largest hog
producers strategically located in North Carolina, such as Carroll's Foods,
Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc. as
well as from other independent hog producers and dealers located in the East,
Southeast and Midwest. The Company obtained 10.1% of the hogs it processed in
fiscal 1997 from Brown's and Smithfield-Carroll's. The Company's raw material
costs fall when hog production at Brown's and Smithfield-Carroll's is profitable
and conversely rise when such production is unprofitable. The profitability of
hog production is directly related to the market price of live hogs and the cost
of corn. Hog producers such as Brown's and Smithfield-Carroll's generate higher
profits when hog prices are high and corn prices are low, and lower profits (or
losses) when hog prices are low and corn prices are high. Management believes
that hog production at Brown's and Smithfield-Carroll's furthers the Company's
strategic initiative of vertical integration and reduces the Company's exposure
to fluctuations in profitability historically experienced by the pork processing
industry. The Company has also established multi-year agreements with Carroll's
Foods, Maxwell Foods, Murphy Family Farms and Prestage Farms which provide the
Company with a stable supply of high-quality hogs at market-indexed prices.
These producers supplied 51.6% of the hogs processed by the Company in fiscal
1997.
The Company purchases its hogs on a daily basis at its Southeastern and
Midwestern slaughter plants; at Company-owned buying stations in three
Southeastern and five Midwestern states; from certain Canadian sources; and
through certain exclusive dealer-operated buying stations in the Midwest. The
Company also purchases fresh pork from other meat processors to supplement its
processing requirements, and raw beef, poultry and other meat products to add to
its sausage, hot dogs and lunch meats. Such meat products and other materials
and supplies, including seasonings, smoking and curing agents, sausage casings
and packaging materials are readily available from numerous sources at
competitive prices.
Customers and Marketing
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The Company has dominant market shares in the Mid-Atlantic and
Southeast and strong market positions in the Northeast, South, Midwest,
Southwest and Western United States. The Company's fundamental marketing
strategy is to sell large quantities of value-priced processed meat products as
well as fresh pork to national and regional supermarket chains, wholesale
distributors and the foodservice industry (fast food, restaurant and hotel
chains, hospitals and other institutional customers) and export markets.
Management believes that this marketing approach reaches the largest number of
value-conscious consumers without requiring large advertising and promotional
campaigns. The Company uses both in-house salesmen as well as independent
commission brokers to sell its products. In fiscal 1997, the Company sold its
products to more than 3,500 customers, none of whom accounted for as much as 10%
of the Company's revenues. The Company has no significant or seasonally variable
backlog because most customers prefer to order products shortly before shipment,
and therefore, do not enter into formal long-term contracts. Management believes
that its registered trademarks have been important to the success of its branded
processed meat products.
The Company in recent years has placed major emphasis on growing and
expanding its international sales. In fiscal 1997, international sales comprised
approximately 6% of the Company's total dollar sales. The Company provides the
Japanese market with a line of unique branded, as well as other chilled and
frozen unbranded, fresh pork products. In connection with export sales to Japan,
the Company maintains a distributorship arrangement with Sumitomo Corporation of
America. The Company also had export sales to Russia, Mexico and to more than
two dozen other foreign countries in fiscal 1997. The Company expects continued
growth in its international sales for the foreseeable future. The Company is
targeting Europe and attractive Pacific Rim markets such as Korea and China for
international sales expansion. International sales are subject to factors beyond
the Company's control, such as tariffs, exchange rate fluctuations and changes
in governmental policies. The Company conducts all of its export sales in U.S.
dollars and therefore bears no currency translation risk.
The Company's processed meats business is somewhat seasonal in that,
traditionally, the heavier periods of sales for hams are the holiday seasons
such as Thanksgiving, Christmas and Easter, and the heavier periods of sales of
smoked sausage, hot dogs and lunch meats are the summer months. The Company
typically builds substantial inventories of hams in anticipation of its seasonal
holiday business.
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The Company uses recognized price risk management and hedging
techniques to enhance sales and to reduce the effect of adverse price changes on
the Company's profitability. The Company's price risk management and hedging
activities currently are utilized in the areas of forward sales, hog production
margin management, procurement of raw materials (ham and bacon) for seasonal
demand peaks, inventory hedging, hog contracting and truck fleet fuel purchases.
Distribution
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The Company uses a private fleet of leased tractors and trailers, as
well as independent common carriers, to distribute both fresh pork and processed
meats to its customers, as well as to move raw material between plants for
further processing. The Company coordinates deliveries and uses backhauling to
reduce overall transportation costs. The Company distributes its products
directly from certain of its plants and from leased distribution centers located
in Connecticut, Indiana, Missouri, Kansas, Texas and California. During fiscal
1998, the Company expects to complete a distribution center adjacent to its
plant in Sioux Falls, South Dakota.
Competition
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The protein industry generally, and the pork processing industry in
particular, are highly competitive. The Company's products compete with a large
number of other protein sources, including beef, chicken, turkey and seafood,
but the Company's principal competition comes from other pork processors.
Management believes that the principal competitive factors in the pork
processing industry are price, quality, product distribution and brand loyalty.
Some of the Company's competitors are larger, have correspondingly greater
financial and other resources and enjoy wider recognition for their branded
products. Some of these competitors are also more diverse than the Company. To
the extent that their other operations generate profits, such companies may be
able to subsidize their pork processing operations for a time.
Regulation
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REGULATION GENERALLY. Like other participants in the meat processing
industry, the Company is subject to various laws and regulations administered by
federal, state and other government entities, including the Environmental
Protection Agency ("EPA") and corresponding state agencies such as the Virginia
State Water Control Board ("VSWCB"), the Virginia Department of Environmental
Quality ("VDEQ"), the North Carolina Division of Environmental Management, the
Iowa Department of Natural Resources, the South Dakota Department of Environment
and Natural Resources, the United States Department of Agriculture and the
Occupational Safety and Health Administration. Management believes that the
Company complies with all such laws and regulations in all material respects,
except as set forth immediately below, and that continued compliance with these
standards will not have a material adverse effect on the Company's financial
position or results of operations.
PERMIT VIOLATIONS AT SMITHFIELD PACKING AND GWALTNEY PLANTS;
ADMINISTRATIVE CONSENT ORDERS; CONNECTION TO HRSD SYSTEM. The wastewater
discharge permit for Smithfield Packing's and Gwaltney's plants in Smithfield,
Virginia, which was last reissued in 1992, imposed more stringent effluent
limitations on phosphorus and two species of nitrogen (ammonia and total
Keldjahl nitrogen) than the wastewater treatment facilities at those plants were
designed to meet or can meet. To achieve compliance, the Company agreed in 1991
to discontinue its wastewater discharges into the Pagan River and connect its
wastewater treatment facilities to the regional sewage collection and treatment
system operated by the Hampton Roads Sanitation District ("HRSD"), when
available. This agreement was embodied in a consent order issued by the VSWCB in
1991 (the "1991 Order"). The entry of the 1991 Order followed several years of
extensive negotiations and litigation, including an application for a variance
from the phosphorus limitations, and preceded the reissuance of the wastewater
discharge permit in 1992. The 1991 Order excused the Company from compliance
with the permit's phosphorus effluent limitations and allowed the Company to
operate under less stringent
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limitations on total Keldjahl nitrogen than the permit would otherwise require,
pending connection of the two wastewater treatment facilities to the HRSD
system. Another VSWCB consent order (the "1994 Order") excused the Company from
compliance with certain other permit terms pending connection to the HRSD
system.
The Company connected its Gwaltney wastewater treatment facilities to
the HRSD system in June 1996 and is connecting its Smithfield Packing facilities
to that system in July 1997. The HRSD system was not available for the Company's
use prior to these dates. The Company has made more than $2.7 million in capital
expenditures to upgrade its existing wastewater treatment facilities (and must
continue to operate these facilities) to produce a wastewater that is suitable
for treatment by the HRSD system. In addition to these continuing operational
costs, the Company expects to pay HRSD sewer use charges in excess of $1.5
million per year. The Company will account for these wastewater treatment costs
as current period charges in the years in which such costs are incurred.
Prior to connecting to the HRSD system, the Smithfield Packing and
Gwaltney plants were operated under the 1991 Order and the 1994 Order. During a
period from May 1994 to January 1995, the two plants had a number of violations
of the permit and the consent orders. Although the Company corrected the
conditions that caused these violations, the Company continued to experience
intermittent exceedances and permit compliance problems at its Gwaltney and
Smithfield Packing plants prior to connecting to the HRSD system.
RECORD-KEEPING VIOLATIONS BY FORMER EMPLOYEE. The Company regularly
conducts tests of its wastewater discharges to assure compliance with the
provisions of its wastewater discharge permits. Federal and state laws require
that records of tests be maintained for three years. Failure to maintain these
records may result in the imposition of civil penalties and criminal sanctions
may be imposed in the event of false reporting or destruction of records. In the
course of a VSWCB inspection of its Smithfield Packing and Gwaltney plants in
July 1994, it was discovered that records of certain tests conducted by the
Company from 1991 through early 1994 could not be located. The employee
responsible for the supervision of the tests and maintenance of the test records
was replaced. The U.S. Department of Justice ("DOJ"), EPA and the Federal Bureau
of Investigation undertook an investigation of possible criminal charges of
false reporting and destruction of records. The Company cooperated fully with
this federal investigation. On October 22, 1996, the former employee entered a
guilty plea and was convicted in the United States District Court for the
Eastern District of Virginia on 23 violations of the federal Clean Water Act,
including making false reports. Eight of these violations related to his duties
as the Company's employee at its Smithfield Packing and Gwaltney plants, while
15 violations were committed in connection with the former employee's outside
consulting business activities for public and private entities unrelated to the
Company. Neither the Company nor any of its other present or former employees
has been charged with any criminal violation arising from this investigation.
SUIT BY THE COMMONWEALTH OF VIRGINIA. On August 30, 1996, VDEQ filed a
civil suit against the Company in the Circuit Court of the County of Isle of
Wight, Virginia, concerning permit exceedances at the Company's Smithfield
Packing and Gwaltney plant. This suit, which was filed under the Virginia State
Water Control Law, concerns all permit violations, including record-keeping
violations, from 1986 to date that were not excused by the 1991 Order and the
1994 Order, as well as several violations of effluent limitations that were
prescribed by such orders. Each violation is subject to a maximum penalty of
$25,000. In March 1997, the Virginia Attorney General filed a bill of
particulars specifying approximately 23,000 alleged violations, the vast
majority of which concern the requirement to conduct certain tests of chlorine
levels at each plant on each hour of each day. The case was initially brought to
trial in state court on July 7, 1997. At the initial trial, VDEQ contended that
the Company received an economic benefit of $4 million, and that the Company
should pay civil penalties in that amount plus $2 million for the violations. On
July 9, 1997, VDEQ withdrew its suit against the Company, but stated its
intention to refile the suit at a later time. On July 16, 1997, VDEQ refiled the
suit in Isle of Wight County Circuit Court. The Company intends to defend this
second suit vigorously, and expects to prove that essentially no economic
benefit accrued to the Company and no environmental damage occurred as a result
of the violations.
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EPA SUIT. On December 16, 1996, DOJ, on behalf of EPA, filed a civil
suit against the Company, Gwaltney and Smithfield Packing under the federal
Clean Water Act in the United States District Court for the Eastern District of
Virginia in Norfolk, Virginia. This action seeks to recover civil penalties
against the Company for approximately 5,500 alleged violations of the federal
Clean Water Act at the Company's Smithfield Packing and Gwaltney plants in
Smithfield, Virginia. Each violation is subject to a civil penalty not to exceed
$25,000. The vast majority of the alleged violations concern permit exceedances
during the last five years that were expressly excused by the 1991 Order and the
1994 Order. The remaining alleged violations duplicate VDEQ's allegations. The
Commonwealth of Virginia, acting through the VSWCB, which has primary
enforcement responsibility in the Clean Water Act's cooperative federal-State
permitting scheme, advised federal authorities of the 1991 Order and the 1994
Order when issued. Notwithstanding this, in its suit, EPA asserted that the
State-issued administrative consent orders do not bar a federal action seeking
relief for permit violations.
In an opinion dated May 30, 1997, the District Court granted EPA's
motion for summary judgment in part on liability issues, holding that the 1991
Order and the 1994 Order did not excuse the alleged permit violations and that
the federal action was not otherwise precluded or barred by estoppel. In the
initial suit by the Commonwealth of Virginia discussed above, however, the
Circuit Court of the County of Isle of Wight, Virginia, based upon a cross claim
filed by the Company, issued a judicial decree reforming the Company's permit
and setting the compliance deadlines consistent with the Company's connection
deadlines to the HRSD system. The EPA suit has been set for trial on July 21,
1997, on the liability issues and on the issue of appropriate civil penalties.
In determining the civil penalties to be assessed, the federal Clean Water Act
requires that the District Court consider the seriousness of the violations, the
economic benefit (if any) resulting from the violations, any history of such
violations, any good-faith efforts to comply with the applicable requirements,
the economic impact of the penalties on the Company, and such other matters as
justice may require. The Company intends to defend the suit vigorously.
EPA is expected to contend at trial that the Company should have spent
approximately $10 million in 1990 to comply with the phosphorus permit
limitation in addition to connecting its facilities to the HRSD system when
available. EPA is expected to seek civil penalties which include this claimed
economic benefit plus an additional gravity-based amount for the permit
violations. The Company expects to prove that no economic benefit accrued to the
Company and that no environmental damage occurred as a result of the violations.
The Company will also show that it has acted in good faith and has complied with
the VSWCB's consent order requirements, at great expense, to connect to the HRSD
system and discontinue its discharges into the Pagan River.
Based on its knowledge, as summarized above, of the facts and
circumstances surrounding the alleged violations in these suits, the Company
believes that the ultimate resolution of the suits will not have a material
adverse effect on the Company's financial position or annual results of
operations.
Employees
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The Company has approximately 17,500 employees, approximately 9,600 of
whom are covered by collective bargaining agreements expiring between July 29,
1997, and February 5, 2002. The Company believes that its relationship with its
employees is good.
Other
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With the exception of the franchise agreement between
Smithfield-Carroll's and NPD described above, the Company has no patents,
licenses, franchises or concessions which it considers material to its business.
The Company owns and uses numerous marks, which are registered
trademarks of the Company or are otherwise subject to protection under
applicable intellectual property laws. Such registrations may be kept in force
in perpetuity through continued use of the marks and timely renewal. The Company
considers these marks and the accompanying goodwill and customer recognition
valuable and material to its business.
- 9 -
ITEM 2. PROPERTIES
The following table summarizes information concerning the principal
plants and other materially important physical properties of the Company:
APPROXIMATE
LAND AREA FLOOR SPACE
LOCATION OPERATION (ACRES) (SQ. FT.)
- -------------------------------------------------------------------------------------------------------------------------
Smithfield Packing Plant No. 1* Slaughtering and cutting hogs; 25.5 457,000
501 North Church Street manufacture of bacon products,
Smithfield, Virginia smoked meats, and dry salt meats;
production of hams and picnics
Smithfield Packing Plant No. 2 Production of bone-in and boneless 20.0 218,000
2501 West Vernon Avenue cooked and smoked ham and other
Kinston, North Carolina smoked meat products
Smithfield Packing Plant No. 3 Production of bone-in smoked ham 7.8 136,000
5801 Columbia Park Drive and other smoked meat products
Landover, Maryland
Smithfield Packing Plant No. 4* Slaughtering and cutting hogs; 860.0 966,000
Carolina Food Processors production of boneless hams and loins
Division (Bladen County)
Route #87
Tarheel, North Carolina
Gwaltney Plant No. 1* Slaughtering and cutting hogs; 56.4 556,000
601 North Church Street production of boneless loins, bacon,
Smithfield, Virginia sausage, bone-in and boneless cooked
and smoked hams and picnics
Gwaltney Plant No. 2 Production of hot dogs, lunch meats 13.1 200,000
3515 Airline Boulevard and sausage products
Portsmouth, Virginia
Gwaltney Plant No. 3 Manufacture of bacon, smoked 11.0 152,000
1013 Iowa Street sausage and boneless cooked hams
Salem, Virginia
John Morrell Plant No. 1* Slaughtering and cutting hogs and 88.0 2,350,000
1400 N. Weber Avenue lambs; production of boneless loins,
Sioux Falls, South Dakota bacon, bot dogs, lunch meats, smoked
and canned hams, and packaged lard
John Morrell Plant No. 2 Slaughtering and cutting hogs; 22.0 243,000
1200 Bluff Road production of boneless hams, loins,
Sioux City, Iowa butts and picnics
John Morrell Plant No. 3 Production of hot dogs, lunch meats, 21.0 177,000
801 East Kemper Road smoked sausage and smoked hams
Springdale, Ohio
- 10 -
APPROXIMATE
LAND AREA FLOOR SPACE
LOCATION OPERATION (ACRES) (SQ. FT.)
- -------------------------------------------------------------------------------------------------------------------------
John Morrell Plant No. 4 Production of bacon and smoked hams 60.0 150,000
South 281 Highway
Great Bend, Kansas
Lykes Meat Group Plant No. 1 Production of hot dogs, lunch meats 55.0 206,763
4811 Lykes Road and sausage products
Plant City, Florida
Lykes Meat Group Plant No. 2 Production of hot dogs, lunch meats, 78.0 312,466
603 Cassidy Road cured meats, bacon, boneless cooked
Thomasville, Georgia and smoked ham and other smoked
bone-in meat products
Patrick Cudahy Plant Manufacture of bacon, dry sausage, 60.0 1,090,000
3500 E. Barnard Avenue boneless cooked hams and refinery
Cudahy, Wisconsin products
- ------------------------
* Pledged as collateral under various loan agreements.
The Company, through John Morrell, leases John Morrell Plant No. 3
under the terms of a 20-year lease expiring in September 2000. The lease
includes an option to purchase the property, which John Morrell exercised in
January 1997. Completion of the purchase is expected to occur prior to October
1997.
The Company, through Brown's, owns and leases hog production facilities
in North Carolina and South Carolina, and through Smithfield-Carroll's, owns hog
production facilities in North Carolina and Virginia.
The Company operates hog buying stations in North Carolina, South
Carolina and Virginia which have facilities for purchasing and loading hogs for
shipment to the Company's plants in Smithfield, Virginia and Bladen County,
North Carolina, and hog buying stations in Iowa, Kansas, Minnesota, Nebraska and
South Dakota, which have facilities for purchasing and loading hogs for shipment
to the Company's plants in Sioux City, Iowa and Sioux Falls, South Dakota.
ITEM 3. LEGAL PROCEEDINGS
Smithfield Foods and its subsidiaries and affiliates are parties in
various lawsuits arising in the ordinary course of business, excluding certain
matters discussed under "Business -- Regulation" above. In the opinion of
management, any ultimate liability with respect to these matters will not have a
material adverse effect on the Company's financial position or results of
operations. For a discussion of certain other regulatory and environmental
matters, see "Item 1. Business -- Regulation" above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
- 11 -
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name and age, position with the
Company and business experience during the past five years of each of the
executive officers of the Company. The Board of Directors elects executive
officers to hold office until the next annual meeting of the Board or Directors
or until their successors are elected, or until their resignation or removal.
POSITION BUSINESS EXPERIENCE
NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------------
Joseph W. Luter, III (58) Chairman of the Board and Mr. Luter has served as Chairman
Chief Executive Officer of the of the Board and Chief Executive
Company Officer since 1975. Prior to May
1995, he also served as President
of the Company.
Lewis R. Little (53) President and Chief Operating Mr. Little was elected President
Officer of the Company and and Chief Operating Officer of the
Smithfield Packing Company and Smithfield Packing
in November 1996. From May
1993 until November 1996, he was
President and Chief Operating
Officer of Gwaltney. Prior to May
1993, Mr. Little served as
Executive Vice President of
Gwaltney.
Timothy A. Seely (47) President and Chief Operating Mr. Seely was elected President
Officer of Gwaltney and Chief Operating Officer of
Gwaltney in November 1996. Prior
to that time, he was Vice
President, Sales and Marketing\
Fresh Meats, of Gwaltney.
Roger R. Kapella (55) President and Chief Operating Mr. Kapella has served as
Officer of Patrick Cudahy President and Chief Operating
Officer of Patrick Cudahy
since 1986.
Joseph B. Sebring (50) President and Chief Operating Mr. Sebring has served as
Officer of John Morrell President and Chief Operating
Officer of John Morrell since May
1994. Between 1992 and May
1994, he served as President and
Chief Executive Officer of Indiana
Packers Company. Prior to 1992,
Mr. Sebring was Executive Vice
President of Fresh Mark, Inc.
- 12 -
POSITION BUSINESS EXPERIENCE
NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------------------
Larry P. Swafford (50) President and Chief Operating Mr. Swafford has served as
Officer of Lykes President and Chief Operating
Officer of Lykes since
November 1996. Between February
1996 and November 1996, he was
Vice President, Sales and
Marketing, of the Company.
Between February 1995 and
February 1996, he was President
of the Wilson Foods Division
of Foodbrands America, Inc.
Prior to February 1995,
Mr. Swafford served as Vice
President of Sales and Marketing
for the Bryan Foods Division
of Sara Lee Corp.
C. Larry Pope (42) Vice President and Controller Mr. Pope joined the Company as
of the Company Controller in 1980. He was
elected Vice President and
Controller in August 1995.
Aaron D. Trub (62) Vice President, Secretary and Mr. Trub has served as Vice
Treasurer of the Company President, Secretary and Treasurer
of the Company since 1978.
- 13 -
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
- ------------------
The Common Stock of the Company is traded in the national
over-the-counter market and is authorized for quotation on The Nasdaq National
Market under the symbol "SFDS."
The following table sets forth, for the fiscal periods indicated, the
highest and lowest sales prices of the Common Stock on The Nasdaq National
Market.
Range of Sales Prices
------------------------------
High Low
------------------------------
Fiscal year ended April 28, 1996
First quarter ....................... 24.25 19.50
Second quarter ...................... 27.00 19.75
Third quarter ....................... 32.75 24.75
Fourth quarter ...................... 31.06 25.25
Fiscal year ended April 27, 1997
First quarter ....................... 30.00 22.62
Second quarter ...................... 32.50 23.25
Third quarter ....................... 38.62 28.50
Fourth quarter ...................... 49.50 32.37
Holders
- -------
As of July 11, 1997, there were 1,160 record holders of the Common
Stock.
Dividends
- ---------
The Company has never paid a cash dividend on its Common Stock and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. In addition, the terms of certain of the Company's debt agreements
prohibit the payment of cash dividends on the Common Stock. The payment of cash
dividends, if any, will be made only from assets legally available for that
purpose, and will depend on the Company's financial condition, results of
operations, current and anticipated capital requirements, restrictions under
then existing debt instruments and other factors deemed relevant by the board of
directors.
- 14 -
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the fiscal
years indicated were derived from the Company's audited consolidated financial
statements. The information should be read in conjunction with the Company's
consolidated financial statements (including the notes thereto) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in, or incorporated by reference into, this
report.
FISCAL YEAR ENDED
--------------------------------------------------------------------------
April 27, April 28, April 30, May 1, May 2,
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
(In thousands, except per share data)
INCOME STATEMENT DATA:
Sales........................................ $3,870,611 $2,383,893 $1,526,518 $1,403,485 $1,113,712
Cost of sales ............................... 3,549,673 2,203,626 1,380,586 1,287,880 1,037,628
--------------------------------------------------------------------------
Gross profit ................................ 320,938 180,267 145,932 115,605 76,084
Selling, general and administrative
expenses .................................. 191,225 103,095 61,723 50,738 42,924
Depreciation expense......................... 35,825 25,979 19,717 21,327 18,418
Interest expense............................. 26,211 20,942 14,054 11,605 6,183
Plant closing costs.......................... - - - - 3,598
--------------------------------------------------------------------------
Income from continuing operations before
income taxes and change in accounting
for income taxes.......................... 67,677 30,251 50,438 31,935 4,961
Income taxes................................. 22,740 10,465 18,523 12,616 1,690
--------------------------------------------------------------------------
Income from continuing operations
before change in accounting for
income taxes.............................. 44,937 19,786 31,915 19,319 3,271
Income (loss) from discontinued operations... - (3,900) (4,075) 383 (420)
Cumulative effect of change in accounting
for income taxes.......................... - - - - 1,138
--------------------------------------------------------------------------
Net income................................ $ 44,937 $ 15,886 $ 27,840 $ 19,702 $ 3,989
==========================================================================
NET INCOME (LOSS) PER SHARE:
Continuing operations before cumulative
effect of change in accounting for
income taxes.............................. $ 2.34 $ 1.06 $ 1.83 $ 1.11 $ .18
Discontinued operations...................... - (.22) (.24) .02 (.03)
Cumulative effect of change in
accounting for income taxes............... - - - - .07
--------------------------------------------------------------------------
Net income................................... $ 2.34 $ .84 $ .1.59 $ 1.13 $ .22
==========================================================================
Weighted average shares outstanding......... 18,685 17,530 17,059 16,768 16,372
BALANCE SHEET DATA:
Working capital.............................. $ 158,601 $ 88,026 $ 60,911 $ 81,529 $ 64,671
Total assets................................. 995,254 857,619 550,225 452,279 399,567
Long term debt and capital lease
obligations............................... 288,486 188,618 155,047 118,942 124,517
Stockholders' equity......................... 307,486 242,516 184,015 154,950 135,770
OPERATING DATA:
Fresh pork sales (pounds).................... 2,280,729 1,635,300 955,290 820,203 588,284
Processed meats sales (pounds)............... 1,444,052 839,341 774,615 661,783 631,521
Total hogs purchased......................... 16,869 12,211 8,678 7,414 5,767
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis set forth below should be read in
conjunction with the Company's consolidated financial statements (including the
notes thereto) appearing elsewhere in this Form 10-K.
Operations
- ----------
In December 1995, the Company acquired all of the capital stock of John
Morrell & Co. ("John Morrell"). The Company's fiscal 1997 operating results
include those of John Morrell for the full fiscal year compared to an 18-week
period in fiscal 1996. In November 1996, the Company acquired the assets and
business of the Lykes Meat Group, Inc. ("Lykes") from Lykes Bros. Inc. The
fiscal 1997 operating results include those of Lykes for the 25-week period from
its date of acquisition. Accordingly, the substantial increases in sales, cost
of sales, gross profit, selling, general and administrative expenses,
depreciation expense and interest expense in fiscal 1997 reflect the impact of
these acquisitions.
Fiscal 1997 Compared to Fiscal 1996
- -----------------------------------
Sales in fiscal 1997 increased $1.49 billion, or 62.4%, from fiscal
1996. This increase was due to the inclusion of the sales of John Morrell and
Lykes, significant increases in unit sales prices of both fresh pork and
processed meats and increased sales of fresh pork related to an increase in the
number of hogs slaughtered at the Company's Bladen County, North Carolina plant.
The increase in unit sales prices reflected the pass-through of higher raw
material costs due to an 18.8% increase in live hog costs. The increase in sales
reflected a 41.9% increase in fresh pork tonnage and a 45.2% increase in
processed meats tonnage, primarily related to the John Morrell and Lykes
acquisitions.
Cost of sales increased $1.35 billion, or 61.1%, in fiscal 1997,
reflecting the increased sales tonnage and increased live hog costs. Gross
profit increased $140.7 million, or 78.0%, in fiscal 1997 compared to fiscal
1996, reflecting the inclusion of the operations of John Morrell and Lykes and
increased overall margins at the Company's other operating subsidiaries. The
increase in gross profit reflected significantly improved margins on sales of
processed meats (37.3% of dollar sales) which were somewhat offset by lower
margins on sales of fresh pork (58.9% of dollar sales). Fresh pork margins were
adversely impacted by high hog costs due to a shortage of live hogs, excess
industry slaughter capacity and strong competition at the retail level from
comparatively lower-priced beef and chicken. This trend has persisted for the
past two fiscal years and is continuing in the first quarter of fiscal 1998.
Gross profit was also favorably affected by a $20.7 million reduction in cost of
sales reflecting the profitability of the Company's hog production group in
fiscal 1997 compared to a $10.8 million reduction in cost of sales in fiscal
1996. The Company's hog production group consists of Brown's of Carolina, Inc.,
an 86%-owned subsidiary of the Company ("Brown's"); a 50%-interest in the
Smithfield-Carroll's joint hog production arrangement ("Smithfield-Carroll's"),
and a 33%-interest in the Circle Four joint hog production arrangement ("Circle
Four"). During fiscal 1997, the Company obtained 10.1% of the hogs it processed
from Brown's and Smithfield-Carroll's. The hogs produced by Circle Four are sold
to an unrelated party.
The Company uses recognized price-risk management and hedging
techniques to enhance sales and to reduce the effect of adverse price changes on
the Company's profitability. The Company's price-risk management and hedging
activities currently are utilized in the areas of forward sales, hog production
margin management, procurement of raw materials (hams and bacon) for seasonal
demand peaks and inventory hedging. The Company recognizes gains and losses
resulting from hedging transactions when the related sales are made and the
hedges are lifted. As of April 27, 1997, the Company had deferred $2.2 million
of unrealized hedging gains on outstanding futures contracts pending delivery of
hogs in the future and lifting of the related hedges, and the completion of open
sales transactions and lifting of the related hedges.
- 16 -
Selling, general and administrative expenses increased $88.1 million,
or 85.5%, in fiscal 1997. This increase was primarily due to the inclusion of
the operations of John Morrell and Lykes.
Depreciation expense increased $9.8 million, or 37.9%, in fiscal 1997.
The increase was primarily due to the inclusion of the operations of John
Morrell and Lykes.
Interest expense increased $5.3 million, or 25.2%, in fiscal 1997,
reflecting borrowings to finance the acquisition of Lykes, increased carrying
costs on higher levels of inventories and accounts receivable related to higher
live hog costs, and the higher cost of long-term debt placed during the fiscal
year.
The effective income tax rate in fiscal 1997 decreased to 33.6% from
34.6% in fiscal 1996, reflecting a lower tax rate on increased foreign sales and
a reduction in the effective rate of state income taxes. The Company had no
valuation allowance related to income tax assets as of April 27, 1997, and there
was no change in the valuation allowance during fiscal 1997.
Income from continuing operations increased $37.4 million in fiscal
1997, reflecting the operating results of John Morrell for the full fiscal year,
significantly improved margins on processed meats and substantially increased
profitability at the Company's hog production group.
Reflecting the factors discussed above, net income increased to $44.9
million in fiscal 1997, up from $15.9 million in the prior fiscal year.
Fiscal 1996 Compared to Fiscal 1995
- -----------------------------------
Sales in fiscal 1996 increased $857.4 million, or 56.2%, from fiscal
1995. The increase was primarily due to the inclusion of the sales of John
Morrell for the 18-week period, an increase in unit sales prices of both fresh
pork and processed meats and increased sales of fresh pork related to increased
slaughter levels at the Bladen County plant. The increase in unit sales prices
reflected the pass-through of higher raw material costs due to a 20.0% increase
in live hog costs. The increase in sales tonnage reflected a 71.2% increase in
fresh pork tonnage and an 8.4% increase in processed meats tonnage.
Cost of sales increased $823.0 million, or 59.6%, in fiscal 1996,
reflecting the increased sales tonnage, increased live hog costs and higher
warehousing and distribution costs associated with the increase in sales
tonnage. Gross profit increased $34.3 million, or 23.5%, in fiscal 1996 compared
to fiscal 1995. The increase in gross profit resulted from the increased sales
tonnage of both fresh pork (58.8% of dollar sales) and processed meats (36.7% of
dollar sales), offset by lower sales margins on both fresh pork and processed
meats. In addition, gross profit was favorably affected by a $10.8 million
reduction in cost of sales reflecting the profitability of the Company's hog
production group. In fiscal 1995, gross profit was adversely affected by a $0.2
million increase in cost of sales as a result of a loss at the group. During
fiscal 1996, the Company obtained 11.3% of the hogs it processed from Brown's
and Smithfield-Carroll's. As of April 28, 1996, the Company had deferred $2.2
million of unrealized hedging gains on outstanding futures contracts pending the
completion of open sales transactions and lifting of the related hedges.
Selling, general and administrative expenses increased $41.4 million,
or 67.0%, in fiscal 1996. The increase was primarily due to the inclusion of the
operations of John Morrell and higher selling and marketing costs associated
with the increase in fresh pork tonnage.
Depreciation expense increased $6.3 million, or 31.8%, in fiscal 1996.
The increase was related to continued expansion at the Bladen County plant,
additional hog production facilities at Brown's and the inclusion of the
operations of John Morrell.
Interest expense increased $6.9 million, or 49.0%, in fiscal 1996,
reflecting increased carrying costs on long-term debt related to the funding of
capital projects at the Bladen County plant and Brown's, higher short- and
- 17 -
long-term interest rates and interest costs associated with the cash portion of
the purchase price related to the acquisition of John Morrell.
The effective income tax rate in fiscal 1996 decreased to 34.6% from
36.7% in fiscal 1995, reflecting a lower tax rate on foreign sales and benefits
related to certain insurance contracts. The Company had no valuation allowance
related to income tax assets as of April 28, 1996, and there was no change in
the valuation allowance during fiscal 1996.
Income from continuing operations decreased $12.1 million in fiscal
1996, reflecting lower sales margins on both fresh pork and processed meats
compared to fiscal 1995. The prior year's results reflected exceptionally strong
margins on fresh pork due to unusually low hog prices. John Morrell made a
significant contribution to the Company's overall profitability in fiscal 1996.
In fiscal 1996, the Company completed the disposition of the assets and
business of Ed Kelly, Inc., resulting in a loss from discontinued operations of
$3.9 million.
Reflecting the factors discussed above, net income decreased to
$15.9 million in fiscal 1996 from $27.8 million in fiscal 1995.
Financial Condition
- -------------------
The pork processing industry is characterized by high sales tonnage and
rapid turnover of inventories and accounts receivable. Because of the rapid
turnover rate, the Company considers its inventories and accounts receivable
highly liquid and readily convertible into cash. Borrowings under the Company's
lines of credit are used to finance increases in the levels of inventories and
accounts receivable resulting from seasonal and other market-related
fluctuations in raw material costs. The demand for seasonal borrowings usually
peaks in early November when ham inventories are at their highest levels and
borrowings are repaid in January when accounts receivable generated by sales of
the hams are collected.
As of April 27, 1997, the Company had credit facilities totaling $300
million, consisting of a 364-day $225 million revolving credit facility and a
two-year $75 million revolving credit facility. The short-term facility is used
for seasonal inventory and receivable needs, and the long-term facility is used
for working capital and capital expenditures. Borrowings under the facilities
are secured by substantially all of the Company's inventories and accounts
receivable. Weighted average borrowings under the facilities were $165.1 million
in fiscal 1997, $133.4 million in fiscal 1996 and $69.9 million in fiscal 1995,
at weighted average interest rates of approximately 7%, 7% and 6%, respectively.
Maximum borrowings were $215.0 million in fiscal 1997, $179.8 million in fiscal
1996 and $117.0 million in fiscal 1995. The outstanding balances under the
facilities totaled $150.0 million and $151.3 million as of April 27, 1997 and
April 28, 1996, respectively, at a weighted average interest rate of 7% for both
years.
The Company has recently negotiated $350 million of senior secured
revolving credit facilities with a bank group which will replace its existing
$300 million credit facilities. The new facilities will consist of a 5-year $300
million revolving credit facility and a 364-day $50 million revolving credit
facility. This financing is scheduled to close in the first quarter of fiscal
1998.
During fiscal 1997, the Company privately placed $140 million of senior
secured notes with a group of institutional lenders. The placement consisted of
$40 million of seven-year 8.34% notes and $100 million of 10-year 8.52% notes,
secured by four of the Company's major processing plants. The proceeds of the
financing were used to repay $65.2 million of long-term bank debt and reduce
short-term borrowings. In conjunction with the placement of the senior secured
notes, the Company refinanced $59.7 million of existing institutional long-term
debt with the same institutional lenders. The refinancing resulted in revised
maturity dates and repayment schedules for the refinanced debt; however, no
additional proceeds resulted from this refinancing.
- 18 -
In November 1996, the Company acquired substantially all of the assets
and business of Lykes from Lykes Bros. Inc. for $34.8 million in cash, which was
borrowed under the Company's revolving credit facilities, and the assumption of
$10.6 million of current liabilities.
The Company expended $69.1 million in fiscal 1997, primarily for
additional hog production facilities and a feedmill at Brown's and for plant
renovation and expansion projects at certain of its processing plants. The
capital expenditures were financed with internally generated funds and with a
portion of the net proceeds from the placement of the $140 million of notes.
During fiscal 1997, all of the Company's Series C 6.75% preferred
stock was converted into 666,666 shares of the Company's common stock at
$30.00 per share.
In fiscal 1998, the Company plans to increase its processed meats and
value-added fresh pork capacity at several of its processing plants and to
continue to expand its hog production operations. The Company anticipates that
these expansion plans will be financed with internally generated funds.
The Company's various debt agreements contain covenants regarding
working capital, current ratio, fixed charges coverage and net worth, and, among
other restrictions, limit additional borrowings, the acquisition, disposition
and leasing of assets and payment of dividends to stockholders.
The Company and certain subsidiaries are defendants in two civil
actions alleging violations of their wastewater discharge permits; one brought
by the Virginia Department of Environmental Quality and the other by the
Environmental Protection Agency. The Company believes that the ultimate
resolution of these two suits will not have a material adverse effect on its
financial position or annual results of operations. (See Note 12 to Consolidated
Financial Statements for a full discussion of these cases.)
Cautionary Statement Pursuant to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------
This report may contain "forward-looking" information within the
meaning of the federal securities laws. The forward-looking information may
include, among other information, statements concerning the Company's outlook
for fiscal 1998, volume trends, industry conditions and expectations for capital
expenditures. There may also be other statements of exceptions, beliefs, future
plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts. The forward-looking
information and statements in this report are subject to risks and
uncertainties, including availability and prices of raw materials, product
pricing, competitive environment and related market conditions, operating
efficiencies, access to capital and actions of governments, that could cause
actual results to differ materially from those expressed in or implied by the
information or statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed in Item 14(a) hereof are
incorporated herein by reference and are filed as a part of this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 19 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Information required by this Item regarding directors and all
persons nominated or chosen to become directors is incorporated by reference
from the Company's definitive proxy statement to be filed with respect to its
Annual Meeting of Stockholders to be held on August 28, 1997.
(b) Information required by this Item regarding the executive officers
of the Company is included in Part I, Item 4A of this report.
There is no family relationship between any of the persons named in
response to Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Stockholders to be held on August 28, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Stockholders to be held on August 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Stockholders to be held on August 28, 1997.
- 20 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Index to Financial Statements and Financial Statement
Schedule
An "Index to Financial Statements and Financial Statement Schedule" has
been filed as a part of this Form 10-K Annual Report on page F-1 hereof.
3. Exhibits
Exhibit 3.1 -- Composite Certificate of Incorporation of the Company, as
amended to date (incorporated by reference to Exhibit 3.1
to the Company's Form 10-K Annual Report for the fiscal
year ended April 28, 1991).
Exhibit 3.2 -- By-Laws of the Company, as amended to date (incorporated
by reference to Exhibit 3.2 to the Company's Form 10-K
Annual Report for the fiscal year ended April 28, 1996).
Exhibit 4.1 -- Composite Certificate of Incorporation of the Company, as
amended to date (see Exhibit 3.1 above).
Exhibit 4.2 -- Form of Certificate representing the Company's Common
Stock, par value $.50 per share (including Rights legend)
(incorporated by reference to Exhibit 4.2 to the
Company's Form 10-K Annual Report for the fiscal year
ended April 28, 1991).
Exhibit 4.3 -- Form of Certificate representing Rights (incorporated by
reference to Exhibit 4 to the Company's Amendment No. 1
to Registration Statement on Form 8-A dated May 23,
1991).
Exhibit 4.4 -- Rights Agreement dated as of May 8, 1991, as amended by
Amendment No. 1 dated as of January 31, 1994, by and
between the Company and First Union National Bank of
North Carolina, Rights Agent (incorporated by reference
to Exhibit 4.5 to the Company's Form 10- K Annual Report
for the fiscal year ended May 1, 1994).
Exhibit 4.5 -- Five-Year Credit Agreement dated as of July 10, 1997,
among Smithfield Foods, Inc., the Subsidiary Guarantors
party thereto, the Lenders party thereto, and The Chase
Manhattan Bank, as Administrative Agent, relating to a
$300,000,000 secured five-year revolving credit facility.
Exhibit 4.5(a) -- 364-Day Credit Agreement dated as of July 10, 1997, among
Smithfield Foods, Inc., the Subsidiary Guarantors party
thereto, the Lenders party thereto, and The Chase
Manhattan Bank, as Administrative Agent, relating to a
$50,000,000 secured 364-day revolving credit facility.
Exhibit 4.5(b) -- Collateral Agency, Pledge and Security Agreement dated as
of July 10, 1997, among Smithfield Foods, Inc., the
Subsidiary Guarantors party thereto, The Chase Manhattan
Bank, as Collateral Agent, relating to the Company's
five-year revolving credit facility and its 364- day
revolving credit facility.
Exhibit 4.6 -- Note Purchase Agreement dated as of July 15, 1996, among
Smithfield Foods, Inc. and each of the Purchasers listed
on Annex 1 thereto, relating to $140,000,000 in senior
secured notes (incorporated by reference to Exhibit 4.7
to the Company's Form 10-Q Quarterly Report for the
fiscal quarter ended July 28, 1996); and Amendment Number
One to the Note Purchase Agreement dated as of July 15,
1997.
- 21 -
Exhibit 4.6(a) -- Joint and Several Guaranty dated as of July 15,
1996, by Gwaltney of Smithfield, Ltd., John Morrell &
Co., The Smithfield Packing Company, Incorporated, SFFC,
Inc., Patrick Cudahy Incorporated, and Brown's of
Carolina, Inc. (incorporated by reference to Exhibit
4.7(a) to the Company's Form 10-Q Quarterly Report for
the fiscal quarter ended July 28, 1996); and Amendment
Number One to the Note Purchase Agreement dated as of
July 15, 1997 (incorporated by reference to Exhibit 4.6
of this Form 10-K).
Exhibit 4.6(b) -- Joint and Several Guaranty dated as of July 15, 1997, by
Lykes Meat Group, Inc., Sunnyland, Inc., Valleydale
Foods, Inc., Hancock's Old Fashioned Country Hams, Inc.,
Copaz Packing Corporation, and Smithfield Packing -
Landover, Inc.
Exhibit 4.7 -- Master Lease Agreement dated May 14, 1993 between General
Electric Capital Corporation and Brown's of Carolina,
Inc. (incorporated by reference to Exhibit 4.12 to the
Company's Form 10-K Annual Report for the fiscal year
ended May 2, 1993).
Exhibit 4.7(a) -- Corporate Guaranty by Smithfield Foods, Inc. dated May
14, 1993 (incorporated by reference to Exhibit 4.12(a) to
the Company's Form 10-K Annual Report for the fiscal year
ended May 2, 1993).
Exhibit 10.1 -- Subscription Agreement dated September 3, 1992 between
Smithfield Foods, Inc. and Carroll's Foods, Inc.,
covering 1,000,000 shares of Smithfield Foods, Inc.
Common Stock (incorporated by reference to Exhibit 10.1
of the Company's Form 10-K Annual Report for the fiscal
year ended May 2, 1993); and Amendment No. 1 to
Subscription Agreement dated January 31, 1995.
Exhibit 10.2 -- Smithfield Foods, Inc. 1984 Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.1 to the
Company's Form 10-K Annual Report for the fiscal year
ended April 28, 1991).
Exhibit 10.3 -- Smithfield Foods, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the
Company's Form 10-K Annual Report for the fiscal year
ended May 2, 1993).
Exhibit 10.4 -- Smithfield Foods, Inc. Incentive Bonus Plan applicable to
the Company's Chairman of the Board and Chief Executive
Officer (incorporated by reference to Exhibit 10.8 to the
Company's Form 10-K Annual Report for the fiscal year
ended April 30, 1995).
Exhibit 10.5 -- Smithfield Foods, Inc. 1997 Incentive Bonus Plan
applicable to the Company's President and Chief Operating
Officer (incorporated by reference to Exhibit 10.6 to the
Company's Form 10-K Annual Report for the fiscal year
ended April 28, 1996).
Exhibit 10.6 -- Smithfield Foods, Inc. 1998 Incentive Bonus Plan
applicable to the Company's Chief Operating Officer.
Exhibit 11 -- Computation of Net Income Per Common Share.
Exhibit 21 -- Subsidiaries of the Registrant.
Exhibit 23 -- Consent of Independent Public Accountants.
Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K
None.
- 22 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMITHFIELD FOODS, INC.
Date: July 23, 1997 By: /s/ JOSEPH W. LUTER, III
---------------------------
Joseph W. Luter, III
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on July 23, 1997.
SIGNATURE TITLE
--------- -----
Chairman of the Board and Chief Executive
/s/ JOSEPH W. LUTER, III Officer and Director
- -------------------------------------------------------
Joseph W. Luter, III
President and Chief Operating Officer
/s/ LEWIS R. LITTLE and Director
- -------------------------------------------------------
Lewis R. Little
Vice President, Secretary and Treasurer
/s/ AARON D. TRUB and Director
- ------------------------------------------------------- (Principal-Financial-Officer)
Aaron D. Trub
Vice President and Controller
/s/ C. LARRY POPE (Principal Accounting Officer)
- -------------------------------------------------------
C. Larry Pope
/s/ ROBERT L. BURRUS, JR. Director
- -------------------------------------------------------
Robert L. Burrus, Jr.
/s/ F. J. FAISON, JR. Director
- -------------------------------------------------------
F. J. Faison, Jr.
/s/ JOEL W. GREENBERG Director
- -------------------------------------------------------
Joel W. Greenberg
Director
- -------------------------------------------------------
Cecil W. Gwaltney
- S-1 -
/s/ GEORGE E. HAMILTON, JR. Director
- -------------------------------------------------------
George E. Hamilton, Jr.
/s/ RICHARD J. HOLLAND Director
- -------------------------------------------------------
Richard J. Holland
/s/ ROGER R. KAPELLA Director
- -------------------------------------------------------
Roger R. Kapella
/s/ H. GORDON MAXWELL, III Director
- -------------------------------------------------------
H. Gordon Maxwell, III
/s/ WENDELL H. MURPHY Director
- -------------------------------------------------------
Wendell H. Murphy
/s/ WILLIAM H. PRESTAGE Director
- -------------------------------------------------------
William H. Prestage
/s/ JOSEPH B. SEBRING Director
- -------------------------------------------------------
Joseph B. Sebring
- S-2 -
SMITHFIELD FOODS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page(s)
-------
FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................... F-2
Consolidated Statements of Income for the Years Ended April 27, 1997,
April 28, 1996, and April 30, 1995................................................. F-3
Consolidated Balance Sheets at April 27, 1997 and April 28, 1996....................... F-4
Consolidated Statements of Cash Flows for the Years ended April 27,
1997, April 28, 1996, and April 30, 1995 .......................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended
April 27, 1997, April 28, 1996, and April 30, 1995 ................................ F-6
Notes to Consolidated Financial Statements............................................. F-7 to F-21
FINANCIAL STATEMENT SCHEDULE
Independent Public Accountants' Report on Financial Statement Schedule................. F-22
Schedule I - Condensed Financial Information of Registrant ............................ F-23 to F-27
- F-1 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF SMITHFIELD FOODS, INC.:
We have audited the accompanying consolidated balance sheets of Smithfield
Foods, Inc. (a Delaware corporation), and subsidiaries as of April 27, 1997, and
April 28, 1996, and the related consolidated statements of income, cash flows,
and stockholders' equity for each of the three years in the period ended April
27, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smithfield Foods, Inc., and
subsidiaries as of April 27, 1997, and April 28, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
April 27, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Richmond, Virginia
June 6, 1997
F-2
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FISCAL YEARS ENDED
----------------------
APRIL 27, APRIL 28,
1997 1996
--------- ---------
(IN THOUSANDS)
ASSETS
Current assets:
Cash.............................................................................................. $ 25,791 $ 28,529
Accounts receivable less allowances of $1,499 and $1,084.......................................... 166,094 144,956
Inventories....................................................................................... 253,276 210,759
Net advances to joint hog production arrangements................................................. - 7,578
Prepaid expenses and other current assets......................................................... 43,217 28,585
--------- ---------
Total current assets........................................................................... 488,378 420,407
--------- ---------
Property, plant and equipment:
Land.............................................................................................. 13,964 12,453
Buildings and improvements........................................................................ 205,523 146,545
Machinery and equipment........................................................................... 344,328 303,384
Construction in progress.......................................................................... 50,578 74,207
--------- ---------
614,393 536,589
Less accumulated depreciation..................................................................... (187,518) (163,866)
--------- ---------
Net property, plant and equipment.............................................................. 426,875 372,723
--------- ---------
Other assets:
Investments in partnerships....................................................................... 44,582 29,662
Deferred income taxes............................................................................. - 10,235
Other............................................................................................. 35,419 24,592
--------- ---------
Total other assets............................................................................. 80,001 64,489
--------- ---------
$ 995,254 $ 857,619
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................................................................... $ 77,500 $ 110,563
Current portion of long-term debt and capital lease obligations................................... 7,800 13,392
Accounts payable.................................................................................. 132,268 113,344
Accrued expenses and other current liabilities.................................................... 106,498 95,082
--------- ---------
Total current liabilities...................................................................... 324,066 332,381
--------- ---------
Long-term debt and capital lease obligations........................................................ 288,486 188,618
--------- ---------
Other noncurrent liabilities:
Pension and postretirement benefits............................................................... 55,320 59,128
Deferred income taxes............................................................................. 7,260 -
Other............................................................................................. 12,636 14,975
--------- ---------
Total other noncurrent liabilities............................................................. 75,216 74,103
--------- ---------
Commitments and contingencies
Convertible preferred stock......................................................................... - 20,000
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares..................................... - -
Common stock, $.50 par value, 25,000,000 authorized shares;
19,196,681 and 18,453,015 issued............................................................... 9,598 9,227
Additional paid-in capital........................................................................ 113,661 92,762
Retained earnings................................................................................. 191,870 148,171
Treasury stock, at cost, 437,000 shares........................................................... (7,643) (7,643)
--------- ---------
Total stockholders' equity..................................................................... 307,486 242,517
--------- ---------
$ 995,254 $ 857,619
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales............................................................................... $3,870,611 $2,383,893 $1,526,518
Cost of sales....................................................................... 3,549,673 2,203,626 1,380,586
---------- ---------- ----------
Gross profit...................................................................... 320,938 180,267 145,932
Selling, general and administrative expenses........................................ 191,225 103,095 61,723
Depreciation expense................................................................ 35,825 25,979 19,717
Interest expense.................................................................... 26,211 20,942 14,054
---------- ---------- ----------
Income from continuing operations before income taxes............................... 67,677 30,251 50,438
Income taxes........................................................................ 22,740 10,465 18,523
---------- ---------- ----------
Income from continuing operations................................................... 44,937 19,786 31,915
Loss from discontinued operations, net of tax....................................... - (3,900) (4,075)
---------- ---------- ----------
Net income.......................................................................... $ 44,937 $ 15,886 $ 27,840
---------- ---------- ----------
---------- ---------- ----------
Net income available to common stockholders......................................... $ 43,699 $ 14,734 $ 27,165
---------- ---------- ----------
---------- ---------- ----------
Income (loss) per common share:
Continuing operations............................................................. $ 2.34 $ 1.06 $ 1.83
Discontinued operations........................................................... - (.22) (.24)
---------- ---------- ----------
---------- ---------- ----------
Net income........................................................................ $ 2.34 $ .84 $ 1.59
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-4
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Cash flows from operating activities:
Net income........................................................................ $ 44,937 $ 15,886 $ 27,840
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 39,057 28,299 22,127
Increase in accounts receivable.............................................. (12,606) (9,251) (6,141)
Increase in inventories...................................................... (30,008) (41,316) (1,717)
(Increase) decrease in prepaid expenses and other current assets............. (1,605) 1,535 (2,802)
(Increase) decrease in other assets.......................................... (10,410) 22,682 (8,121)
Increase in accounts payable, accrued expenses and other liabilities......... 9,377 19,166 8,272
Increase (decrease) in deferred income taxes................................. 7,810 (27,059) 6,637
(Gain) loss on sale of property and equipment................................ (3,288) 2,168 1,130
---------- ---------- ----------
Net cash provided by operating activities........................................... 43,264 12,110 47,225
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures.............................................................. (69,147) (74,888) (90,550)
Business acquisitions, net of cash acquired....................................... (34,835) (14,079) -
Investments in partnerships....................................................... (7,293) (2,486) (4,037)
Net advances to joint hog production arrangements................................. (113) 6,464 (6,364)
Proceeds from sale of property and equipment...................................... 4,141 82 969
---------- ---------- ----------
Net cash used in investing activities............................................... (107,247) (84,907) (99,982)
---------- ---------- ----------
Cash flows from financing activities:
Net (repayments) borrowings on notes payable...................................... (33,063) 33,592 17,560
Proceeds from issuance of long-term debt and capital lease obligations............ 171,250 50,000 50,000
Principal payments on long-term debt and capital lease obligations................ (76,974) (16,672) (13,588)
Proceeds from issuance of preferred stock......................................... - 20,000 -
Exercise of common stock options.................................................. 1,270 768 1,900
Dividends on preferred stock...................................................... (1,238) (1,152) (675)
---------- ---------- ----------
Net cash provided by financing activities........................................... 61,245 86,536 55,197
---------- ---------- ----------
Net (decrease) increase in cash..................................................... (2,738) 13,739 2,440
Cash at beginning of year........................................................... 28,529 14,790 12,350
---------- ---------- ----------
Cash at end of year................................................................. $ 25,791 $ 28,529 $ 14,790
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized.......................................... $ 25,751 $ 20,684 $ 14,630
---------- ---------- ----------
Income taxes paid, net............................................................ $ 15,043 $ 1,685 $ 16,254
---------- ---------- ----------
Non-cash investing and financing activities:
Refinancing of long-term debt.................................................. $ 59,707 $ - $ -
---------- ---------- ----------
Conversion of preferred stock to common stock.................................. $ 20,000 $ 10,000 $ -
---------- ---------- ----------
Common stock issued for acquisition............................................ $ - $ 33,000 $ -
---------- ---------- ----------
Conversion of advances to joint hog production arrangements to investments in
partnerships.................................................................. $ 7,691 $ - $ 12,500
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-5
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
------ ---------- -------- --------
(IN THOUSANDS)
Balance, May 1, 1994............................................................ $8,357 $ 47,964 $106,272 $ (7,643)
Net income.................................................................... - - 27,840 -
Exercise of stock options..................................................... 60 1,840 - -
Dividends on preferred stock.................................................. - - (675) -
------ ---------- -------- --------
Balance, April 30, 1995......................................................... 8,417 49,804 133,437 (7,643)
Net income.................................................................... - - 15,886 -
Common stock issued for acquisition of John Morrell & Co...................... 547 32,453 - -
Conversion of preferred stock................................................. 233 9,767 - -
Exercise of stock options..................................................... 30 738 - -
Dividends on preferred stock.................................................. - - (1,152) -
------ ---------- -------- --------
Balance, April 28, 1996......................................................... 9,227 92,762 148,171 (7,643)
Net income.................................................................... - - 44,937 -
Conversion of preferred stock................................................. 333 19,667 - -
Exercise of stock options..................................................... 38 1,232 - -
Dividends on preferred stock.................................................. - - (1,238) -
------ ---------- -------- --------
Balance, April 27, 1997......................................................... $9,598 $ 113,661 $191,870 $ (7,643)
------ ---------- -------- --------
------ ---------- -------- --------
The accompanying notes are an integral part of these consolidated statements.
F-6
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Smithfield Foods, Inc. and subsidiaries (the "Company"). The Company's principal
subsidiaries include Brown's of Carolina, Inc. ("Brown's"), Gwaltney of
Smithfield, Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat
Group, Inc. ("Lykes"), Patrick Cudahy Incorporated ("Patrick Cudahy") and The
Smithfield Packing Company, Incorporated ("Smithfield Packing"). All material
intercompany balances and transactions have been eliminated.
FISCAL YEAR
The Company's fiscal year is the 52 or 53 week period which ends on the
Sunday nearest April 30. All years presented were 52 week periods.
INVENTORIES
The Company's inventories are valued at the lower of first-in, first-out
(FIFO) cost or market. Inventories consist of the following:
APRIL APRIL
27, 28,
1997 1996
-------- --------
(IN THOUSANDS)
Fresh and processed meats................................................... $183,480 $156,232
Hogs on farms............................................................... 44,563 36,337
Manufacturing supplies...................................................... 15,732 12,686
Other....................................................................... 9,501 5,504
-------- --------
$253,276 $210,759
-------- --------
-------- --------
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost and depreciated over the
estimated useful lives of the assets. Buildings and improvements are depreciated
over periods from 20 to 40 years. Machinery and equipment is depreciated over
periods from 2 to 15 years. Repair and maintenance charges are expensed as
incurred. Improvements that materially extend the life of the asset are
capitalized. Gains and losses from dispositions or retirements of property,
plant and equipment are recognized currently.
Interest on capital projects is capitalized during the construction period.
Total interest capitalized was $2,640,000 in fiscal 1997, $2,021,000 in fiscal
1996 and $842,000 in fiscal 1995. Repair and maintenance expenses totaled
$89,670,000, $59,951,000 and $50,975,000 in fiscal 1997, 1996 and 1995,
respectively.
OTHER ASSETS
Cost in excess of net assets acquired is amortized over 40 years.
Organization costs are amortized over a five-year period. Deferred debt issuance
costs are amortized over the terms of the related loan agreements. Start-up
costs associated with hog production are amortized over a three-year period.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current or future operations are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments and/or cleanups are probable and the cost can be reasonably
estimated. Other than for assessments, the timing of these accruals coincides
with the Company's commitment to a formal plan of action (See Note 12).
F-7
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
SELF-INSURANCE PROGRAMS
The Company is self-insured for certain levels of general and vehicle
liability, workers' compensation and health care coverage. The cost of these
self-insurance programs is accrued based upon estimated settlements for known
and anticipated claims. Any resulting adjustments to previously recorded
reserves are reflected in current operating results.
PRICE-RISK MANAGEMENT AND HEDGING
The Company uses recognized price-risk management and hedging techniques to
enhance sales and to reduce the effect of adverse price changes on the Company's
profitability. The Company's price-risk management and hedging activities
currently are utilized in the areas of forward sales, hog production margin
management, procurement of raw materials (hams and bacon) for seasonal demand
peaks and inventory hedging. Contracts related to sales or purchase commitments
are accounted for as hedges. Gains and losses on these contracts are deferred
and recorded to cost of sales when the sales or purchase commitments are
fulfilled. As of April 27, 1997 and April 28, 1996, the Company had deferred
unrealized hedging gains of $2,183,000 and $2,160,000, respectively, on
outstanding futures contracts. As of April 27, 1997 and April 28, 1996, the
Company had open futures contracts with contract values of $44,291,000 and
$31,819,000, respectively.
INCOME PER COMMON SHARE
Income per common share is computed using the weighted average shares of
common stock and dilutive common stock equivalents (options and convertible
preferred stock) outstanding during the respective periods. Net income available
to common stockholders is net income less dividends on preferred stock. The
number of weighted average shares used in calculating income per common share
was 18,685,000 in fiscal 1997, 17,530,000 in fiscal 1996 and 17,059,000 in
fiscal 1995.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This new
standard defines a fair value method of accounting for employee stock option
plans. SFAS 123 allows the choice of recognizing compensation expense for stock
option plans by adopting the new fair value standard or to continue measuring
compensation using the intrinsic value approach of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). If APB 25
is elected, SFAS 123 requires supplemental disclosure to show the pro forma
effects as if the new method was applied. The Company has elected to continue
applying APB 25 to account for its stock option plans and adopt the supplemental
disclosure requirements of SFAS 123 (see Note 7). Accordingly, SFAS 123 does not
affect the Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the Company's financial position and amounts reported in
results of operations. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been restated to conform to 1997
presentations.
NOTE 2 -- ACQUISITIONS
In November 1996, the Company acquired substantially all of the assets and
business of Lykes from Lykes Bros. Inc. for $34,835,000 in cash and the
assumption of $10,616,000 of current liabilities.
The following unaudited pro forma information combines the operating
results of the Company and Lykes assuming the acquisition had been made as of
the beginning of each of the periods presented.
F-8
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- ACQUISITIONS -- Continued
1997 1996
-------------- --------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Sales............................................................................. $3,948,091 $2,630,031
Income from continuing operations................................................. 37,214 12,291
Net income........................................................................ 37,214 8,391
Income per common share:
Continuing operations........................................................... $ 1.93 $ .61
Net income...................................................................... 1.93 .40
On December 20, 1995, the Company acquired all of the capital stock of John
Morrell from Chiquita Brands International, Inc. ("Chiquita"), for $58,000,000,
consisting of $25,000,000 in cash and $33,000,000 of the Company's common stock
(1,094,273 shares), plus the assumption of all of John Morrell's liabilities.
The following unaudited pro forma information combines the operating
results of the Company and John Morrell assuming the acquisition had been made
as of the beginning of each of the periods presented.
1996 1995
-------------- --------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Sales............................................................................. $3,414,561 $2,949,426
Income from continuing operations................................................. 25,094 49,257
Net income........................................................................ 21,194 45,182
Income per common share:
Continuing operations........................................................... $ 1.31 $ 2.68
Net income...................................................................... 1.10 2.45
The Company accounted for these acquisitions using the purchase method of
accounting. The results of operations of these acquired businesses are included
in the accompanying consolidated statements of income from the respective dates
of acquisition.
The pro forma amounts above are not intended to be projections of future
results or trends and do not purport to be indicative of what actual
consolidated results of operations might have been if the acquisitions had been
effective as of the beginning of the periods presented.
NOTE 3 -- JOINT HOG PRODUCTION ARRANGEMENTS
SMITHFIELD-CARROLL'S
The Company has an arrangement with certain affiliates of Carroll's Foods,
Inc. ("CFI") to produce hogs for the Company's meat processing plants in North
Carolina and Virginia. The arrangement involves: (1) Smithfield-Carroll's Farms
("Smithfield-Carroll's"), a partnership owned jointly by the Company and
Carroll's Farms of Virginia, Inc. ("CFAV"), which owns the hog raising
facilities, and (2) a long-term purchase contract between the Company and
Carroll's Foods of Virginia, Inc. ("CFOV"), which leases and operates the
facilities, obligating the Company to purchase all the hogs produced by CFOV at
prices equivalent to market at the time of delivery. A director of the Company
is the president and a director of CFI, CFAV and CFOV. In addition, the Company
has a long-term agreement to purchase hogs from CFI at prices which, in the
opinion of management, are equivalent to market.
As of April 27, 1997 and April 28, 1996, the Company had investments of
$27,943,000 and $20,252,000, respectively, in the partnership which are
accounted for using the equity method. Profits and losses are shared equally
under the arrangement. During fiscal 1997 and 1995, the Company converted
$7,691,000 and $12,500,000, respectively, of advances to partners' equity, which
are included in the investments above. In addition, as of April 27, 1997, the
Company had $1,414,000 of working capital loans outstanding to the partnership.
These demand loans are expected to be repaid in fiscal 1998.
F-9
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- JOINT HOG PRODUCTION ARRANGEMENTS -- Continued
Substantially all revenues of the partnership consist of lease payments
from CFOV which cover debt service, depreciation charges and other operating
expenses. For the fiscal years 1997, 1996 and 1995, revenues were $8,227,000,
$8,912,000 and $9,479,000, respectively.
Pursuant to the long-term purchase contract, the Company purchased
$93,049,000, $70,540,000 and $54,081,000 of live hogs from CFOV in fiscal years
1997, 1996 and 1995, respectively. The contract resulted in decreased raw
material costs (as compared to market costs) of $5,245,000 and $2,617,000 in
fiscal 1997 and 1996, respectively, and increased raw material costs of
$2,615,000 in fiscal 1995. In fiscal 1997, the Company received $6,905,000 from
CFOV in repayment of all outstanding demand loans. Pursuant to the agreement
with CFI, the Company purchased $269,499,000, $201,878,000 and $134,937,000 of
hogs in fiscal 1997, 1996 and 1995, respectively.
CIRCLE FOUR
The Company has an arrangement with three of its principal hog suppliers to
produce hogs in the state of Utah for sale to an unrelated party. The chief
executive officers of two of the suppliers and the president of another serve as
directors of the Company. As of April 27, 1997, the Company had a 33% interest
in the arrangement, which is accounted for using the equity method. As of April
27, 1997 and April 28, 1996, the Company had investments of $12,673,000 and
$7,083,000, respectively, in the arrangement.
B&G
Brown's has an arrangement with a company owned by the daughter and
son-in-law of the chairman and chief executive officer of the Company. The
arrangement, B&G Farms LLC ("B&G"), involves the leasing of hog production
facilities to Brown's and the production of hogs by Brown's on a contractual
basis. In addition, the Company has a contract to purchase all of the hogs
produced by B&G at prices, which in the opinion of management, are equivalent to
market. Profits and losses are shared equally under the arrangement. As of April
27, 1997 and April 28, 1996, B&G had advanced $1,430,000 and $1,527,000,
respectively, to Brown's for working capital. As of April 27, 1997 and April 28,
1996, the Company had investments of $1,291,000 and $1,260,000, respectively, in
B&G.
B&G's revenues consist of lease payments from Brown's, which cover debt
service and depreciation charges, and the profits or losses on the sale of hogs.
Pursuant to the contract, the Company purchased $6,439,000 and $7,990,000 of
hogs in fiscal 1997 and 1996, respectively.
The summarized unaudited financial information which follows represents an
aggregation of the financial position of the unconsolidated hog production
operations of Smithfield-Carroll's, Circle Four and B&G.
APRIL 27, APRIL 28,
1997 1996
-------------- --------------
(IN THOUSANDS)
Current assets.......................................................... $ 17,116 $ 6,532
Property and equipment, net............................................. 134,937 107,996
Other assets............................................................ 6,978 6,094
-------------- --------------
$159,031 $120,622
-------------- --------------
-------------- --------------
Current liabilities..................................................... $ 15,721 $ 11,785
Long-term debt.......................................................... 71,094 54,926
Equity.................................................................. 72,216 53,911
-------------- --------------
$159,031 $120,622
-------------- --------------
-------------- --------------
F-10
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- DEBT
Long-term debt consists of the following:
APRIL 27, APRIL 28,
1997 1996
--------- ---------
(IN THOUSANDS)
Notes payable to institutional lenders:
8.52% notes, payable through August 2006............................................................ $ 100,000 $ -
8.34% notes, payable through August 2003............................................................ 40,000 -
8.41% notes, payable through August 2004............................................................ 14,779 15,000
9.85% notes, payable through November 2006.......................................................... 13,000 14,333
8.41% notes, payable through August 2006............................................................ 9,853 10,000
10.75% notes, payable through August 2005........................................................... 8,500 9,500
9.80% notes, payable through August 2003............................................................ 8,437 9,187
6.24% notes, payable through November 1998.......................................................... 1,977 3,108
7.15% notes, payable through October 1997........................................................... 1,052 3,044
7.00% notes, payable through September 1998......................................................... 895 1,429
Notes payable to banks:
Long-term credit facility, expiring July 1998....................................................... 75,000 43,750
Notes based on prime rate........................................................................... - 45,000
6.48% notes......................................................................................... - 20,700
7.10% notes......................................................................................... - 2,290
Other notes payable................................................................................... 112 407
--------- ---------
273,605 177,748
Less current portion.................................................................................. (5,949) (11,810)
--------- ---------
$ 267,656 $ 165,938
--------- ---------
--------- ---------
Scheduled maturities of long-term debt are as follows:
(IN THOUSANDS)
--------------
Fiscal year
1998....................................................................... $ 5,949
1999....................................................................... 79,253
2000....................................................................... 3,083
2001....................................................................... 3,084
2002....................................................................... 3,083
Thereafter................................................................. 179,153
--------------
$273,605
--------------
--------------
In fiscal 1997, the Company privately placed $140,000,000 of senior secured
notes with a group of institutional lenders. The placement consisted of
$40,000,000 of seven-year 8.34% notes and $100,000,000 of 10-year 8.52% notes
secured by four of the Company's major processing plants. The proceeds of the
financing were used to repay $65,200,000 of long-term bank debt and to reduce
short-term borrowings. In conjunction with the placement of the senior secured
notes, the Company refinanced $59,707,000 of existing institutional long-term
debt with the same institutional lenders. The refinancing resulted in revised
maturity dates and repayment schedules for the refinanced debt; however, no
additional proceeds resulted from this refinancing.
As of April 27, 1997, the Company had credit facilities totaling
$300,000,000, consisting of a 364-day $225,000,000 revolving credit facility and
a two-year $75,000,000 revolving credit facility. The short-term facility is
used for seasonal inventory and receivable needs, and the long-term facility is
used for working capital and capital expenditures. The line expires in July 1997
(the two-year facility expires in July 1998) and is expected to be refinanced in
the first quarter of fiscal
F-11
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- DEBT -- Continued
1998. The facilities have no compensating balance requirements but require
commitment fees of one-quarter of one percent per annum on the unused portion.
Weighted average borrowings under the facilities were $165,071,000 in
fiscal 1997, $133,400,000 in fiscal 1996 and $69,900,000 in fiscal 1995 at
weighted average interest rates of approximately 7%, 7% and 6%, respectively.
Maximum borrowings were $215,000,000 in fiscal 1997, $179,800,000 in fiscal 1996
and $117,000,000 in fiscal 1995. The outstanding balances under the facilities
totaled $150,000,000 and $151,300,000 as of April 27, 1997 and April 28, 1996,
respectively, at a weighted average interest rate of 7% for both years.
Notes payable to institutional lenders are secured by four of the Company's
major processing plants and certain other property, plant and equipment. The
credit facilities are collateralized with substantially all of the Company's
inventories and accounts receivable. As of April 27, 1997, the fair value of
long-term debt, based on the market value of debt with similar maturities and
covenants, approximates recorded values.
The Company's various debt agreements contain covenants regarding current
ratio, fixed charges coverage, minimum net worth and, among other restrictions,
limit additional borrowings, the acquisition, disposition and leasing of assets
and payments of dividends to stockholders.
NOTE 5 -- INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Income from continuing operations...................................... $22,740 $10,465 $18,523
Discontinued operations................................................ - (2,600) (2,716)
------- ------- -------
$22,740 $ 7,865 $15,807
------- ------- -------
------- ------- -------
Income tax expense attributable to income from continuing operations
consists of the following:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Current tax expense:
Federal.............................................................. $12,765 $ 8,850 $10,373
State................................................................ 2,805 1,530 1,835
------- ------- -------
15,570 10,380 12,208
------- ------- -------
Deferred tax expense (benefit):
Federal.............................................................. 9,424 (129) 5,301
State................................................................ (2,254) 214 1,014
------- ------- -------
7,170 85 6,315
------- ------- -------
$22,740 $10,465 $18,523
------- ------- -------
------- ------- -------
A reconciliation of taxes computed at the federal statutory rate to the
provision for income taxes is as follows:
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
Federal income taxes at statutory rate................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit......................... 1.7 3.9 3.6
Other.................................................................. (3.1) (4.3) (1.9)
----- ----- -----
33.6% 34.6% 36.7%
----- ----- -----
----- ----- -----
F-12
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- INCOME TAXES -- Continued
The tax effects of temporary differences consist of the following:
APRIL APRIL
27, 28,
1997 1996
------- -------
(IN THOUSANDS)
Deferred tax assets:
Employee benefits................................................................... $28,986 $35,925
Alternative minimum tax credit...................................................... 12,278 5,607
Tax credits, carryforwards and net operating losses................................. 11,807 12,523
Inventories......................................................................... 1,377 1,297
Other assets........................................................................ (903) 317
Accrued expenses.................................................................... 12,519 12,004
------- -------
$66,064 $67,673
------- -------
------- -------
Deferred tax liabilities:
Property, plant and equipment....................................................... $35,072 $33,643
Investments in subsidiaries......................................................... 3,154 574
Start-up costs...................................................................... 1,197 1,805
------- -------
$39,423 $36,022
------- -------
------- -------
As of April 27, 1997 and April 28, 1996, the Company had $33,901,000 and
$21,416,000, respectively, of net current deferred tax assets included in
prepaid expenses and other current assets. The Company had no valuation
allowance related to income tax assets as of April 27, 1997 or April 28, 1996,
and there was no change in the valuation allowance during fiscal 1997 and 1996.
The tax credits, carryforwards, and net operating losses expire from fiscal
1998 to 2011. The alternative minimum tax credits do not expire.
NOTE 6 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
APRIL 27, APRIL 28,
1997 1996
-------- --------
(IN THOUSANDS)
Payroll and related benefits...................................................... $ 43,723 $ 42,737
Self-insurance reserves........................................................... 18,112 18,914
Pension and postretirement benefits............................................... 17,518 16,006
Other............................................................................. 27,145 17,425
-------- --------
$106,498 $ 95,082
-------- --------
-------- --------
NOTE 7 -- STOCKHOLDERS' EQUITY AND PREFERRED STOCK
ISSUANCE OF COMMON STOCK
In fiscal 1996, the Company issued 1,094,273 shares of its common stock to
Chiquita as part of the acquisition of John Morrell (See Note 2).
PREFERRED STOCK
The Company has 1,000,000 shares of $1.00 par value preferred stock
authorized, none of which are issued. The board of directors is authorized to
issue preferred stock in series and to fix, by resolution, the designation,
dividend rate, redemption provisions, liquidation rights, sinking fund
provisions, conversion rights and voting rights of each series of preferred
stock.
F-13
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- STOCKHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
In fiscal 1996, the Company authorized and issued 2,000 shares of Series C
6.75% cumulative convertible redeemable preferred stock in a private transaction
for $20,000,000. In fiscal 1997, all of these shares were converted into 666,666
shares of the Company's common stock at $30.00 per share.
In fiscal 1996, all of the Series B 6.75% cumulative convertible redeemable
preferred stock, totaling $10,000,000, was converted into 465,116 shares of the
Company's common stock at $21.50 per share.
STOCK OPTIONS
In fiscal 1997, as discussed in Note 1, the Company adopted SFAS 123 and
elected to continue to account for its stock option plans under APB 25.
Under the Company's 1984 Stock Option Plan (the "1984 Plan"), officers and
certain key employees were granted incentive and nonstatutory stock options to
purchase shares of the Company's common stock for periods not exceeding 10 years
at prices that were not less than the fair market value of the common stock on
the date of grant. Stock appreciation rights which are exercisable upon a change
in control of the Company are attached to the options granted pursuant to the
1984 Plan. The 1984 Plan has expired with the exception of outstanding options.
Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"), management
and other key employees may be granted nonstatutory stock options to purchase
shares of the Company's common stock exercisable five years after grant for
periods not exceeding 10 years. The exercise price for options granted prior to
August 31, 1994 was not less than 150% of the fair market value of the common
stock on the date of grant. On August 31, 1994, the Company amended and restated
the 1992 Plan, changing the exercise price of options granted on or after that
date to not less than the fair market value of the common stock on the date of
grant. The Company has reserved 1,250,000 shares of common stock under the 1992
Plan. As of April 27, 1997, there were 354,500 options available for grant under
the 1992 Plan.
The following is a summary of transactions for the 1984 Plan and the 1992
Plan during fiscal 1995, 1996 and 1997.
AVERAGE PRICE
STOCK OPTIONS PER SHARE
------------- -------------
(IN THOUSANDS)
Outstanding at May 1, 1994..................................................................... 1,652,000 $ 14.79
Granted...................................................................................... 60,000 30.63
Exercised.................................................................................... (120,900) 7.89
Canceled..................................................................................... (25,000) 23.06
------------- -------------
Outstanding at April 30, 1995.................................................................. 1,566,100 15.80
Granted...................................................................................... 345,000 25.30
Exercised.................................................................................... (59,600) 6.59
Canceled..................................................................................... (50,000) 23.06
------------- -------------
Outstanding at April 28, 1996.................................................................. 1,801,500 17.72
Granted...................................................................................... 80,000 31.34
Exercised.................................................................................... (77,000) 6.22
Canceled..................................................................................... (270,000) 24.57
------------- -------------
Outstanding at April 27, 1997.................................................................. 1,534,500 $ 17.81
------------- -------------
------------- -------------
As of April 27, 1997, April 28, 1996 and April 30, 1995, the number of
options exercisable were 639,000, 716,000 and 775,600, respectively, at average
per share exercise prices of $8.13, $7.92 and $7.82, respectively.
F-14
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- STOCKHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
The following table summarizes information about stock options outstanding
as of April 27, 1997.
WEIGHTED
STOCK OPTIONS AVERAGE WEIGHTED
EXERCISE OUTSTANDING REMAINING AVERAGE
PRICE RANGE APRIL 27, 1997 CONTRACTUAL LIFE EXERCISE PRICE
- ---------------- -------------- ---------------- --------------
$ 8.13 639,000 2.1 $ 8.13
21.44 to 23.06 620,500 6.5 23.01
27.25 to 30.62 225,000 8.7 27.40
32.93 to 35.69 50,000 9.6 33.76
Stock options with an exercise price of $8.13 are the only options
exercisable as of April 27, 1997.
The fair value of each stock option granted in fiscal 1997 and 1996 is
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for both years: dividend yield of 0%, expected
volatility of 35%, weighted average risk-free interest rate of 5.8% and expected
lives of six years. The weighted average fair value of options granted is $15.23
and $12.02 for fiscal 1997 and 1996, respectively. Pro forma net income and
income per share based on the fair value method as defined in SFAS 123 for
fiscal 1997 and 1996 approximate recorded values.
PREFERRED SHARE PURCHASE RIGHTS
In fiscal 1992, the Company adopted a preferred share purchase rights plan
(the "Rights Plan") and declared a dividend of one preferred share purchase
right (a "Right") on each outstanding share of common stock. Under the terms of
the Rights Plan, if the Company is acquired in a merger or other business
combination transaction, each Right will entitle its holder to purchase, at the
Right's then current exercise price, a number of the acquiring company's common
shares having a market value of twice such price. In addition, if a person or
group acquires 20% (or other applicable percentage, as summarized in the Rights
Plan) or more of the outstanding common stock, each Right will entitle its
holder (other than such person or members of such group) to purchase, at the
Right's then current exercise price, a number of shares of common stock having a
market value of twice such price.
Each Right will entitle its holder to buy five ten-thousandths of a share
of Series A junior participating preferred stock, par value $1.00 per share, at
an exercise price of $75 subject to adjustment. Each share of Series A junior
participating preferred stock will entitle its holder to 1,000 votes and will
have an aggregate dividend rate of 1,000 times the amount, if any, paid to
holders of common stock. Currently, 25,000 shares of Series A junior
participating preferred stock have been reserved. The Rights will expire in
fiscal 2002 unless previously exercised or redeemed at the option of the board
of directors for $.005 per Right. Generally, each share of common stock issued
after May 31, 1991, will have one Right attached.
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS
The Company sponsors several defined benefit pension plans covering
substantially all employees. Plans covering salaried employees provide benefits
based on years of service and average salary levels. Plans covering hourly
employees provide benefits of stated amounts for each year of service. The
Company's funding policy is to contribute annually the minimum amount required
under ERISA. The plans' assets are invested primarily in equities, debt
securities, insurance contracts and money market funds.
In connection with the John Morrell acquisition, the Company assumed the
obligations under two non-contributory, defined benefit pension plans for
substantially all full-time salaried and hourly employees. Benefit accrual for
substantially all hourly employees under the defined benefit pension plan ceased
as of March 1991. Current benefits for these employees are provided by a defined
contribution plan covering both salaried and hourly employees.
F-15
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued
The status of the Company's plans and the components of pension expense are
as follows:
APRIL 27, 1997 APRIL 28, 1996
------------------------- -------------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
PLANS PLANS PLANS PLANS
---------- ----------- ---------- -----------
(IN THOUSANDS)
Accumulated benefit obligation....................................... $ 30,974 $ 170,850 $ 29,548 $ 175,103
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Vested benefit obligation............................................ $ 26,483 $ 168,222 $ 25,591 $ 169,468
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Plan assets at fair value............................................ $ 47,179 $ 123,417 $ 39,127 $ 116,542
Projected benefit obligation......................................... (38,805) (177,114) (36,434) (181,306)
---------- ----------- ---------- -----------
Excess (deficiency) of plan assets
over projected benefit obligation.................................. 8,374 (53,697) 2,693 (64,764)
Items not recorded on balance sheets:
Unrecognized net transition gain................................... (90) - (181) -
Unrecognized net gain from experience differences.................. (6,799) (10,173) (3,356) (8,710)
Unrecognized prior service cost.................................... 992 88 1,188 175
---------- ----------- ---------- -----------
Prepaid (accrued) pension costs.................................... $ 2,477 $ (63,782) $ 344 $ (73,299)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
1997 1996 1995
------- ------- -------
Net periodic pension cost included the following:
Service costs for benefits earned........................................................... $ 4,054 $ 2,662 $ 2,079
Interest accrued on projected benefit obligation............................................ 16,299 7,532 3,089
Actual return on plan assets................................................................ (15,556) (6,691) (2,558)
Net amortization and deferral............................................................... 878 (200) (304)
------- ------- -------
Net periodic pension cost................................................................ $ 5,675 $ 3,303 $ 2,306
------- ------- -------
------- ------- -------
In determining the projected benefit obligation in fiscal 1997 and 1996,
the weighted average assumed discount rate was 8% and 7.75%, respectively, while
the assumed rate of increase in future compensation was 5% in fiscal 1997 and 5%
to 6% in fiscal 1996. The weighted average expected long-term rate of return on
plan assets was 9% in fiscal 1997 and 1996.
The Company provides health care and life insurance benefits for certain
retired employees. These plans are unfunded and generally pay covered costs
reduced by retiree premium contributions, co-payments and deductibles. The
Company retains the right to modify or eliminate these benefits.
The status of the Company's plans are as follows:
APRIL 27, APRIL 28,
1997 1996
------- -------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees and dependents...................................................................... $ 8,226 $ 8,996
Active plan participants..................................................................... 1,404 1,300
------- -------
Total accumulated postretirement benefit obligation.......................................... 9,630 10,296
Unrecognized net gain........................................................................ 651 -
------- -------
Accrued postretirement benefit cost............................................................ $10,281 $10,296
------- -------
------- -------
In determining the accumulated postretirement benefit obligation in fiscal
1997 and 1996, the weighted average assumed discount rate was 8% and 7.75%,
respectively. The assumed annual rate of increase in per capita cost of covered
health care benefits is 7.5% for fiscal 1997, 6.5% for fiscal 1998 and 5.5%
thereafter.
F-16
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued
The total cost of postretirement benefits was $1,072,000, $673,000 and
$406,000 in fiscal 1997, 1996 and 1995, respectively.
NOTE 9 -- LEASE OBLIGATIONS AND COMMITMENTS
The Company leases transportation equipment under operating leases ranging
from 1 to 10 years with options to cancel at earlier dates. In addition, the
Company has a long-term maintenance agreement related to this equipment.
Maintenance fees are based upon fixed monthly charges for each vehicle, as well
as the maintenance facility itself and contingent fees based upon transportation
equipment usage. The amounts shown below as minimum rental commitments do not
include contingent maintenance fees.
The Company has agreements, expiring in fiscal 2004 and 2008, to use two
cold storage warehouses owned by a partnership, 50% of which is owned by the
Company. The Company has agreed to pay prevailing competitive rates for use of
the facilities, subject to aggregate guaranteed minimum annual fees of
$3,600,000. In fiscal 1997, 1996 and 1995, the Company paid $5,372,000,
$4,641,000 and $5,986,000, respectively, in fees for use of the facilities. As
of April 27, 1997 and April 28, 1996, the Company had investments of $1,137,000
and $1,067,000, respectively, in the partnership which are accounted for using
the equity method.
Minimum rental commitments under all noncancelable operating leases and
maintenance agreements are as follows:
(IN THOUSANDS)
--------------
Fiscal year
1998............................................................................. $ 19,083
1999............................................................................. 16,995
2000............................................................................. 14,938
2001............................................................................. 12,970
2002............................................................................. 17,023
Thereafter....................................................................... 24,239
--------------
$105,248
--------------
--------------
Rental expense was $24,270,000 in fiscal 1997, $17,664,000 in fiscal 1996
and $15,025,000 in fiscal 1995. Rental expense in fiscal 1997, 1996 and 1995
included $3,593,000, $3,389,000 and $2,681,000 of contingent maintenance fees,
respectively.
The Company has a sale and leaseback arrangement for certain hog production
facilities at Brown's. The arrangement provides for an early termination at
predetermined amounts after 10 years.
Property, plant, and equipment under capital leases as of April 27, 1997
consists of land of $2,659,000, buildings and improvements of $7,017,000 and
machinery and equipment of $6,701,000, less accumulated depreciation of
$5,361,000.
F-17
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- LEASE OBLIGATIONS AND COMMITMENTS -- Continued
Future minimum lease payments for assets under capital leases and the
present value of the net minimum lease payments are as follows:
(IN THOUSANDS)
--------------
Fiscal year
1998............................................................................. $ 3,876
1999............................................................................. 3,991
2000............................................................................. 4,046
2001............................................................................. 3,672
2002............................................................................. 3,190
Thereafter....................................................................... 12,793
--------------
31,568
Less amounts representing interest............................................... (8,888)
--------------
Present value of net minimum obligations......................................... 22,680
Less current portion............................................................. (1,851)
--------------
Long-term capital lease obligations.............................................. $ 20,829
--------------
--------------
As of April 27, 1997, the Company had outstanding commitments for
construction of hog production facilities and plant expansion projects of
approximately $20,964,000.
NOTE 10 -- RELATED PARTY TRANSACTIONS
A director of the Company is the chairman and chief executive officer and a
director of Murphy Family Farms, Inc. ("MFF"). The Company has a long-term
agreement to purchase hogs from MFF at prices, which in the opinion of
management, are equivalent to market. Pursuant to this agreement with MFF, the
Company purchased $433,861,000, $330,033,000 and $232,130,000 of hogs in fiscal
1997, 1996 and 1995, respectively.
A director of the Company is the chairman, president and chief executive
officer and a director of Prestage Farms, Inc. ("PFI"). The Company has a
long-term agreement to purchase hogs from PFI at prices, which in the opinion of
management, are equivalent to market. Pursuant to this agreement with PFI, the
Company purchased $182,576,000, $129,577,000 and $79,292,000 of hogs in fiscal
1997, 1996 and 1995, respectively.
A director of the Company is a director and owns 50% of the voting stock of
Maxwell Foods, Inc. ("MFI"). The Company has a long-term agreement to purchase
hogs from MFI at prices, which in the opinion of management, are equivalent to
market. Pursuant to this agreement with MFI, the Company purchased $109,470,000,
$76,448,000 and $7,784,000 of hogs in fiscal 1997, 1996 and 1995, respectively.
In fiscal 1997, 1996 and 1995, the Company purchased raw materials totaling
$12,772,000, $10,069,000 and $7,535,000, respectively, from a company which is
48% owned by the chairman and chief executive officer's children. In the opinion
of management, these purchases are made at prices which are equivalent to
market.
The Company is engaged in hog production arrangements with several related
parties. See Note 3 for additional information regarding these arrangements.
NOTE 11 -- DISCONTINUED OPERATIONS
In fiscal 1996, the Company completed the disposition of the assets and
business of Ed Kelly, Inc., its former retail electronics subsidiary, which is
reported separately as discontinued operations in the consolidated statements of
income. A loss from discontinued operations of $3,900,000 and $4,100,000 is
reflected in fiscal 1996 and 1995, respectively.
F-18
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- REGULATION AND LITIGATION
Like other participants in the meat processing industry, the Company is
subject to various laws and regulations administered by federal, state and other
government entities, including the Environmental Protection Agency ("EPA") and
corresponding state agencies such as the Virginia State Water Control Board
("VSWCB"), the Virginia Department of Environmental Quality ("VDEQ"), the United
States Department of Agriculture and the Occupational Safety and Health
Administration. Management believes that the Company complies with all such laws
and regulations in all material respects, except as set forth immediately below.
The wastewater discharge permit for Smithfield Packing's and Gwaltney's
plants in Smithfield, Virginia, which was last reissued in 1992, imposed more
stringent effluent limitations on phosphorus and two species of nitrogen
(ammonia and total Keldjahl nitrogen) than the wastewater treatment facilities
at those plants were designed to meet or can meet. To achieve compliance, the
Company agreed in 1991 to discontinue its wastewater discharges into the Pagan
River and connect its wastewater treatment facilities to the regional sewage
collection and treatment system operated by the Hampton Roads Sanitation
District ("HRSD"), when available. This agreement was embodied in a consent
order issued by the VSWCB in 1991 (the "1991 Order"). The entry of the 1991
Order followed several years of extensive negotiations and litigation, including
an application for a variance from the phosphorus limitations, and preceded the
reissuance of the wastewater discharge permit in 1992. The 1991 Order excused
the Company from compliance with the permit's phosphorus effluent limitations
and allowed the Company to operate under less stringent limitations on total
Keldjahl nitrogen than the permit would otherwise require, pending connection of
the two wastewater treatment facilities to the HRSD system. Another VSWCB
consent order (the "1994 Order") excused the Company from compliance with
certain other permit terms pending connection to the HRSD system.
The Company connected its Gwaltney wastewater treatment facilities to the
HRSD system in June 1996 and is connecting its Smithfield Packing facilities to
that system in July 1997. The HRSD system was not available for the Company's
use prior to these dates. The Company has made more than $2,700,000 in capital
expenditures to upgrade its existing wastewater treatment facilities (and must
continue to operate these facilities) to produce a wastewater that is suitable
for treatment by the HRSD system. In addition to these continuing operational
costs, the Company expects to pay HRSD sewer use charges in excess of $1,500,000
per year. The Company will account for these wastewater treatment costs as
current period charges in the years in which such costs are incurred.
Prior to connecting to the HRSD system, the Smithfield Packing and Gwaltney
plants were operated under the 1991 Order and the 1994 Order. During a period
from May 1994 to January 1995, the two plants had a number of violations of the
permit and the consent orders. Although the Company corrected the conditions
that caused these violations, the Company continued to experience intermittent
exceedances and permit compliance problems at its Gwaltney and Smithfield
Packing plants prior to connecting to the HRSD system.
The Company regularly conducts tests of its wastewater discharges to assure
compliance with the provisions of its wastewater discharge permits. Federal and
state laws require that records of tests be maintained for three years. Failure
to maintain these records may result in the imposition of civil penalties, and
criminal sanctions may be imposed in the event of false reporting or destruction
of records. In the course of a VSWCB inspection of the Smithfield Packing and
Gwaltney plants in July 1994, it was discovered that records of certain tests
conducted by the Company from 1991 through early 1994 could not be located. The
employee responsible for the supervision of the tests and maintenance of the
test records was replaced. The U.S. Department of Justice ("DOJ"), EPA and the
Federal Bureau of Investigation undertook an investigation of possible criminal
charges of false reporting and destruction of records. The Company cooperated
fully with this federal investigation. On October 22, 1996, the former employee
entered a guilty plea and was convicted in the United States District Court for
the Eastern District of Virginia on 23 violations of the federal Clean Water
Act, including making false reports. Eight of these violations related to his
duties as the Company's employee at its Smithfield Packing and Gwaltney plants,
while 15 violations were committed in connection with the former employee's
outside consulting business activities for public and private entities unrelated
to the Company. Neither the Company nor any of its other present or former
employees has been charged with any criminal violation arising from this
investigation.
On August 30, 1996, VDEQ filed a civil suit against the Company in the
Circuit Court of the County of Isle of Wight, Virginia, concerning permit
exceedances at the Company's Smithfield Packing and Gwaltney plants. This suit,
which was
F-19
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- REGULATION AND LITIGATION -- Continued
filed under the Virginia State Water Control Law, concerns all permit
violations, including record-keeping violations, from 1986 to date that were not
excused by the 1991 Order and the 1994 Order, as well as several violations of
effluent limitations that were prescribed by such orders. Each violation is
subject to a maximum penalty of $25,000. In March 1997, the Virginia Attorney
General filed a bill of particulars specifying approximately 23,000 alleged
violations, the vast majority of which concern the requirement to conduct
certain tests of chlorine levels at each plant on each hour of each day. The
case was initially brought to trial in state court on July 7, 1997. The VDEQ
contended that the Company received an economic benefit of $4,000,000, and
should pay civil penalties in that amount plus $2,000,000 for the violations. On
July 9, 1997, the VDEQ withdrew its suit against the Company, but stated its
intention to refile the suit at a later time. The Company intends to defend the
suit vigorously, and expects to prove that essentially no economic benefit
accrued to the Company and no environmental damage occurred as a result of the
violations.
On December 16, 1996, the DOJ, on behalf of the EPA, filed a civil suit
against the Company, Gwaltney and Smithfield Packing under the federal Clean
Water Act in the United States District Court for the Eastern District of
Virginia in Norfolk, Virginia. This action seeks to recover civil penalties
against the Company for approximately 5,500 alleged federal Clean Water Act
violations at the Company's Smithfield Packing and Gwaltney plants in
Smithfield, Virginia. Each violation is subject to a civil penalty not to exceed
$25,000. The vast majority of the alleged violations concern permit exceedances
during the last five years that were expressly excused by the 1991 Order and the
1994 Order. The remaining alleged violations duplicate the VDEQ's allegations.
The Commonwealth of Virginia, acting through the VSWCB, which has primary
enforcement responsibility in the Clean Water Act's cooperative federal-State
permitting scheme, advised federal authorities of the 1991 Order and the 1994
Order when issued. Not-withstanding this, in its suit, the EPA asserted that the
State-issued administrative consent orders do not bar a federal action seeking
relief for permit violations.
In an opinion dated May 30, 1997, the District Court granted the EPA's
motion for summary judgment in part on liability issues, holding that the 1991
Order and the 1994 Order did not excuse the alleged permit violations and that
the federal action was not otherwise precluded or barred by estoppel. In the
suit by the Commonwealth of Virginia discussed above, however, the Circuit Court
of the County of Isle of Wight, Virginia, based upon a cross claim filed by the
Company, issued a judicial decree reforming the Company's permit and setting the
compliance deadlines consistent with the Company's connection deadlines to the
HRSD system. This matter has been set for trial on July 21, 1997, on the
liability issues and on the issue of appropriate civil penalties. In determining
the civil penalties to be assessed, the federal Clean Water Act requires that
the District Court consider the seriousness of the violations, the economic
benefit (if any) resulting from the violations, any history of such violations,
any good-faith efforts to comply with the applicable requirements, the economic
impact of the penalties on the Company, and such other matters as justice may
require. The Company intends to defend the suit vigorously.
The EPA is expected to contend that the Company should have spent
approximately $10,000,000 in 1990 to comply with the phosphorus permit
limitation in addition to connecting its facilities to the HRSD system when
available. The EPA is expected to seek civil penalties which include this
claimed economic benefit plus an additional gravity-based amount for the permit
violations. The Company expects to prove that no economic benefit accrued to the
Company and that no environmental damage occurred as a result of the violations.
The Company will also show that it has acted in good faith and has complied with
the VSWCB's consent order requirements, at great expense, to connect to the HRSD
system and discontinue its discharges into the Pagan River.
Based on its knowledge, as summarized above, of the facts and circumstances
surrounding the alleged violations in these suits, the Company believes that the
ultimate resolution of the suits will not have a material adverse effect on the
Company's financial position or annual results of operations.
F-20
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13 -- QUARTERLY RESULTS OF OPERATIONS (Unaudited)
FIRST SECOND THIRD FOURTH
-------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Sales...................................................................... $892,870 $969,226 $1,080,979 $927,536
Gross profit............................................................. 58,762 73,577 88,704 99,895
Net income................................................................. 746 9,017 15,734 19,440
Net income per common share................................................ .02 .46 .82 1.01
1996
Sales...................................................................... $367,328 $455,799 $ 687,000 $873,766
Gross profit............................................................. 21,023 35,412 56,319 67,513
Income (loss) from continuing operations................................... (2,594) 4,615 10,787 6,978
Discontinued operations.................................................... (1,800) - (2,100) -
Net income (loss).......................................................... (4,394) 4,615 8,687 6,978
Income (loss) per common share:
Continuing operations.................................................... $ (.16) $ .26 $ .58 $ .35
Discontinued operations.................................................. (.11) - (.12) -
Net income (loss)........................................................ (.27) .26 .46 .35
F-21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
TO THE STOCKHOLDERS OF SMITHFIELD FOODS, INC.
We have audited in accordance with generally accepted auditing standards the
financial statements included in the Form 10-K Annual Report of Smithfield
Foods, Inc. for the fiscal year ended April 27, 1997, and have issued our report
thereon dated June 6, 1997. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
on the Index to Financial Statements and Financial Schedule filed as a part of
the Company's Form 10-K Annual Report is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Richmond, Virginia
June 6, 1997
- F-22 -
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY BALANCE SHEETS
As of April 27, 1997 and April 28, 1996
APRIL 27, APRIL 28,
ASSETS 1997 1996
- -------------------------------------------------------------------- ----------------------------------------
(in thousands)
Current assets:
Cash $ 38 $ 563
Accounts receivable 3,675 2,346
Receivables from related parties 1,414 9,150
Deferred income taxes 33,901 6,857
Other 5,137 1,770
----------------------------------------
Total current assets 44,165 20,686
----------------------------------------
Investments in and net advances to subsidiaries,
at cost plus equity in undistributed earnings 444,149 303,642
----------------------------------------
Other assets:
Investments in partnerships 41,753 28,402
Property, plant and equipment, net 9,838 8,612
Other 16,476 15,071
----------------------------------------
Total other assets 68,067 52,085
----------------------------------------
$556,381 $376,413
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------
Current liabilities:
Note payable $ 2,500 $ 3,000
Current portion of long-term debt 4,263 3,304
Accounts payable 5,167 1,325
Accrued expenses 28,617 16,763
Income taxes payable 1,789 229
----------------------------------------
Total current liabilities 42,336 24,621
----------------------------------------
Long-term debt 192,384 64,836
----------------------------------------
Deferred income taxes and other noncurrent liabilities 14,175 24,439
----------------------------------------
Redeemable preferred stock - 20,000
----------------------------------------
Stockholders' equity 307,486 242,517
----------------------------------------
$556,381 $376,413
========================================
The accompanying notes are an integral part of these balance sheets
F-23
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY STATEMENTS OF OPERATIONS
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
APRIL 27, APRIL 28, APRIL 30,
1997 1996 1995
---------------------------------------------------------
(in thousands)
Sales $ - $ - $ -
Cost of sales 1,820 (2,540) (1,368)
---------------------------------------------------------
Gross profit (1,820) 2,540 1,368
General and administrative expenses,
net of allocation to subsidiaries 10,911 5,780 2,680
Depreciation expense 903 892 496
Interest expense 16,434 2,556 2,596
-------------------------------------------------------
Loss before income taxes and equity
in earnings of subsidiaries (30,068) (6,688) (4,404)
Income tax benefit (12,562) (2,400) (1,003)
--------------------------------------------------------
Loss before equity in earnings
of subsidiaries (17,506) (4,288) (3,401)
Equity in earnings of subsidiaries 62,443 20,174 31,241
--------------------------------------------------------
Net income $ 44,937 $15,886 $27,840
=======================================================
The accompanying notes are an integral part of these statements
F-24
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
APRIL 27, APRIL 28, APRIL 30,
1997 1996 1995
--------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 44,937 $ 15,886 $ 27,840
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,040 1,162 619
Gain on sale of property and equipment (2,328) (1) (5)
Change in deferred income taxes and
other noncurrent liabilities (37,308) 5,343 6,748
Increase in accounts receivable (1,329) (2,171) (55)
Decrease (increase) in receivables from
related parties 45 6,615 (9,431)
(Increase) decrease in other current
assets (3,367) (1,318) 65
Increase in accounts payable and
accrued expenses 15,696 260 546
(Increase) decrease in refundable
income taxes - 3,458 (3,458)
Increase (decrease) in income taxes
payable 1,560 229 (3,154)
Increase in other assets (1,541) (4,778) (8,558)
--------------------------------------------------------------
Net cash provided by operating activities 17,405 24,685 11,157
--------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (3,226) (2,987) (4,534)
Proceeds from sale of property, plant
and equipment 3,424 38 7
Increase in investments in and advances
to subsidiaries, net of common stock
issued to acquire John Morrell & Co. (80,800) (36,649) (49,669)
Investment in partnerships (5,660) (2,376) (4,123)
--------------------------------------------------------------
Net cash used in investing activities (86,262) (41,974) (58,319)
------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of short-term debt (500) 500 2,500
Proceeds from issuance of long-term debt 140,000 - 50,000
Principal payments on long-term debt (71,200) (2,420) (6,738)
Exercise of options 1,270 767 1,901
Issuance of preferred stock - 20,000 -
Preferred dividends (1,238) (1,152) (675)
--------------------------------------------------------------
Net cash provided by financing activities 68,332 17,695 46,988
--------------------------------------------------------------
Net (decrease) increase in cash (525) 406 (174)
Cash at beginning of year 563 157 331
------------------------------------------------------------
Cash at end of year $ 38 $ 563 $ 157
============================================================
The accompanying notes are an integral part of these statements
F-25
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
April 27, 1997 and April 28, 1996
1. The Notes to Parent Company Financial Statements should be read in
conjunction with the Notes to Registrant's Consolidated Financial
Statements included herein.
2. Restricted assets of Registrant:
Existing loan covenants contain provisions which limit the amount of funds
available for transfer from the subsidiaries to Smithfield Foods, Inc.
without the consent of certain lenders.
3. Accrued expenses as of April 27, 1997 and April 28, 1996 are as follows:
(In thousands) 1997 1996
-------------- ---- ----
Self-insurance reserves $14,151 $ 8,784
Payroll and related benefits 6,465 5,696
Interest expense 4,162 402
Other 3,839 1,881
------- -------
$28,617 $16,763
======= =======
4. Long-Term Debt:
In fiscal 1997, the Registrant privately placed $140,000,000 of senior
secured notes. The proceeds of the financing were used to repay $65,200,000
of long-term bank debt and for investments in and advances to subsidiaries.
In conjunction with the placement of these notes, the Registrant refinanced
$59,707,000 of existing long-term debt previously recorded by its
subsidiaries. The result of the refinancing was to transfer debt to the
parent and revise maturity dates and repayment schedules for the refinanced
debt. No additional proceeds resulted from this refinancing.
As of April 27, 1997, the Registrant is guaranteeing $20,173,000 of capital
lease obligations of its subsidiaries and lines of credit aggregating
$300,000,000 of which $150,000,000 is outstanding.
Scheduled maturities of the Registrant's long-term debt consists of the
following:
Fiscal Year (In thousands)
----------- ---------
1998 $ 4,263
1999 3,981
2000 3,083
2001 3,083
2002 3,083
Thereafter 179,154
---------
$196,647
=========
5. The amount of dividends received from subsidiaries in fiscal 1997 and 1996
was $65,316,000 and $5,000,000, respectively.
6. In fiscal 1997, all of the Series C 6.75% cumulative convertible redeemable
preferred stock, totaling $20,000,000, was converted into the Registrant's
common stock.
F-26
7. Supplemental disclosures of cash flow information (in thousands):
1997 1996 1995
---- ---- ----
Interest paid, net of amount capitalized $11,106 $ 1,807 $ 2,403
======= ======= =======
Income taxes $15,043 $ 1,685 $16,254
======= ======= =======
Noncash investing and financing activities:
Refinancing of long-term debt $59,707 $ - $ -
======= ======= =======
Conversion of preferred stock to
common stock $20,000 $10,000 $ -
======= ======= =======
Common stock issued for acquisition $ - $33,000 $ -
======= ======= =======
Conversion of receivables from related
parties to investments in partnerships $ 7,691 $ - $12,500
======= ======= =======
F-27