UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
COMMISSION FILE NUMBER 0-17060
WLR FOODS, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-1295923
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
P.O. Box 7000
Broadway, Virginia 22815
(Address including Zip Code of Registrant's
Principal Executive offices)
(540) 896-7001
(Registrant's telephone number, including area code)
Indicate by cross 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 ()
The number of shares outstanding of Registrant's Common Stock, no par
value, at April 29, 1999 was 16,520,426 shares.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(unaudited) Thirteen weeks ended
In thousands, except per share data MARCH 27, MARCH 28,
1999 1998
<S> <C> <C>
Net sales $192,881 $212,487
Cost of sales 169,716 201,763
-------- --------
Gross profit 23,165 10,724
Selling, general and administrative
expenses 22,406 22,082
-------- --------
Operating income (loss) 759 (11,358)
Other expense:
Interest expense 1,425 6,255
Gain on sale of Goldsboro division 55 -
Other income (515) (242)
-------- --------
Other expense, net 965 6,013
-------- --------
Loss before income taxes (206) (17,371)
Income tax benefit (79) (6,254)
-------- --------
Net loss from continuing operations ($127) ($11,117)
Loss from discontinued operations, net
of tax - (147)
<PAGE>
Gain on disposal of discontinued
operations, net of tax 644 -
-------- --------
Total income (loss) from discontinued
operations 644 (147)
-------- --------
Net income (loss) $517 ($11,264)
======== ========
Basic loss per common share, continuing
operations ($0.01) ($0.68)
Basic earnings (loss) per common share,
discontinued operations 0.04 (0.01)
-------- --------
Total basic earnings (loss) per common
share $0.03 ($0.69)
======== ========
Diluted loss per common share,
continuing operations ($0.01) ($0.68)
Diluted earnings (loss) per common
share, discontinued operations 0.04 (0.01)
-------- --------
Total diluted earnings (loss) per common
share $0.03 ($0.69)
======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
2
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<TABLE>
<CAPTION>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) Thirty-nine weeks ended
In thousands, except per share data MARCH 27, MARCH 28,
1999 1998
<S> <C> <C>
Net sales $660,097 $702,710
Cost of sales 557,845 659,835
-------- --------
Gross profit 102,252 42,875
Selling, general and administrative
expenses 70,509 68,070
-------- --------
Operating income (loss) 31,743 (25,195)
Other expense:
Interest expense 9,314 15,489
Gain on sale of Goldsboro division (7,699) -
Other income (212) (722)
-------- --------
Other expense, net 1,403 14,767
-------- --------
Earnings (loss) before income taxes and
minority interest 30,340 (39,962)
Income tax expense (benefit) 11,529 (14,386)
Minority interest in net earnings of
consolidated subsidiary - 66
-------- --------
Net earnings (loss) from continuing
operations $18,811 ($25,642)
Income from discontinued operations, net
of tax 664 2,044
3
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Gain on disposal of discontinued
operations, net of tax 16,143 -
-------- --------
Total income from discontinued
operations 16,807 2,044
Extraordinary charge on early
extinguishment of debt, net of tax ($2,559) -
-------- --------
Net income (loss) $33,059 ($23,598)
======== ========
Basic earnings (loss) per common share,
continuing operations $1.12 ($1.57)
Basic earnings per common share,
discontinued operations 1.00 0.12
Basic loss per common share,
extinguishment of debt (0.15) -
-------- --------
Total basic earnings (loss) per common
share $1.97 ($1.45)
======== ========
Diluted earnings (loss) per common
share, continuing operations $1.11 ($1.57)
Diluted earnings per common share,
discontinued operations 0.99 0.12
Diluted loss per common share,
extinguishment of debt (0.15) -
-------- --------
Total diluted earnings (loss) per common
share $1.95 ($1.45)
======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands
MARCH 27, June 27,
1999 1998
ASSETS (unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $148 $335
Accounts receivable, less allowance for
doubtful accounts of $1,724 and $1,515. 55,935 72,457
Inventories (Note 2) 105,511 128,031
Income taxes receivable 1,002 1,002
Other current assets 2,372 1,870
-------- --------
Total current assets 164,968 203,695
Property, plant and equipment, net 114,236 153,702
Deferred income taxes 2,365 18,247
Other assets 6,773 6,098
-------- --------
TOTAL ASSETS $288,342 $381,742
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $4,793 $3,452
Excess checks over bank balances 16,055 9,925
Trade accounts payable 26,020 28,742
Accrued expenses 33,979 32,245
Deferred income taxes 8,810 10,636
5
<PAGE>
Other current liabilities 1,529 -
-------- --------
Total current liabilities 91,186 85,000
Long-term debt, excluding current
maturities 55,387 189,225
Other liabilities and deferred credits 3,724 3,626
Shareholders' equity :
Common stock, no par value. 68,946 67,851
Additional paid-in capital 2,974 2,974
Retained earnings 66,125 33,066
-------- --------
Total shareholders' equity 138,045 103,891
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $288,342 $381,742
======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
6
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<TABLE>
<CAPTION>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Thirty-nine weeks ended
Dollars in thousands MARCH 27, MARCH 28,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss) $33,059 ($23,598)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Extraordinary loss on early
extinguishment of debt 2,559 -
Depreciation and amortization 16,351 19,592
Gains on sale of property, plant and
equipment (78) (52)
Gain on sale of Goldsboro division (7,699) -
Gain on sale of discontinued operation (26,038) -
Deferred income taxes 14,056 (13,761)
Valuation allowance on assets held for
sale 1,354 -
Other, net 51 (287)
Change in operating assets and
liabilities:
Decrease in accounts receivable 11,251 11,878
Decrease in inventories 13,461 23,194
Decrease (Increase) in other current
assets (593) 3,529
Decrease (Increase) in long-term
assets (1,165) 630
Decrease in accounts payable (1,356) (7,391)
Increase in accrued expenses and
other 5,743 1,330
-------- --------
Net Cash Provided by Operating Activities 60,956 15,064
7
<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (19,240) (16,193)
Proceeds from sale of discontinued
operation 54,968 -
Proceeds from sale of Goldsboro division 37,582 -
Proceeds from sale of property, plant and
equipment 325 1,582
-------- --------
Net Cash Provided By (Used in) Investing
Activities 73,635 (14,611)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of revolver and
long-term debt 418,900 23,040
Payments on revolver and long-term debt (558,364) (10,454)
Financing costs paid (1,966) (5,174)
Increase (decrease) in checks drawn not
presented 6,130 (4,125)
Issuance of common stock 522 699
Repurchase of common stock - (4,438)
-------- --------
Net Cash Used in Financing Activities (134,778) (452)
-------- --------
(Decrease) Increase in Cash and Cash
Equivalents (187) 1
Cash and Cash Equivalents at Beginning of
Fiscal Year 335 283
-------- --------
Cash and Cash Equivalents at End of
Period $148 $284
======== ========
8
<PAGE>
Supplemental Cash Flow Information:
Cash paid (refunded) for :
Interest $11,713 $13,026
Income taxes 6,306 (3,149)
The Company considers all highly liquid investments with
maturities of 3 months or less at purchase to be cash equivalents.
Non-cash financing activities:
In fiscal 1998:
The Company issued 102,296 shares as a stock dividend in the
first quarter.
The Company issued 889,898 stock warrants in the third quarter
relating to the debt refinancing; of these 266,969 were immediately
exercisable and were recorded at a value of $1,695,256.
In fiscal 1999:,
The Company recorded 142,384 stock warrants at a value of
$904,136 which related to the February 1998 debt refinancing in the
first quarter.
The Company had 28,180 stock warrants expire at a value of
$178,943 when a portion of the February 1998 debt was repaid in the
first quarter.
The Company incurred an extraordinary charge on early
extinguishment of debt in the amount of $4.1 million in the second
quarter.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
9
<PAGE>
Notes to Consolidated Financial Statements
WLR Foods, Inc. and Subsidiaries
1. Accounting Policies
The consolidated financial statements presented herein, include the
accounts of WLR Foods, Inc. and its wholly-owned subsidiaries. All
material balances and transactions have been eliminated in
consolidation. The consolidated balance sheet as of March 27, 1999,
and the consolidated statements of operations for the thirteen and
thirty-nine weeks ended March 27, 1999 and March 28, 1998, and the
consolidated statements of cash flows for the thirty-nine weeks ended
March 27, 1999 and March 28, 1998 are unaudited. In the opinion of
management, all adjustments necessary for fair presentation of such
consolidated financial statements have been included. Such
adjustments consisted only of normal recurring accruals and the use of
estimates. Interim results are not necessarily indicative of results
for the entire fiscal year.
The consolidated financial statements and notes are presented in
conformity with the requirements for Form 10-Q and do not contain
certain information included in the Company's annual consolidated
financial statements and notes.
The Company's unaudited interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements included in the Annual Report to Shareholders for the
fiscal year ended June 27, 1998. In both, the accounting policies and
principles used are consistent in all material respects.
2. Inventories
A summary of inventories at March 27, 1999 and June 27, 1998 follows:
(unaudited)
Dollars in thousands MARCH 27, June 27,
1999 1998
Live poultry and breeder flocks $ 48,736 $ 58,947
Processed poultry and meat products 30,364 38,837
Packaging supplies, parts and other 13,665 15,879
Feed, grain and eggs 12,746 14,368
------- -------
Total inventories $105,511 $128,031
======= =======
10
<PAGE>
3. Earnings Per Share
The following is a reconciliation between the calculation of basic
and diluted net earnings (loss) per share:
Third Quarter Third Quarter
March 27, 1999 March 28, 1998
Basic EPS Computation
Numerator - Net earnings (loss) $517 ($11,264)
======== ========
Denominator:
Common shares outstanding 16,492 16,334
Effect of outstanding stock warrants 303 82
-------- --------
Basic weighted average common shares
outstanding 16,795 16,416
======== ========
Basic earnings (loss) per share $0.03 ($0.69)
======== ========
Diluted EPS Computation
Numerator - Net earnings (loss) $517 ($11,264)
======== ========
Denominator:
Common shares outstanding 16,492 16,334
Effect of outstanding options 0 0
Effect of outstanding stock warrants 303 82
-------- --------
Diluted weighted average common shares
outstanding 16,795 16,416
======== ========
Diluted earnings (loss) per share $0.03 ($0.69)
======== ========
Year To Date Year To Date
March 27, 1999 March 28, 1998
Basic EPS Computation
Numerator - Net earnings (loss) $33,059 ($23,598)
======== ========
Denominator:
Common shares outstanding 16,462 16,291
Effect of outstanding stock warrants 299 28
-------- --------
11
<PAGE>
Basic weighted average common shares
outstanding 16,761 16,319
======== ========
Basic earnings (loss) per share $1.97 ($1.45)
======== ========
Diluted EPS Computation
Numerator - Net earnings (loss) $33,059 ($23,598)
======== ========
Denominator:
Common shares outstanding 16,462 16,291
Effect of outstanding options 13 0
Effect of outstanding stock warrants 445 28
-------- --------
Diluted weighted average common shares
outstanding 16,920 16,319
======== ========
Diluted earnings (loss) per share $1.95 ($1.45)
======== ========
4. Sale of Assets
The Company completed the sale of its Cassco Ice & Cold Storage
subsidiary on July 31, 1998 for net proceeds of approximately $54
million, resulting in a gain of approximately $25 million ($15 million
after tax). Income from operations in the current fiscal year was
approximately $1 million ($0.7 million after tax). Both items
relating to the sale have been segregated from continuing operations
and reported as separate line items on the statement of operations.
Based on a net asset value calculation at the date of sale,
additional consideration was due to the Company. A portion of this
additional consideration, $1.1 million, was received and recorded by
the Company in February 1999. Additional proceeds, if any, will be
recognized by the Company when agreed to and collected.
In August 1998, the Company completed the sale of its Goldsboro, North
Carolina chicken complex. Net proceeds of approximately $37 million
resulted in a gain of approximately $8 million ($5 million after tax).
Subsequent to the end of the third quarter, the Company completed the
sale of its processing plant in Monroe, NC for net proceeds of $4.3
million, resulting in a loss of approximately $1.4 million, which had
been previously reserved. During the second quarter of fiscal 1999,
the Company had recorded a non-cash charge of $1.4 million to reduce
the Monroe carrying value to approximate its net realizable value.
12
<PAGE>
5. Debt Refinancing
The Company refinanced its Secured Term Notes and Secured Revolving
Credit Notes as of November 20, 1998. The new facility is a
three-year financing agreement that provides a total borrowing
capacity of $150 million. The Agreement includes a $50 million term
loan and $100 million revolving credit facility. Both facilities have
a maturity date of November 20, 2001 and are secured by virtually all
of the Company's assets.
At March 27, 1999, all $50 million of the term loan borrowings were
based on a LIBOR rate of 5.00% plus the applicable margin of 140 basis
points for a total rate of 6.40%. Revolving credit borrowings totaled
$9.0 million as of March 27, 1999, at a LIBOR rate of 4.95% plus the
140 basis point applicable margin for a total rate of 6.35%. At the
end of each quarter, the applicable margin is adjusted based upon
Company performance. As of March 27, 1999 the applicable margin was
at its lowest possible point.
Principal payments of $1.0 to $1.5 million are required at the end of
each fiscal quarter beginning with the fourth quarter of 1999 for the
Term Loan portion of the credit facility. Additionally, principal
payments are required on the proceeds of asset sales in excess of $1.0
million annually and for substantial new issuances of common stock.
The Company recorded an extraordinary non-cash charge to write-off the
remaining unamortized debt issue costs of the prior credit facility
during the quarter ended December 26, 1998 of $1.5 million ($1.0
million after tax). The charge is shown as an extraordinary item for
the early extinguishment of debt. During the first quarter ended on
September 26, 1998, the Company recorded an extraordinary charge of
$2.6 million ($1.6 million after tax) for the early extinguishment of
debt resulting from the permanent reduction of its prior credit
facility due to the sale of its Cassco Ice & Cold Storage, Inc.
subsidiary and its Goldsboro, North Carolina chicken complex. Total
year to date charges for the early extinguishment of debt are $4.1
million ($2.6 million after tax).
The Company incurred approximately $2.0 million in costs to establish
the new credit facility, which have been capitalized and are being
amortized to interest expense over the life of the loan.
In connection with the refinancing, an interest rate swap that was
required under the prior credit facility was assigned from First Union
National Bank to the Bank of Montreal. Accordingly, the swap has been
marked to market as of November 20, 1998, with a non-cash charge of
$0.6 million taken into interest expense. The variable to fixed
interest rate swap agreement has a notional amount of $50.0 million,
and fixes the Company's variable interest rate at 6.29% through
13
<PAGE>
January 4, 2000. The related $0.6 million mark to market credit will
be amortized as an offset to interest expense over the remaining life
of the swap agreement.
The Company was in compliance with all covenants required by its new
credit facility as of March 27, 1999.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
WLR Foods, Inc. (the Company) is a fully integrated poultry
production, processing and marketing business with operations in
Virginia, West Virginia, Pennsylvania and North Carolina.
Operating income for the third quarter of fiscal 1999 of $0.8 million
was $12.1 million more than the same quarter last year. The
improvement was primarily due to lower feed costs approximating $12
million. In total, prices declined approximately $4 million from the
same quarter last year, with a $6 million decline in chicken pricing
offset by a $2 million increase in the prices received for turkey
products. Offsetting the decline in prices was improvements in
operations and performance that totaled approximately $4 million.
Results of Operations
Net sales from continuing operations for the third quarter decreased
$19.6 million or 9.2% to $192.9 million, compared to $212.5 million
for the same quarter last year. Of this decrease, approximately $10
million is due to the closing of the distribution business in
Franconia, Pennsylvania during the first quarter. Chicken revenues
for the quarter increased 3%, the result of a 10% increase in volume,
partially offset by a 7% decrease in pricing. Turkey revenues
decreased 8%, with a 2% increase in price partially offsetting
decreased volumes of 10%, which were planned cutbacks that primarily
resulted from the conversion of the Marshville complex from turkey to
chicken in the first quarter of this fiscal year.
For the first nine months of fiscal 1999, net sales from continuing
operations decreased $42.6 million or 6.1% to $660.1 million, compared
to $702.7 million for the same period last year. Approximately $30
million of the decrease is the result of the closing of the Franconia
distribution business. Chicken revenues increased 10%, the result of a
3% increase in pricing and a 7% increase in volume. Turkey revenues
decreased 6%, with a 2% increase in price partially offsetting
decreased volumes of 8%.
For the third quarter of fiscal 1999, gross profits from continuing
operations increased $12.4 million to $23.2 million and gross profit
margins from continuing operations improved to 12.0% from 5.0% for the
same quarter last year. Improving grain costs of approximately $12
million were the result of corn and soymeal average delivered prices
decreasing 18% and 31%, respectively. Turkey prices for the quarter
increased 2% resulting in additional revenues of $2 million, while
15
<PAGE>
decreased chicken prices of 7% provided $6 million less in revenues.
The Company also benefited from improved operating costs and
performance of approximately $4 million.
Gross profits from continuing operations increased $59.4 million to
$102.3 million for the first nine months of fiscal 1999. Gross profit
margins from continuing operations improved to 15.5% from 6.1% last
year. The improvements in gross profits are primarily attributable to
decreases in grain costs of approximately $46 million. In addition,
chicken and turkey prices for the nine months increased 3% and 2%,
respectively, compared to the same period last year, resulting in
additional revenues of $8 million in chicken and $6 million in turkey.
During the third quarter of fiscal 1999, selling, general and
administrative expenses, which included accrued employee incentives of
$0.1 million, increased $0.3 million when compared to the same quarter
last year. For the first nine months of 1999, selling, general and
administrative expenses, which included $1.6 million of accrued
employee incentives, increased $2.4 million when compared to the same
period last year.
Interest expense decreased $4.8 million for the quarter and $6.2
million for the first nine months of the year, when compared to the
same periods last year. These decreases are primarily the result of
reduced borrowings.
On August 14th, 1998 the Company sold its Goldsboro, North Carolina
chicken complex for approximately $37 million in net proceeds
resulting in a pre-tax gain of approximately $8 million The net
proceeds were used to reduce long term debt.
The Company had a net loss from continuing operations of $0.1 million,
or $0.01 per diluted share for the third quarter of fiscal 1999,
compared with a net loss of $11.1 million, or $0.68 per diluted share
for the same quarter last year. For the first nine months of fiscal
1999, net earnings from continuing operations were $18.8 million, or
$1.11 per diluted share, versus a net loss of $25.6 million, or $1.57
per diluted share in the same period last year.
On July 31st, 1998 the Company sold its Cassco Ice and Cold Storage,
Inc. subsidiary for approximately $54 million in net proceeds. The net
proceeds from the sale of the subsidiary were used to reduce long-term
debt. While there was no income from Cassco during the third quarter
of this fiscal year, the year-to-date Cassco income from discontinued
operations, net of tax, is $0.6 million and compares to $2.0 million
in after-tax income for the nine months ended March 28, 1998. During
the first fiscal quarter of 1999, the Company recorded a $15.5 million
after-tax gain on the sale. Additional consideration was received
during the third quarter of fiscal 1999 resulting in a $0.6 million
16
<PAGE>
after-tax increase in the gain on sale of discontinued operations.
Due to the permanent reduction of long term debt resulting from the
sale of the Cassco subsidiary and the Goldsboro complex, the Company
recorded an extraordinary after-tax charge of $1.6 million during the
first quarter of fiscal 1999, representing the write-off of
capitalized debt costs.
In conjunction with the November 20, 1998 debt refinancing, the
Company recorded an extraordinary after-tax charge of $1.0 million
during the second quarter of fiscal 1999, representing the write-off
of remaining capitalized debt costs pertaining to the refinanced
credit facility.
Net income for the fiscal 1999 third quarter was $0.5 million, or
$0.03 per diluted share, and included an additional after-tax
settlement totaling $0.6 million, or $0.04 per diluted share, on the
sale of the Company s Cassco Ice & Cold Storage subsidiary, versus a
net loss of $11.3 million, or $0.69 per diluted share, which included
an after-tax loss of $0.2 million, or $0.01 per diluted share from the
discontinued Cassco operation, for the same quarter last year.
For the fiscal 1999 nine-month period, net income was $33.1 million,
or $1.95 per diluted share, and included: after-tax income of $0.7
million, or $0.04 per diluted share from the Company's Cassco Ice &
Cold Storage subsidiary; an after-tax gain of $16.1 million or $0.95
per diluted share on the sale of Cassco; and an after-tax, non-cash
write-off totaling $2.6 million, or $0.15 per diluted share, on the
early extinguishment of debt, versus a net loss of $23.6 million, or
$1.45 per diluted share, which included after-tax income of $2.0
million, or $0.12 per diluted share from Cassco, for the same period
last year.
Financial Condition and Liquidity
Accounts receivable and total inventory at the end of the first nine
months of fiscal 1999 were $16.5 million and $22.5 million lower,
respectively, when compared to the end of fiscal year 1998. Live and
processed inventories decreased $10.2 million and $8.5 million,
respectively. The decrease in live inventory was primarily due to the
reduction in the number of turkeys grown and lower feed costs, while
the processed inventories decreased primarily from the seasonal sale
of turkey products and decreases in turkey production.
Debt levels were reduced substantially during the first nine months of
fiscal 1999, from $192.7 million at fiscal 1998 year-end to $60.2
million at the end of the first nine months of fiscal 1999. The
decrease of $132.5 million is the result of approximately $93 million
17
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from the sales of Cassco Ice and Cold Storage, Inc. and the Goldsboro
complex, and from approximately $39.5 million in cash flow from
operations.
Capital Resources
The Company's capital spending was $4.2 million and $19.2 million for
the third quarter and the first nine months of fiscal 1999,
respectively. The major capital project during this fiscal year was
the conversion of the Marshville, North Carolina complex from turkey
to chicken, which resulted in capital expenditures of $0.5 million for
the third quarter and $9.9 million for the nine month period. The
remaining capital expenditures were primarily for replacements of
existing equipment and safety requirements. Depreciation expense was
$4.8 million for the quarter and $14.5 million year-to-date.
Projected capital spending for fiscal 1999 is expected to total $24 to
$26 million.
The Company remains in material compliance with all regulatory
requirements at the present time. The Company adopted SFAS No. 130,
"Reporting Comprehensive Income," on March 28, 1998. The statement
establishes standards for reporting comprehensive income and its
components in a full set of general-purpose financial statements. The
implementation of the standard did not have an impact on the financial
reporting of the Company.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The standard requires that companies report certain information about
operating segments in a complete set of financial statements and in
condensed financial statements of interim periods issued to
shareholders. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. The Company does not believe the adoption of
this statement will have a significant impact on the financial
statements.
Company performance expectations or "forward looking statements"
expressed from time to time are always subject to the possible
material impact of any risks of the business. These risks include
weather conditions impacting grain production and harvesting and live
growout of poultry; feed supplies and prices; supplies and selling
prices of poultry and competing meats; consumer preferences;
governmental and regulatory controls of the poultry industry; changes
in the regulations governing production processes; and fluctuations in
the general business climate.
Year 2000 Update
The Company began addressing the Year 2000 issues in 1995 and elected
to replace its multiple financial and order management systems with
18
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one set of integrated software from Oracle Corporation. An upgrade to
a newer release of the Oracle software that supports the Year 2000 was
completed in March of 1999. The Company has assessed all personal
computers and communication networks and believes there are no
significant Year 2000 problems in these areas.
A review of operational systems, including processing plants, feed
mills, warehouses and hatcheries has been performed. This review has
resulted in a plan for minor upgrades or replacements of equipment.
At the present time, management is not aware of any significant
operational problems resulting from Year 2000 related equipment.
To ensure that WLR's business with vendors and customers will continue
without interruption in the new millennium, the Company began
assessing vendor and customer Year 2000 readiness by written
questionnaires in November of 1998. Questionnaires were sent to
customers comprising a majority of sales revenue and to all
significant vendors. To date, no problems have arisen with either
vendors or customers, but all responses have not yet been obtained.
The Company will continue to monitor and request Year 2000 readiness
disclosures from its vendors and customers through out the remainder
of the year. There can be no assurance that the systems of other
parties upon which the Company relies will be converted on a timely
basis.
In evaluating contingency plans, the Company has identified its live
production accounting as the area most likely to need a backup system
in case of Year 2000 problems. The system is not deemed a critical
system in terms of operating procedures and operates independently
from the major Oracle operating systems. The Company estimates that
the live production accounting system will be year 2000 compliant by
no later than October of 1999. In the event of a system failure in
the live accounting area, the Company believes that there is
sufficient written documentation to prepare the needed accounting
information on a manual basis.
The Company has a committee that meets regularly to discuss progress
and issues pertaining to the Year 2000. Progress is reported on a
regular basis to the Board of Directors.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Market risks relating to the Company's operations result primarily
from changes in interest rates and commodity prices. To address these
risks, the Company enters into various hedging transactions as
described below. The Company does not use financial instruments for
trading purposes and is not party to any leveraged derivatives.
Interest Rate Sensitivity
The Company hedges exposures to changes in interest rates on certain
of its financial instruments. Under the terms of various term and
revolving credit loans, the Company enters into interest rate swap
agreements to effectively lock in a fixed interest rate for a portion
of these borrowings. In addition, the Company enters into interest
rate cap agreements to effectively limit the Company's exposure to
increases in interest rates.
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are
sensitive to changes in interest rates. For debt obligations, the
table presents principal cash flows and related weighted average
interest rates by expected maturity dates. For interest rate swaps,
the table presents notional amounts and weighted average interest
rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the
contract.
Expected Maturity Date
Liabilities:
Dollars in thousands 1999 2000 2001 2002
- -------------------- ---- ---- ---- ----
Liabilities:
Long-term debt, including
Current Portion
Fixed Rate $18 $196 $202 $215
Average interest rate 6.00% 6.00% 6.00% 6.00%
Variable Rate $1,027 $4,850 $5,850 $47,590
Average interest rate 6.39% 6.39% 6.39% 6.39%
20
<PAGE>
Interest Rate Derivatives
Dollars in thousands 1999 2000 2001 2002
- -------------------- ---- ---- ---- ----
Interest Rate Swaps
Variable to Fixed $0 $50,000 $0 $0
Average pay rate 0.00 6.29% 0.00 0.00
Average receive rate
- USD 1 month Libor
Interest Rate Cap $0.00 $75,000 $0.00 $0.00
Average pay rate 0.00 6.50% 0.00 0.00
Average receive rate
- USD 1 month Libor
Liabilities: There- Fair
Dollars in thousands 2003 after Total Value
- -------------------- ---- ------ ----- -----
Liabilities:
Long-term debt, including
Current Portion
Fixed Rate $89 $144 $864 $864
Average interest rate 6.00% 6.00% 6.00%
Variable Rate $0 $0 $59,317 $59,317
Average interest rate 0.00% 0.00% 6.39%
21
<PAGE>
Interest Rate Derivatives There- Fair
Dollars in thousands 2003 after Total Value
- -------------------- ---- ------ ----- -----
Interest Rate Swaps
Variable to Fixed $0 $0 $50,000 ($535)
Average pay rate 0.00 0.00 6.29%
Average receive rate
- USD 1 month Libor
Interest Rate Cap $0.00 $0.00 $75,000 (1)
Average pay rate 0.00 0.00 6.50%
Average receive rate
- USD 1 month Libor
Commodity Price Sensitivity
The Company is a purchaser of certain commodities, primarily corn and
soybeans. The Company uses commodity futures and forward purchasing
for hedging purposes to reduce the effect of changing commodity prices
on a portion of its commodity purchases. The contracts that
effectively meet risk reduction and correlation criteria are recorded
using hedge accounting. Gains and losses on hedge transactions are
recorded as a component of the underlying inventory purchase.
The following table provides information about the Company's corn,
soybean meal, other feed ingredient inventory, futures contracts and
forward purchases that are sensitive to changes in commodity prices.
For inventory, the table presents the carrying amount and fair value
at March 27, 1999. For the futures contracts and forward purchases,
the table presents the notional amounts in bushels, the weighted
average contract prices, and the total dollar contract amount by
expected maturity dates, the latest of which occurs in May 2000.
Contract amounts are used to calculate the contractual payments and
quantity of corn and soybean meal to be exchanged under the futures
and forward contracts.
22
<PAGE>
On Balance Sheet Commodity Position and Related Derivatives
Carrying Fair
Dollars in thousands Amount Value
- -------------------- -------- -----
Corn, Soybean Meal and Other Feed
Ingredient Inventory 8,519 8,519
Contractual Fair
Related Derivatives Amount Value
Corn Futures Contracts and
Forward Purchasing
Contract Volumes (100,000 bushels) 152
Weighted Average Price (per bushel) $2.30 $2.41
Contract Amount (dollars in
thousands) 34,891 36,626
Soy Bean Meal Futures Contracts and
Forward Purchasing
Contract Volumes (100 tons) 946
Weighted Average Price (per ton) $141.82 $141.22
Contract Amount (dollars in
thousands) 13,416 13,360
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported on Form 8-K, filed with the Commission on
March 1, 1999, on February 24, 1999, the Attorney General of the
State of West Virginia filed suit against WLR Foods and its
Wampler Foods, Inc. subsidiary in the Circuit Court of Hardy
County, West Virginia under the West Virginia Consumer Credit and
Protection Act, seeking unspecified damages. The suit alleged
that Wampler provided substandard chicks and feed to broiler
growers who raise chickens for Wampler.
On April 6, 1999, the Company was served with an Amended
Complaint, alleging that the Company violated the West Virginia
Consumer Credit and Protection Act, the West Virginia Antitrust
Act and the federal Packers and Stockyard Act in dealing with its
broiler growers in West Virginia. In addition to seeking
restitution to growers and damages of an unspecified amount,
which would be trebled in the case of violations of the West
Virginia Antitrust Act, the suit seeks a $100,000 civil penalty
for alleged violations of the Antitrust Act and civil penalties
of $5,000 for each alleged violation of the Consumer Credit and
Protection Act. The State has also requested a preliminary
injunction, enjoining Wampler Foods from paying any grower less
than the current average base rate, and from terminating any
existing grower's contract. The Company has filed a Notice of
Removal in the U.S. District Court in Elkins, West Virginia,
removing the case to federal court
The lawsuit is not expected to have a material effect on the
Company's financial statements. The Company continues to believe
the suit is without merit, and intends to defend it vigorously.
Item 5. Other Information.
On April 27, 1999, Phillip C. Stone, President of
Bridgewater College, Bridgewater, Virginia, was appointed to the
Registrant s Board of Directors to serve as an additional Class A
Director until the next annual meeting of the shareholders. Mr. Stone
received his undergraduate education at Bridgewater College, attended
the University of Chicago Graduate School of Economics, and received a
law degree from the University of Virginia. After practicing law for
24 years, Mr. Stone became President of Bridgewater College in 1994.
He has held leadership positions in the Virginia State Bar and the
Virginia Bar Association, of which he served as President in 1997. He
has also chaired the Virginia State Bar Committee on Ethics and its
Disciplinary Board.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See attached Exhibit Index
(b) Form 8-K
Reporting Date February 24, 1999. Item Reported - Item
5, Other Events. WLR Foods, Inc. reported that the Attorney General
for the State of West Virginia had filed suit against the Company and
its wholly-owned subsidiary, Wampler Foods, Inc., alleging violations
of the West Virginia Consumer Credit and Protection Act, seeking
unspecified damages.
Reporting Date March 19, 1999. Item Reported - Item 5,
Other Events. WLR Foods, Inc. reported the resignation of Ruth J.
Mack, Executive Vice President of Sales and Marketing.
25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed this 11th day of May, 1999, by the Registrant's
principal financial officer who is also authorized by the Registrant
to sign on its behalf.
WLR FOODS, INC.
__/s/ Dale S. Lam__
Dale S. Lam, Chief Financial
Officer and duly authorized
signator for Registrant
26
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
27
<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-END> MAR-27-1999
<CASH> 148
<SECURITIES> 0
<RECEIVABLES> 55,935
<ALLOWANCES> 1,724
<INVENTORY> 105,511
<CURRENT-ASSETS> 164,968
<PP&E> 304,300
<DEPRECIATION> 190,064
<TOTAL-ASSETS> 288,342
<CURRENT-LIABILITIES> 91,186
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0
0
<COMMON> 68,946
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<SALES> 192,881
<TOTAL-REVENUES> 192,881
<CGS> 169,716
<TOTAL-COSTS> 169,716
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<INCOME-PRETAX> (206)
<INCOME-TAX> (79)
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<CHANGES> 0
<NET-INCOME> 517
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