SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 1997
[ ] 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: 1-9050
Hudson Foods, Inc.
(Exact name of registrant as specified in its charter)
Delaware 71-0427616
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1225 Hudson Road
Rogers, Arkansas 72756
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501) 636-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Class A Common Stock, $.01 par value New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 of this Form 10-K. [ ]
On December 1, 1997 there were outstanding 20,967,054 shares of the
registrant's Class A common stock, $.01 par value, and 9,602,372 shares of
the registrant's Class B common stock, $.01 par value. The Class B common
stock is not registered or publicly traded, and its transferability is
restricted.
The aggregate market value of the 19,891,610 shares of Class A common stock
held by non-affiliates of the registrant as of December 1, 1997 was
$375,454,139. The aggregate market value of the 2,372 shares of Class B
common stock held by non-affiliates of the registrant on December 1, 1997
was $44,772, assuming that each share of Class B common stock has a market
value equal to a share of Class A common stock.
DOCUMENTS INCORPORATED BY REFERENCE
(Not Applicable)
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
- -------------------------------
Hudson Foods, Inc. ("Hudson" or the "Company") was organized as a
privately held company in 1972 by James T. Hudson to purchase a broiler
processing plant in Noel, Missouri and other related assets from the
Ralston Purina Company. In February 1986, the Company completed an initial
public stock offering of 2 million shares of its Class A common stock. The
Company issued an additional 2.5 million shares of Class A common stock in
November 1994.
The Company's poultry operations have grown since 1972 through expansions
of existing plants and a series of acquisitions including an integrated
turkey operation in 1979 and a major poultry company in 1986 which doubled
Hudson's size. In 1994, the Company began construction of a fully
integrated broiler complex near Henderson, Kentucky, which began processing
in July 1996. Between 1987 and 1990 the Company broadened its product
lines to include luncheon meat with the acquisition of three luncheon meat
processing plants and the related brand names. In 1990, the Company added
another product line, frozen portioned entrees, through the acquisition of
Pierre Frozen Foods, Inc. and expanded those operations in 1992 with the
purchase of an additional processing plant in Caryville, Tennessee. The
Company began producing beef products when its newly constructed beef
processing plant in Columbus, Nebraska began production in February 1995.
The Company sold its Topeka and Wichita, Kansas luncheon meat plants and
related brand names during fiscal 1996. The two plants produced ham, bacon
and a variety of luncheon meats. The Company continues to produce luncheon
meat products at its plant in Albert Lea, Minnesota.
In August 1997, the Company was requested by the United States Department
of Agriculture ("USDA") to recall three days' production of raw ground beef
products processed at its Columbus, Nebraska plant. The recall was
requested because of concerns that such production might be subject to a
form of E. coli bacterial contamination. It was recognized by the USDA
that the contamination most likely originated at a Hudson supplier and not
at the Company's state-of-the-art Nebraska facility. Subsequently, because
of USDA concern that the E. coli contamination could have spread to
additional days of production, the recall was expanded at the request of
the USDA to include all raw ground beef products processed at the plant
(the "Beef Recall"). The USDA's concern stemmed from an industry accepted
practice of product rework. Because of the extent of the production
affected by the precautionary recall, the Company determined to close the
plant pending further review. In September 1997 the Company entered into
an agreement, which was consummated in October 1997, to sell the plant and
related assets. (See NARRATIVE DESCRIPTON OF BUSINESS)
In the wake of the Beef Recall and its potential to negatively impact the
Company's other operations, the Company's senior management decided to
explore merger discussions with Tyson Foods, Inc., ("Tyson"). After a
series of meetings between senior management of both companies and their
advisors, the Board of Directors met formally on the morning of September
4, 1997. By a unanimous vote of the members present, the Board of
Directors: 1) approved and adopted the Agreement and Plan of Merger
("Merger Agreement"), 2) recommended submission of the Merger Agreement for
approval and adoption by the Company's stockholders and 3) recommended that
the Company's stockholders vote "for" the proposal to approve and adopt the
Merger Agreement.
Simultaneously with the execution of the Merger Agreement, James T. Hudson
entered into a Stock Voting Agreement ("Voting Agreement") with Tyson. The
Voting Agreement states that Mr. Hudson will vote all shares of Class A
and Class B common stock owned by him, to approve and adopt the Merger
Agreement. The Voting Agreement will terminate on the earlier of : 1) the
effective date of the merger or 2) the termination of the Merger Agreement
in accordance with its terms. The Merger Agreement may be terminated under
certain circumstances, including: 1) by either Tyson or the Company if the
merger has not been consummated on or before February 28, 1998 and (2) by
the Company if the Board of Directors of the Company reasonably determines,
based on certain specified standards, that a written, unsolicited proposal
or offer is made for a business combination or similar transaction with the
Company which is more favorable to the Company and its stockholders than
the merger with Tyson.
NARRATIVE DESCRIPTION OF BUSINESS
- ---------------------------------
General
- -------
The Company was established as a regional fully integrated poultry producer
selling commodity-type products in the United States. As a fully
integrated producer, the Company controls the breeding, hatching, growing,
processing, packaging, marketing and distribution of its product lines.
The Company has changed dramatically since 1972 and is now a fully
integrated producer of further-processed poultry and a processor of other
meat products. The Company's products are produced at plants in several
U.S. locations and sold domestically and internationally. According to
industry statistics, the Company was the fifth largest poultry company,
ranked by annual sales dollars, out of 43 companies that were
surveyed.(1)
The Company has achieved sales growth through acquisitions, expansions,
product line diversification, new product development and the development
of an international customer base. The Company has also tried to stabilize
its profit margins by shifting production to further-processed products and
increasing sales to targeted large customers under supply and pricing
arrangements.
Consistent with that strategy, the Company entered into a five-year, cost-
plus agreement with Boston Chicken, Inc., a franchiser and operator of
Boston Market foodservice stores specializing in complete meals featuring
rotisserie roasted chicken. The original agreement, dated October 12,
1994, provided for two Hudson chicken processing plants (one in Dexter,
Missouri and one near Henderson, Kentucky) to be cost-plus facilities for
Boston Chicken. Subsequent to the original agreement, Boston Market
significantly expanded the protein options on its menu. As a result, the
Company and Boston Chicken amended the original purchase and supply
agreement. Under the agreement, the Company is the Primary Supplier to
Boston Market for turkey and ham. The Company also supplied meat loaf
until its Columbus, Nebraska beef plant was sold.
The Company entered into a supply agreement dated April 26, 1994 with
Restaurant Services, Inc., as purchasing agent for the Burger King system.
The Burger King system committed to purchase, for a multi-year period,
approximately one-third of the capacity of the Company's Columbus, Nebraska
beef plant and had an option to buy more. Sales to the Burger King system
were made based on a formula price plus raw material costs. In addition,
the Company is a minority co-investor with Burger King Corporation and SBS
Processing, Inc. in a similar beef processing plant in Petersburg,
Virginia. In August 1997, as a result of the Beef Recall, Burger King
publicly announced that it had decided not to purchase additional beef
products from the Company and took steps to terminate its supplier
agreement. Burger King acknowledged that there was no evidence that any
contaminated product had been delivered to it and reported that the recall
was a precautionary measure. The Company and Burger King have indicated
they may have claims arising out of this series of events. Subsequently,
the Company entered into an agreement to sell the Columbus, Nebraska plant
and related assets. The sale was consummated in October 1997. The Company
continues to sell chicken products to the Burger King system.
[FN]
- ------------
(1) Information contained in the October/November 1997 issue
of "Poultry".
</FN>
Products, Marketing and Customers
- ---------------------------------
The following table sets forth, for the periods indicated, the net sales for
each of the Company's major product lines and the respective percentage of
total sales.
<TABLE>
<CAPTION>
Fiscal Year Ended
- -------------------------------------------------------------------------------------------
September 27, 1997 September 28, 1996 September 30, 1995
Percentage Percentage Percentage
Net of Total Net of Total Net of Total
Sales Sales Sales Sales Sales Sales
- -------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Chicken $1,018.6 61.2% $ 788.9 57.2% $ 648.3 54.0%
Portioned entrees 223.5 13.4 175.4 12.7 171.4 14.3
Turkey 190.5 11.4 182.6 13.2 145.1 12.1
Beef 104.0 6.3 90.3 6.6 37.3 3.1
Luncheon meats 75.3 4.5 94.2 6.8 159.0 13.2
Other(1) 53.2 3.2 47.1 3.5 39.4 3.3
-------- ------ -------- ------ ------- ------
Totals $1,665.1 100.0% $1,378.5 100.0% $1,200.5 100.0%
-------- ------ -------- ------ ------- ------
<FN>
- ------------
(1) Primarily includes sales of liquid and dried egg products, live birds, feed,
transportation and miscellaneous product sales.
</FN>
</TABLE>
The following table sets forth for the periods indicated the net sales to each
of the Company's customer groups and the respective percentage of total sales.
<TABLE>
<CAPTION>
Fiscal Year Ended
- -------------------------------------------------------------------------------------------
September 27, 1997 September 28, 1996 September 30, 1995
Percentage Percentage Percentage
Net of Total Net of Total Net of Total
Sales Sales Sales Sales Sales Sales
- -------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Foodservice $ 425.9 25.6% $ 350.3 25.4% $ 324.5 27.0%
Club stores 281.3 16.9 250.2 18.2 184.4 15.4
Retail 561.4 33.7 487.1 35.3 506.2 42.2
International 333.6 20.0 241.1 17.5 139.2 11.6
Other 62.9 3.8 49.8 3.6 46.2 3.8
-------- ------ -------- ------ ------- ------
Totals $1,665.1 100.0% $1,378.5 100.0% $1,200.5 100.0%
-------- ------ -------- ------ ------- ------
</TABLE>
The Company's products are sold domestically in three primary markets:
foodservice, club store and retail. The foodservice market is comprised
primarily of full service and fast food restaurants, prepared food
companies, various institutional customers such as schools, colleges and
health care facilities, vending machine operators, convenience stores and
delicatessens. The retail market includes grocery store chains,
independent grocery stores and grocery wholesalers.
The Company sells its products nationwide through independent brokers and
sales personnel of the Company under a variety of brand names, product
lines and private labels. The products are distributed from the Company's
plants, storage and distribution facilities and independent storage
facilities to the final customer or distributors via Company- owned trucks
or contract carriers.
The Company's products are sold internationally to wholesalers under the
Hudson[Registered], Delightful Farms[Registered] and Pierre[Trademark]
brand names and also private labels.
The primary raw materials used by the Company in its operations include raw
meat, feed ingredients, cooking ingredients and packaging supplies. The
Company grows substantially all the live chickens and turkeys used by its
processing plants but also buys live birds and processed poultry from
outside sources. All beef and pork raw materials are purchased from
outside sources. The Company believes that its sources of supply for these
materials are adequate for its present needs and does not anticipate any
difficulty in acquiring these materials in the future.
Chicken. The Company offers a wide variety of further-processed chicken
products including: cooked and uncooked individually frozen boneless and
bone-in chicken pieces; marinated whole chicken; breaded and fried chicken
breast patties, tenderloins and nuggets; buffalo-style wings and barbecued
chicken. These products are sold to retail, foodservice, club store,
international and other customers under the Hudson[Registered] and
Delightful Farms[Registered] brand names. In addition to further-processed
products, the Company sells chill-packed and ice-packed chicken parts and
whole birds. The chill-packed products are sold to retail and foodservice
outlets under the Hudson[Registered] brand name and private labels. The
ice-packed products are sold in bulk to retail and foodservice outlets.
Turkey. The Company offers a full line of further-processed turkey
products which includes smoked turkey, turkey sausage, turkey pastrami,
turkey salami, turkey bologna and turkey ham sold under the
Hudson[Registered] brand name. The Company also sells a premium, fully
cooked turkey breast produced in a variety of flavors and sold under the
Gourmet Recipe[Registered] line. Another major turkey product is raw
marinated breasts sold under the Carving Station[Trademark] line. The
Company's turkey products are sold primarily to retail, foodservice and
international customers.
Portioned Entrees. The Company offers a full line of portion-controlled
products including: flame-broiled chicken, beef, turkey and pork patties;
wrapped microwaveable sandwiches; sausage patties and links; country-fried
steak; chicken nuggets; unbreaded char-broiled chicken; beef and pork
fingers; pizza; potato skin kits; chicken fajita kits and flavored chicken
wings. The Company's portioned entree products are primarily sold to
domestic retail, foodservice and club store customers, but some portioned
entree products are also sold to international wholesalers. Foodservice
customers buying portioned entree products primarily include restaurants,
cafeterias, schools, colleges, health-care facilities, vending machine
operators and sandwich makers that service convenience stores. The Company
is one of the nation's largest processors of USDA commodity beef and pork
into further-processed products for school lunch programs. The portioned
entree products are primarily marketed under the Pierre[Trademark] and
Hudson[Registered] brand names and also under the Classic
Seasons[Registered], Rib-B-Q[Registered], and Fast Choice[Registered]
product lines.
Beef. During fiscal 1997, the Company sold raw hamburger patties mainly to
a large foodservice customer. In addition, the Company sold patties and
chub packages to other foodservice, club store, retail and international
customers. Due to the sale of the Company's Columbus, Nebraska beef
facility in October 1997, the Company no longer produces raw beef products.
Luncheon Meats. The Company's luncheon meat products include sandwich
meats, wieners, sausage, turkey hams, and miscellaneous chicken and turkey
products. The Company's luncheon meat products are primarily sold to
retail, club store, foodservice and international customers under the
Schweigert[Registered] and Hudson[Registered] brand names as well as
various private labels.
International Sales
- -------------------
The Company's products are sold internationally through sales offices
located in Rogers, Arkansas; Miami, Florida; Gdynia, Poland and Moscow,
Russia. International sales accounted for 20.0% of the Company's total
sales during fiscal 1997. The Company's products are sold primarily to
wholesalers in Russia, Eastern Europe, Asia and Latin America. The
majority of these sales are chicken leg quarters in Russia and Poland, but
the Company also sells other items such as hot dogs and turkey products.
The loss of sales to Russia could have a material adverse effect on the
Company.
During fiscal 1997, the Company recorded charges associated with a
reorganization of its International Division. The reorganization placed
particular emphasis on structural changes to the Company's Russian market
distribution system. Specifically, the Company elected to discontinue its
utilization of a Russian distributor to market its products throughout
Russia and began to distribute its products directly to customers in
Russia. The distributor previously accounted for the majority of the
Company's sales in Russia. As part of the change, the Company incorporated
a subsidiary in Russia and has initiated the expansion of marketing and
other personnel in Russia. The Company believes that the reorganization
will allow it to grow its customer base by distributing its products into
the widespread geographic markets of Russia. Associated with these
changes, the Company recognized that receivables of $24.2 million and
inventory costs of $14.0 million would not be recoverable. The charge
associated with receivables was reported as a loss on international
reorganization and the charge associated with inventory has been included
in cost of sales in the accompanying statement of operations. The Company
also recorded international bad debt expense of $11.0 million that was
included in selling expense.
Major Customers
- ---------------
The Company's sales to Wal-Mart Stores, Inc. ("Wal-Mart") in fiscal 1997
constituted approximately 17.9% of total sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1997. Sales
to the Company's next largest customers, a Russian wholesaler, the Burger
King system and Boston Chicken were approximately 5.6%, 5.3% and 3.9%,
respectively, of total sales in 1997. The loss of any large customers
could have a material adverse effect on the Company. Due to the sale of
the Company's beef operation, the Company no longer sells beef patties to
the Burger King system but continues to sell them chicken products. Beef
sales to Burger King were 3.3% of total sales in fiscal 1997.
Competition
- -----------
The primary competitive factors in the poultry industry include price,
product quality, product development, brand identification and customer
service. Hudson's poultry products compete primarily with other integrated
poultry companies. Although poultry is relatively inexpensive in
comparison with other meats, the Company also competes indirectly with the
producers of other meats and fish. Changes in the relative prices of these
foods may affect consumer buying patterns.
The Company's portioned entree and luncheon meat product lines compete with
regional and national meat processing companies, some of which are
divisions of fully integrated companies. Price, product quality, product
development, brand identification and customer service are important
factors in the business.
Regulation
- ----------
The poultry industry is subject to significant government regulation,
particularly in the health and environmental areas by the USDA, the Food
and Drug Administration ("FDA") and the Environmental Protection Agency.
The Company anticipates increased regulation by the USDA concerning food
safety as well as by the FDA regarding the use of medication in feed. The
Company's food processing facilities are subject to on-site examination,
inspection and regulation by the USDA. The FDA inspects the production of
the Company's feed mills.
In August 1997, the Company recalled all ground beef products produced at
its Columbus, Nebraska facility. The recall resulted from a USDA
investigation into reports of possible product contamination. Due to the
Beef Recall, the Company suspended production at the Columbus, Nebraska
facility and subsequently entered into an agreement, which was consummated
in October 1997, to sell the plant and related assets.
Management believes that the Company is in substantial compliance with all
applicable laws and regulations relating to the operation of its
facilities. The Company takes all reasonable precautions to ensure that
its flocks are healthy and that its processing plants and other facilities
operate in a sanitary and environmentally sound manner. However, events
beyond the control of the Company, such as an outbreak of poultry disease
in its flocks or the adoption by the government of more stringent
environmental regulations, could adversely affect its operations.
Employees and Labor Relations
- -----------------------------
As of September 27, 1997, the Company employed 12,473 persons. Generally,
the Company believes that relations with its employees are good.
Approximately 6,350 of the Company's employees are represented by the
United Food and Commercial Workers, the United Steelworkers, the Glass,
Molders, Pottery, Plastics and Allied Workers, or the Teamsters. The
collective bargaining agreements covering such employees have terms that
expire at various dates between November 1998 and December 2001. The
Company has not experienced any strikes or work stoppages that have had a
material impact on operations.
ITEM 2. PROPERTY
--------
General
- -------
The Company believes that its facilities are generally in good condition
and suitable for their current purposes. The Company regularly engages in
construction and other capital improvement projects intended to expand and
improve the efficiency of its processing and support facilities.
The Company's chicken facilities were approximately 80% utilized in fiscal
1997. The Company's portioned entree, luncheon meat and turkey facilities
were generally 90% to 100% utilized in fiscal 1997. The Company's beef
facility was approximately 57% utilized in fiscal 1997.
The Company's Hope, Arkansas, Springfield, Missouri and Cincinnati, Ohio
facilities are subject to mortgages or deeds of trust.
Plants and Facilities
- ---------------------
Chicken. The Company's chicken operations include breeding, hatching,
rearing, ingredient procurement, feed formulation and milling, veterinary
and other technical services, processing and related transportation and
delivery services. The Company both owns farms and contracts with
independent growers to maintain the Company's flocks of breeder chickens,
which lay eggs. The Company transfers the eggs to its hatcheries. The
newly hatched broiler chicks are then delivered to independent contract
growers or Company-owned farms where they are raised until they reach
processing weight, usually within seven weeks. During the growout period,
the Company provides growers with feed and other items, as well as
supervisory and technical assistance. The broilers are then transported by
Company trucks to its processing plants. The Company operates seven
chicken processing plants devoted to various phases of slaughtering,
dressing, cutting, deboning, further-processing and packaging. These
processing plants are located in Hope, Arkansas; Berlin, Maryland; Noel,
Missouri; Albertville, Alabama; Dexter, Missouri; Corydon, Indiana and
Henderson, Kentucky. The Company operates seven feed mills, nine broiler
hatcheries and five protein facilities.
The Company's current processing capacity is approximately 8.0 million
chickens per week. During fiscal 1997, the Company processed a weekly
average of 6.2 million chickens per week, yielding approximately 1.2
billion pounds.
The Company began processing chickens at its newly constructed Henderson,
Kentucky complex in July 1996. The complex includes a feed mill, hatchery,
processing plant and protein plant. At the end of fiscal 1997, the Company
was processing approximately 900,000 chickens per week at the Kentucky
processing plant and has plans to increase production to 2.0 million
chickens per week.
Turkey. The Company is a fully integrated turkey processor. The Company's
turkey operations include similar processes as discussed above for chicken.
The Company operates two turkey processing facilities in Springfield,
Missouri. One is a basic processing plant and the other is a further-
processing plant. These facilities have an annual production capacity of
approximately 200.0 million pounds. During fiscal 1997, the Company
produced approximately 196.8 million pounds of turkey products. In
addition, the Company operates one feed mill and two hatcheries.
Portioned Entrees. The Company produces its portioned entree products at
plants in Cincinnati, Ohio and Caryville, Tennessee, which have an annual
production capacity of approximately 120.0 million pounds. During fiscal
1997, the Company produced approximately 111.0 million pounds of portioned
entree products.
Beef. The Company completed the construction of a beef processing plant in
Columbus, Nebraska in February 1995. The annual production capacity was
approximately 190.0 million pounds. During fiscal 1997, the Company
produced approximately 109.0 million pounds of beef products. The plant
was originally designed to process hamburger patties primarily for the
Burger King system. However, the plant was subsequently expanded to allow
for additional capacity to serve other customers. After the Beef Recall,
the Company entered into an agreement to sell this plant and its related
assets which was consummated in October 1997.
Luncheon Meat. The Company's luncheon meat plant is located in Albert Lea,
Minnesota. The plant's annual production capacity is approximately 61.0
million pounds. During fiscal 1997, the Company produced approximately
58.7 million pounds of luncheon meat products.
Other. The Company has a feed mill and an egg breaking plant in Social
Circle, Georgia that produces liquid and dried egg products.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On July 22, 1997 the United States Department of Labor-Occupational Safety
and Health Administration ("OSHA") issued to Hudson four citations with
penalties totaling $332,500 for alleged violations of OSHA regulations at
the Company's Noel, Missouri poultry processing facility. The citations
followed a six month investigation of the facility which stemmed from
allegations filed with OSHA by a local union. Hudson strongly denies the
alleged violations and has filed a notice of contest with the OSHA Review
Commission. The Company recorded an expense of $332,500 in fiscal 1997 for
the penalties associated with these violations.
On July 28, 1997 Hudson received notice from the United States Department
of Justice ("DOJ") that it was prepared to bring an action against Hudson
for alleged violation of the Clean Water Act at the Company's Berlin,
Maryland poultry processing facility. The DOJ alleged that over the past
five years, Hudson had repeatedly discharged pollutants in quantities in
excess of its National Pollutant Discharge Elimination System ("NPDES")
permit, violated monitoring and sampling requirements of its NPDES permit
and failed to provide notice of NPDES violations. On September 19, 1997,
Hudson entered into an agreement in principle with the DOJ for settlement
of these claims. While denying all liability, Hudson agreed to the entry
of a consent decree that provides for payments to the United States
totaling $4.0 million and additional expenditures by the Company for
supplemental environmental projects in the amount of $2.0 million. The
settlement remains subject to final approval by senior governmental
officials and the federal courts. The Company recorded a special charge of
$4.0 million in fiscal 1997 associated with this payment to the United
States.
In August 1997, Hudson was requested by the USDA to recall three days'
production of raw ground beef products processed at its Columbus, Nebraska
plant. The recall was requested because of concerns that such production
might be subject to a form of E. coli bacterial contamination. It was
recognized by the USDA that the contamination most likely originated at a
Hudson supplier and not at Hudson's state-of-the-art Nebraska facility.
Subsequently, because of USDA concern that the E. coli contamination could
have spread to additional days of production, the recall was expanded at
the request of the USDA to include all raw ground beef products processed
at the plant. The USDA's concern stemmed from an industry accepted
practice of product rework. Because of the extent of the production
affected by the precautionary recall, the Company determined to close the
plant pending further review. Following the announcement of the expanded
recall, the Company's primary customer for frozen beef patties publicly
announced that it had decided not to purchase additional beef products from
the Company even though the customer acknowledged that there was no
evidence that any contaminated product had been delivered to it and was
aware that the recall was a precautionary measure.
On September 12, 1997 the Marvin Asnes Trust, (the "Asnes Trust"), which
purports to be a stockholder of the Company, filed a stockholder derivative
action against the directors of the Company in the United States District
Court for the Southern District of Florida in which the Company was named
as a nominal defendant. Among other remedies, the Asnes Trust is seeking
unspecified damages. The action is related to the Beef Recall. The
derivative complaint alleges that the Company's directors breached their
fiduciary duties by, among other things, failing to adequately exercise
quality control standards and procedures at the Company's Columbus,
Nebraska facility. The Company believes that these allegations are without
merit and intends to vigorously defend against the action. Regardless of
the outcome, the Company does not expect that the action will have any
adverse impact on its financial condition, future operating results or
liquidity.
In September 1997, the Company learned that the United States Attorney for
the District of Nebraska had begun an investigation into activities
involving the recall of beef products from the Columbus, Nebraska facility.
The Company is cooperating with this investigation and believes that it has
been in full compliance at all times with the law.
Certain parties affected by the Company's Beef Recall have notified the
Company that they may make claims against the Company for damages sustained
as a result of the Beef Recall. On November 3, 1997, Todd Allen McDonald
brought an action against the Company on his own behalf (amended November
21, 1997 to add eight additional plaintiffs) and purportedly on behalf of
others similarly situated in the Chancery Court of Pulaski County,
Arkansas. The action alleges, among other things, that the Company was
negligent and failed to exercise ordinary care at its Columbus, Nebraska
plant and seeks, among other remedies, unspecified damages. No other
product liability suits have been filed against the Company as a result of
the Beef Recall, although the Company is evaluating consumer complaints
communicated through the Company's telephone hotline or by mail. With
respect to the parties alleging sickness, the Company's product liability
insurance is anticipated to cover any losses beyond the Company's
deductible. Investigation of these matters is generally in the preliminary
stages. The Company, after consultation with its attorneys, is unable to
reasonably estimate the extent of the Company's liability, if any, at this
time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Common Stock
- ------------
The Company's certificate of incorporation permits the issuance of up to
40,000,000 shares each of Class A common stock, $.01 par value, and Class B
common stock, $.01 par value. On December 1, 1997, there were 21,813,519
shares of Class A common stock issued (including 846,465 shares held in
treasury) and 9,602,372 shares of Class B common stock issued and
outstanding. The Transfer Agent and Registrar for both classes of common
stock is ChaseMellon Shareholder Services of Los Angeles, California.
The Class A common stock has one vote per share, while the Class B common
stock has ten votes per share in all matters submitted to a vote of the
Company's stockholders. Except as required by law or the certificate of
incorporation, holders of Class A or Class B common stock shall vote
together as a single class. Holders of Class A and Class B common stock
are entitled to receive such dividends and other distributions as may be
determined by the Board of Directors out of any funds of the Company
legally available therefor. However, no dividend may be declared and paid
on the Class B common stock unless a dividend is also declared and paid on
the Class A common stock. In such an event, the dividend per share of
Class B common stock may not exceed 90% of the dividend per share of Class
A common stock. Certain members of the Hudson family own substantially all
of the Class B common stock which concentrates voting control over the
Company with James T. Hudson and the Hudson family. The Class B common
stock voting power is sufficient to, among other things, approve or prevent
extraordinary corporate transactions, such as mergers, consolidations or
sales of substantially all of the Company's assets and to elect or remove
the members of the Board of Directors.
Transfer of the Class B common stock may only be made to a "permitted
transferee" as defined in the Company's certificate of incorporation, but
shares of Class B common stock may be converted by the holder into an equal
number of shares of Class A common stock at any time. The Company may not
issue additional shares of Class B common stock without the approval of a
majority of the votes of the outstanding shares of Class A common stock and
Class B common stock, each voting separately as a class, except in
connection with stock splits and stock dividends. The Board of Directors
and the holders of a majority of the outstanding shares of Class B common
stock may approve the conversion of all of the Class B common stock into
shares of Class A common stock.
In the event of a liquidation of the Company, all assets available for
distribution after payment of all prior claims would be divided among and
paid ratably to the holders of Class A common stock and Class B common
stock.
Subject to any conversion rights of the holders of Class B common stock,
holders of Class A and Class B common stock have no preemptive rights to
subscribe for or receive any part of the authorized stock of the Company,
additional or increased issues of stock of any class or any obligations
convertible into any class or classes of stock. Further, no stockholder
has the right to cumulate votes in the election of directors.
On December 1, 1997, the 20,967,054 shares of Class A common stock then
outstanding were held by approximately 1,040 holders of record (excluding
persons holding shares in nominee names).
The Company's Class A common stock is currently traded on the New York Stock
Exchange ("NYSE") under the symbol "HFI." The following table sets forth the
quarterly high and low sales prices for the Class A common stock as reported
on the NYSE.
High Low
---- ---
Fiscal 1996
- -----------
First Quarter................................ 17 1/2 13 5/8
Second Quarter .............................. 18 1/8 12 3/4
Third Quarter................................ 15 1/8 11 1/2
Fourth Quarter............................... 14 1/2 12 1/8
Fiscal 1997
- -----------
First Quarter................................ 18 3/4 13 1/2
Second Quarter............................... 21 1/4 15 7/8
Third Quarter................................ 17 3/8 14
Fourth Quarter............................... 21 5/8 14 1/8
Fiscal 1998
- -----------
First Quarter (through December 1, 1997)..... 21 5/8 18 1/8
The Class B common stock is not traded on the NYSE or any other exchange,
and the Company is not aware of any public market for such shares. On
November 18, 1997, 9,602,372 shares of Class B common stock were
outstanding and were held by approximately 18 holders of record. James T.
Hudson beneficially owns 99.9 percent of the outstanding Class B common
stock.
Dividend Policy
- ---------------
The Company's Board of Directors has declared cash dividends every fiscal
quarter since the Company's initial public offering in February 1986.
Since April 1987, the Board has declared quarterly dividends of $.02 per
share of Class A common stock and $.0167 per share of Class B common stock.
The Company's certificate of incorporation restricts the per share
dividends declared and paid on Class B common stock to not more than 90
percent of the per share dividends declared and paid on Class A common
stock.
Payment of future dividends will depend upon the Company's financial
condition, results of operations and other factors deemed relevant by the
Board of Directors. Additionally, the Company has entered into certain
loan agreements that restrict its ability to pay dividends. The Company's
primary credit facility restricts dividend payments to a maximum of $2.8
million in any fiscal year.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
FIVE-YEAR FINANCIAL SUMMARY
(Dollars in thousands except per share data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating data:
Sales $1,665,105 $1,378,474 $1,200,512 $1,040,840 $920,545
Cost of sales 1,490,550 1,211,556 1,023,959 885,248 802,002
Gross profit 174,555 166,918 176,553 155,592 118,543
Selling 111,632 94,805 82,945 78,698 63,926
General and administrative 32,527 32,240 29,211 25,755 20,695
International reorganization 24,195 - - - -
Other special charges 28,292 - - - -
Operating income (loss) (22,091) 39,873 64,397 51,139 33,922
Interest, net 13,364 5,789 1,845 6,152 7,975
Interest on tax settlement - - 4,500 - -
Other, net (881) (4,246) (2,190) - 530
Income (loss) before income taxes
and extraordinary item (34,574) 38,330 60,242 44,987 25,417
Income tax expense (benefit) (13,329) 15,332 24,484 17,995 9,512
Income (loss) before extraordinary item (21,245) 22,998 35,758 26,992 15,905
Net income (loss) (21,245) 22,998 35,758 26,992 15,905
Per share data:
Primary earnings (loss) per share
before extraordinary item $(0.70) $.76 $1.21 $1.08 $.67
Primary earnings (loss) per share (0.70) .76 1.21 1.08 .67
Fully diluted earnings (loss) per share
before extraordinary item (0.70) .76 1.21 1.08 .67
Fully diluted earnings (loss) per share (0.70) .76 1.21 1.08 .67
Dividends declared per Class A common share .080 .080 .080 .080 .080
Dividends declared per Class B common share .067 .067 .067 .067 .067
Stockholders' equity per share 9.98 10.82 10.14 8.30 7.17
Financial data:
Working capital $212,956 $213,889 $180,458 $100,096 $103,811
Capital expenditures 66,735 139,387 73,314 49,161 21,453
Property, plant and equipment, net 389,031 367,600 275,624 229,050 205,613
Total assets 887,026 774,742 623,541 473,180 416,503
Long-term obligations less current portion 269,316 224,951 129,973 75,169 88,985
Total debt 294,992 249,665 151,015 97,078 94,070
Stockholders' equity 304,109 325,920 304,349 209,189 173,902
Depreciation and amortization 33,009 26,703 25,137 22,279 22,943
Statistical data:
Sales growth 20.8% 14.8% 15.3% 13.1% 13.8%
Return on sales (net margin) (1.3) 1.7 3.0 2.6 1.7
Return on average stockholders' equity (6.7) 7.3 13.9 14.1 10.3
Current ratio 1.90:1 2.42:1 2.55:1 1.87:1 2.28:1
Long-term obligations to total capitalization 47.0% 40.8% 29.9% 26.4% 33.8%
Shares used in primary earnings
per share computation (000's) 30,234 30,401 29,494 24,948 23,627
Shares used in fully diluted earnings
per share computation (000's) 30,234 30,401 29,494 25,099 23,627
Shares outstanding at year-end (000's) 30,462 30,110 30,019 25,203 24,261
Stockholders of record 1,129 1,332 1,433 1,316 1,402
Number of employees 12,473 11,470 10,303 8,911 8,554
Class A common stock price (high-low) $21 5/8-13 1/2 $18 1/8-11 1/2 $20-12 3/4 $16 3/4-7 1/8 $10 1/4-5
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
- -------
Historically, the Company's operating results have been heavily influenced
by two factors: the cost of feed grains and commodity-based finished
product prices. These two factors have fluctuated significantly and
independently. In recent years the Company has undertaken a business
strategy to increase the production and sale of further-processed products
and increase sales to large customers such as club store and foodservice
chains. In 1997, one such customer accounted for approximately 17.9% of
total sales. This strategy helps decrease the proportion of feed grain
costs to total cost of sales, which reduces the impact of commodity cost
fluctuations. In addition, the sales prices of further-processed products
are less sensitive to commodity price fluctuations. Even so, a material
increase in feed costs or a material decrease in finished product prices
could have an adverse effect on the Company, but management believes that
the implementation of this strategy has reduced the Company's vulnerability
to such price fluctuations.
The Company believes that its operations are in substantial compliance with
applicable environmental laws and regulations.
The Company is currently in the process of evaluating options for replacing
financial and operational software. The year 2000 issue is within the
scope of this process and will be considered and addressed as software is
upgraded or replaced over the next two years.
DISCUSSION OF OPERATIONS
- ------------------------
Fiscal 1997 Compared with Fiscal 1996
Sales from the Company's operations were approximately $1.7 billion for
fiscal 1997, an increase of $286.6 million, or 20.8%, over fiscal 1996.
International sales were 20.0% and 17.5% of fiscal 1997 and 1996 sales,
respectively. The Company's primary international markets are Russia,
Eastern Europe, Asia and Central America. The main products sold into
international markets were chicken leg quarters, chicken paws and turkey
thigh meat. The Company's four main customer groups are: foodservice, club
stores, retail and international. The sales increase primarily resulted
from the following:
o Chicken sales increased 29.1% to $1,018.6 million in fiscal 1997
from $788.9 million in fiscal 1996 primarily due to a 21.9% increase in
volume and a 5.9% increase in selling prices. Sales in all four customer
groups increased due to continuing consumer demand for chicken products.
Selling prices were strong due to high customer demand.
o Portioned entree sales increased 27.5% to $223.5 million in
fiscal 1997 from $175.4 million in fiscal 1996 mostly due to a 28.5%
increase in volume. The volume increase was primarily due to expanded
sales in all four customer groups, especially foodservice customers.
o Turkey sales increased 4.3% to $190.5 million in fiscal 1997 from
$182.6 million in fiscal 1996 mainly due to a 5.0% increase in selling
prices. The Company has changed its production emphasis from whole birds
to further-processed products that command higher selling prices.
o Beef sales were $104.0 million in fiscal 1997 compared with $90.3
million in fiscal 1996 due to a 10.4% increase in volume and a 4.3%
increase in selling prices. The volume increase was due to increased sales
to retail, club and international customers. Selling prices increased due
to increased raw material costs. The Company sold its beef processing
facility and related assets in October 1997.
o Luncheon meat sales decreased 20.1% to $75.3 million in fiscal
1997 from $94.2 million in fiscal 1996 largely due to a 24.7% decrease in
volume offset by a 6.1% increase in selling prices. The volume decrease
was due to the December 29, 1995 sale of the Company's Topeka, Kansas
luncheon meat plant and its related brand names, and the closing and
subsequent sale of its Wichita, Kansas luncheon meat plant. The Company
continues to produce luncheon meat products at its plant in Albert Lea,
Minnesota.
Cost of sales was approximately $1.5 billion for fiscal 1997, an increase
of $279.0 million, or 23.0%, over fiscal 1996. As a percentage of sales,
cost of sales increased to 89.5% in fiscal 1997 from 87.9% in fiscal 1996.
This increase was primarily due to an increase in outside purchases of
birds, higher processing costs and the write-down of international
inventory.
Feed and ingredient costs, as a percentage of sales, were 23.7% for fiscal
1997 and 26.6% for fiscal 1996. Due to a lack of birds for processing at
the Company's new Kentucky plant, additional birds were purchased from
outside sources which caused costs to shift from feed and ingredients to
outside purchases.
Gross profit was $174.6 million in fiscal 1997, an increase of $7.6
million, or 4.6%, over fiscal 1996.
Selling and general and administrative expenses were $144.2 million in
fiscal 1997, an increase of $17.1 million, or 13.5%, over fiscal 1996. As
a percentage of sales, selling and general and administrative expenses
decreased to 8.7% in fiscal 1997 from 9.2% in fiscal 1996. Fiscal 1997
selling expense includes $11.0 million bad debt expense resulting from the
write-off of international receivables.
During fiscal 1997, the Company recorded charges associated with a
reorganization of its International Division. The reorganization placed
particular emphasis on changes to the Company's Russian market distribution
system. Specifically, the Company elected to discontinue its utilization
of a Russian distributor to market its products throughout Russia and began
to distribute its products directly to customers in Russia. The
distributor previously accounted for the majority of the Company's sales in
Russia. As part of the change, the Company incorporated a subsidiary in
Russia and has initiated the expansion of marketing and other personnel in
Russia. The Company believes that the reorganization will allow it to grow
its customer base by distributing its products into the widespread
geographic markets of Russia. Associated with these changes, the Company
recognized that receivables of $24.2 million and inventory costs of $14.0
million would not be recoverable. The charge associated with receivables
was reported as a loss on international reorganization and the charge
associated with inventory has been included in cost of sales in the
accompanying statement of operations. The Company also recorded
international bad debt expense of $11.0 million that was included in
selling expense.
During the fourth quarter of fiscal 1997, the Company recorded other
special charges of $28.3 million comprised of the following:
In August 1997, the Company recalled all ground beef products
produced at its Columbus, Nebraska facility as the result of a USDA
investigation into reports of possible product contamination. Due
to the Beef Recall, the Company closed the Columbus, Nebraska
facility in August 1997 and entered into an agreement on September
25, 1997, which was consummated on October 2, 1997, to sell the
plant and related assets. As a result of the Beef Recall the
Company recorded other special charges of $12.5 million
representing inventory write-downs, freight, storage, product
handling costs and customer refunds. The Company believes that all
recalled products have been returned and are being held in storage
pending receipt of USDA disposal guidelines. The only additional
charges expected to be incurred are storage expenses until the
product is destroyed. The loss associated with the sale of the
Company's beef operations was $11.8 million comprised of an
approximate $4.4 million reduction of investment in the plant and
associated assets to the amount realized on the sale,
approximately$3.6 million related to costs incurred during the
shut-down period (salaries, workers' compensation costs, rental
expense and other operating expenses incurred in August and
September 1997), approximately $3.2 million of loss on a minority
investment in a similar beef processing facility and approximately
$600,000 of other related costs. Operating loss for the Nebraska
facility totaled approximately $917,000 for the year ended
September 27, 1997, excluding the $12.5 million costs related to
the recall and the $11.8 million loss on the sale.
The Company also recorded other special charges of $4.0 million
which were for cash payments to be made to the United States as a
result of an agreement between the Company and the Department of
Justice for claims of violations of the Clean Water Act.
Certain parties affected by the Company's Beef Recall have notified
the Company that they may make claims against the Company for
damages sustained as a result of the Beef Recall. On November 3,
1997, Todd Allen McDonald brought an action against the Company on
his own behalf (amended November 21, 1997 to add eight additional
plaintiffs) and purportedly on behalf of others similarly situated
in the Chancery Court of Pulaski County, Arkansas. The action
alleges, among other things, that the Company was negligent and
failed to exercise ordinary care at its Columbus, Nebraska plant
and seeks, among other remedies, unspecified damages. No other
product liability suits have been filed against the Company as a
result of the Beef Recall, although the Company is evaluating
consumer complaints communicated through the Company's telephone
hotline or by mail. With respect to the parties alleging sickness,
the Company's product liability insurance is anticipated to cover
any losses beyond the Company's deductible. Investigation of these
matters is generally in the preliminary stages. The Company, after
consultation with its attorneys, is unable to reasonably estimate
the extent of the Company's liability, if any, at this time.
Operating loss was $10.3 million in fiscal 1997, a decrease of $50.2
million, or 125.8%, from fiscal 1996. The decrease was mainly due to the
international reorganization and special charges described previously.
Interest expense increased as a result of increased short and long-term
borrowings.
Other expense of $10.9 million for fiscal 1997 was principally due to the
Beef Recall discussed above. As a result of the recall, the Company
suspended production at its Columbus, Nebraska facility and subsequently
entered into an agreement, which was consummated in October 1997, to sell
the plant and related assets. The expense recorded was based upon the
proceeds of the sale and the costs incurred during the shut-down period.
Fiscal 1996 Compared with Fiscal 1995
Sales from the Company's operations were $1.4 billion for fiscal 1996, an
increase of $178.0 million, or 14.8%, over fiscal 1995. International
sales were 17.5% and 11.6% of fiscal 1996 and 1995 sales, respectively.
The sales increase primarily resulted from the following:
o Chicken sales increased 21.7% to $788.9 million in fiscal 1996
from $648.3 million in fiscal 1995 primarily due to an 18.6% increase in
volume and a 2.6% increase in selling prices. The volume increase was
essentially due to increased sales in international markets, especially
Russia and Eastern Europe, and increased domestic consumer demand for
chicken products.
o Turkey sales increased 25.8% to $182.6 million in fiscal 1996
from $145.1 million in fiscal 1995 mainly due to a 23.1% increase in volume
and a 2.2% increase in selling prices. The Company expanded its sales of
turkey in international markets and also to foodservice customers.
o Portioned entree sales increased 2.3% to $175.4 million in fiscal
1996 from $171.4 million in fiscal 1995 mostly due to a 2.9% increase in
volume offset by a slight decrease in selling prices. The volume increase
was primarily due to increased sales to vending, convenience stores and
club stores. Portioned entrees had begun to see benefits from changes to
its customer base and the introduction of new product lines.
o Beef sales were $90.3 million in fiscal 1996 compared with $37.3
million in fiscal 1995. The Company's beef plant in Columbus, Nebraska
began production in February 1995. In fiscal 1996, the Company produced
beef patties primarily for a large restaurant chain but also produced
patties and chub packages for club stores, retail outlets and international
sales.
o Luncheon meat sales decreased 40.7% to $94.2 million in fiscal
1996 from $159.0 million in fiscal 1995 largely due to a 45.0% decrease in
volume offset by a 7.7% increase in selling prices. The volume decrease
was due to the December 29, 1995 sale of the Company's Topeka, Kansas
luncheon meat plant and its related brand names, and the closing and
subsequent sale of its Wichita, Kansas luncheon meat plant. The Company
continued to produce luncheon meat products at its plant in Albert Lea,
Minnesota.
Cost of sales was $1.2 billion for fiscal 1996, an increase of $187.6
million, or 18.3%, over fiscal 1995. As a percentage of sales, cost of
sales increased to 87.9% in fiscal 1996 from 85.3% in fiscal 1995. This
increase was primarily due to increases in volume and higher feed and
ingredient costs that resulted from extremely high grain markets. Feed and
ingredient costs increased to 26.6% of sales in fiscal 1996 from 19.3% in
fiscal 1995.
Gross profit was $166.9 million in fiscal 1996, a decrease of $9.6 million,
or 5.5%, from fiscal 1995.
Selling and general and administrative expenses were $127.0 million in
fiscal 1996, an increase of $14.9 million, or 13.3%, over fiscal 1995. As
a percentage of sales, selling and general and administrative expenses
decreased to 9.2% in fiscal 1996 from 9.3% in fiscal 1995.
Operating income was $39.9 million in fiscal 1996, a decrease of $24.5
million, or 38.1%, from fiscal 1995. The decrease was mainly due to higher
feed and ingredient costs described previously.
Interest expense increased as a result of $120 million and $75 million of
long-term borrowings made in fiscal 1996 and 1995, respectively.
Other income for fiscal 1996 was primarily composed of a gain of $7.5
million resulting from insurance proceeds received in excess of the book
value of assets destroyed by fire. That gain was offset by a loss of $1.3
million resulting from the sale of the Topeka and Wichita, Kansas luncheon
meat assets and related brand names.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital at September 27, 1997 was $213.0 million compared with
$213.9 million at September 28, 1996 and the current ratio was 1.90 to 1
and 2.42 to 1 at September 27, 1997 and September 28, 1996, respectively.
Accounts receivable and inventories increased mainly due to expanded sales
in both international and domestic markets. Other current assets increased
primarily due to: (i) $31.0 million of grower facility construction costs
incurred by the Company under agreements with individual growers whereby
the growers purchase the facilities at the Company's cost upon completion
and (ii) $10.3 million of assets held for sale associated with the
Company's sale of its Columbus, Nebraska beef facility which was
consummated in October 1997. Accrued liabilities increased primarily due
to $6.3 million expenses associated with the hamburger recall and $4.0
million to be paid to the United States as a result of an agreement between
the Company and the DOJ for claims of violations of the Clean Water Act.
The Company's total capitalization, as represented by long-term obligations
plus stockholders' equity, was $573.4 million on September 27, 1997,
compared with $550.9 million on September 28, 1996. Long-term obligations
represented 47.0% and 40.8% of total capitalization on September 27, 1997
and September 28, 1996, respectively.
Cash flows used for operations were $46.9 million for fiscal 1997 compared
with cash flows provided by operations of $10.1 million for fiscal 1996.
The change was primarily due to the net loss and increases in operating
assets.
The Company's capital budget for fiscal 1998 contemplates aggregate capital
expenditures of approximately $45 million for normal improvements to
current production facilities and related equipment. The capital
expenditures have been and will continue to be financed by operations,
borrowings and lease arrangements.
For fiscal 1997 and 1996, the Company had capital expenditures of $66.7
million and $139.4 million, respectively. Capital expenditures for fiscal
1997 included the construction of a chicken complex near Henderson,
Kentucky and the expansion and/or upgrading of existing production
facilities and related equipment. The Company began processing chickens at
its newly constructed Henderson, Kentucky complex in July 1996. The
complex includes a feed mill, hatchery, processing plant and protein plant.
At the end of fiscal 1997, the Company was processing approximately 900,000
chickens per week at the Kentucky processing plant and has plans to
increase production to 2.0 million chickens per week.
Historically, the Company's operations have been financed through
internally generated funds, borrowings, lease arrangements and the issuance
of common stock. On April 30, 1996, the Company entered into a $200.0
million unsecured credit agreement that expires June 30, 2000, but may be
extended annually. At September 27, 1997, the Company had $63.0 million in
notes payable outstanding under the agreement and $11.2 million in
outstanding letters of credit. The credit agreement, among other things,
limits the payment of dividends to approximately $2.8 million in any fiscal
year and limits annual capital expenditures and lease obligations. It
requires the maintenance of minimum levels of working capital and tangible
net worth, and requires that the current ratio, leverage ratio and cash
flow coverage ratio be maintained at certain levels. It also limits the
creation of new secured debt to $25.0 million and new unsecured short-term
debt with parties outside the credit agreement to $20.0 million.
Additionally, an event of default will occur if the aggregate outstanding
voting power of James T. Hudson and his immediate family is reduced below
51%.
Also, the Company has three separate unsecured short-term credit agreements
with financial institutions (outside the $200.0 million credit agreement)
giving the Company the right to borrow up to $15.0 million each from two
institutions and $10.0 million from the other. At September 27, 1997, the
Company had $15.0 million in notes outstanding under these agreements.
On December 6, 1996, the Company borrowed $50.0 million under an unsecured
term loan agreement from an insurance company at 6.97% due December 6,
2006. On April 11, 1997, $15.0 million in unsecured loans at 9.99% from
insurance companies matured. The loans were rolled into new unsecured
loans totaling $20.0 million from the same insurance companies at 6.99% due
April 11, 2007. For the new loans, interest payments only will be due in
the first three years. In the fourth year, quarterly principal and monthly
interest payments will be due. Restrictions and covenants are
substantially the same as those included in the $200.0 million unsecured
credit agreement.
FORWARD LOOKING STATEMENTS
- --------------------------
Certain statements in this document constitute forward looking statements
and involve risks, uncertainties and other factors which may cause the
actual performance of the Company to be materially different from the
performance expressed or implied by such statements. Such factors include,
among others, market conditions and weather patterns that may affect the
cost of grain, consumer demand for poultry products, the completion on
schedule of capital projects planned or under construction, adverse
publicity involving the Company or the poultry industry, the possibility of
tariff law changes or other marketplace changes and restrictions directly
affecting export sales, difficulties in assessing credit risks in sales to
Russian customers and in collecting amounts owed, fluctuations in foreign
exchange rates, and other risks commonly encountered in international
trade.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Hudson Foods, Inc.
We have audited the accompanying consolidated balance sheet of Hudson
Foods, Inc. and subsidiaries as of September 27, 1997 and September 28,
1996, and the related consolidated statements of operations and cash flows
and the related financial statement schedule for each of the three years in
the period ended September 27, 1997. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated 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 consolidated financial position of Hudson
Foods, Inc. and subsidiaries as of September 27, 1997 and September 28,
1996, and the consolidated results of their operations and the cash flows
for each of the three years in the period ended September 27, 1997, in
conformity with generally accepted accounting principles. In addition, in
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information required to be
included therein.
Coopers & Lybrand L.L.P.
Tulsa, Oklahoma
November 10, 1997
<TABLE>
<CAPTION>
HUDSON FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended September 27, September 28, September 30,
(Dollars in thousands except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $1,665,105 $1,378,474 $1,200,512
Cost of sales 1,490,550 1,211,556 1,023,959
- -------------------------------------------------------------------------------------------------------------
Gross profit 174,555 166,918 176,553
Selling 111,632 94,805 82,945
General and administrative 32,527 32,240 29,211
International reorganization (Note 10) 24,195 - -
Other special charges (Note 11) 28,292 - -
- -------------------------------------------------------------------------------------------------------------
Operating income (loss) (22,091) 39,873 64,397
- -------------------------------------------------------------------------------------------------------------
Other expense (income):
Interest, net 13,364 5,789 1,845
Interest on tax settlement - - 4,500
Other, net (Note 3) (881) (4,246) (2,190)
- -------------------------------------------------------------------------------------------------------------
Total other expense (income) 12,483 1,543 4,155
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (34,574) 38,330 60,242
Income tax expense (benefit) (13,329) 15,332 24,484
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $(21,245) $22,998 $35,758
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $(0.70) $0.76 $1.21
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
<CAPTION>
HUDSON FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
September 27, September 28,
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,753 $ 6,437
Accounts receivable 134,038 110,655
Less allowance for doubtful accounts 5,853 1,863
- -------------------------------------------------------------------------------------------------------------
128,185 108,792
Inventories 243,915 226,872
Other 73,419 22,373
- -------------------------------------------------------------------------------------------------------------
Total current assets 448,272 364,474
- -------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 389,031 367,600
Excess cost of investment over net assets acquired, net 13,557 14,119
Other assets 36,166 28,549
- -------------------------------------------------------------------------------------------------------------
Total assets $887,026 $774,742
- -------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 78,000 $ -
Current portion of long-term obligations 25,676 24,714
Accounts payable 67,498 69,552
Accrued liabilities 64,142 49,578
Deferred income taxes - 6,741
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 235,316 150,585
- -------------------------------------------------------------------------------------------------------------
Long-term obligations 269,316 224,951
- -------------------------------------------------------------------------------------------------------------
Deferred income taxes and deferred gain 78,285 73,286
- -------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity:
Common stock:
Class A, $.01 par value, issued 21,746,659 and 21,384,664 shares 217 214
Class B, $.01 par value, issued and outstanding 9,602,372
and 9,602,522 shares 96 96
Additional capital 161,382 159,314
Retained earnings 153,618 177,153
- -------------------------------------------------------------------------------------------------------------
315,313 336,777
Treasury stock, at cost (886,644 and 877,196 Class A shares) (11,204) (10,857)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 304,109 325,920
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $887,026 $774,742
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
HUDSON FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended September 27, September 28, September 30,
(Dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(21,245) $22,998 $35,758
Non-cash items included in net income (loss):
Depreciation 31,699 25,318 24,084
Amortization 1,310 1,385 1,053
Deferred income taxes (benefit) (13,828) 3,661 4,637
International charges 49,135 - -
Loss on sale of business 8,148 1,306 -
Other (2,004) (2,198) (2,777)
Changes in assets and liabilities:
Accounts receivable (43,859) (33,811) (15,570)
Inventories (43,385) (54,946) (41,554)
Accounts payable (2,075) 21,876 6,488
Accrued liabilities 17,949 6,340 4,423
Other (28,780) 18,138 (35,261)
Cash flows provided by (used for) operating activities (46,935) 10,067 (18,719)
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (66,735) (139,387) (73,314)
Disposition of property, plant and equipment, net 887 758 3,828
Funds received from (held by) trustee for capital project - 16,926 (16,926)
Sale of business - 28,885 -
Other (12,988) (9,613) (5,427)
- -------------------------------------------------------------------------------------------------------------
Cash flows used for investing activities (78,836) (102,431) (91,839)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Additions (reductions) to notes payable 78,000 (12,300) (4,500)
Additions to long-term obligations 55,000 120,000 75,000
Reductions of long-term obligations (9,673) (9,050) (11,021)
Sale of Class A common stock - - 51,264
Dividends (2,290) (2,277) (2,249)
Exercise of stock options and other 1,050 269 2,324
- -------------------------------------------------------------------------------------------------------------
Cash flows provided by financing activities 122,087 96,642 110,818
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,684) 4,278 260
Cash and cash equivalents at beginning of period 6,437 2,159 1,899
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $2,753 $6,437 $2,159
- -------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $15,397 $6,957 $7,111
Income taxes $1,135 $8,524 $32,210
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. Summary of Significant Accounting Policies
Nature of Operations. The Company is a vertically integrated producer of
chicken and turkey products, including the breeding, hatching, growing,
processing and packaging of those product lines. Additionally, the Company
processes and markets beef and pork products. The Company's products are
sold domestically in three primary markets: foodservice, club stores and
retail outlets. The Company's products are also sold internationally to
wholesalers primarily in Russia, Eastern Europe, Asia and Latin America.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries.
Estimates. Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets,
liabilities, revenue and expenses as reflected in the financial statements.
Actual results could differ from estimates. Significant estimates
impacting the Company's financial statements include allowances for bad
debts and loss contingencies associated with the Company's product recall.
(See Note 11 Contingencies). It is at least reasonably possible that
material changes in such estimates may occur in the near term.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. At September 27, 1997 and September 28, 1996, cash and cash
equivalents included temporary cash investments in certificates of deposit,
U.S. treasury bills and U.S. government agency securities of $9,396,000 and
$18,817,000, respectively. Cash equivalents are stated at cost, which
approximates market value, and have been used to offset book overdrafts.
Concentrations. Financial instruments which subject the Company to
concentrations of credit risk consist primarily of trade receivables from
large domestic and foreign companies. The Company generally does not
require collateral from its customers. Such credit risk is considered by
management to be limited due to the Company's broad customer base. In
fiscal years 1997, 1996 and 1995, one domestic customer accounted for
approximately 17.9%, 18.7% and 14.7% of consolidated sales, respectively.
At September 27, 1997 and September 28, 1996, accounts receivable from this
customer were $26.7 million and $20.8 million, respectively. The Company's
foreign sales in fiscal years 1997, 1996 and 1995 were 20.0%, 17.5% and
11.6% of total sales, respectively. In fiscal 1997 and 1996 5.6% of total
sales were to one foreign customer. At September 27, 1997 and September
28, 1996, accounts receivable from this foreign customer were $8.0 million
and $14.0 million, respectively.
Inventories. Inventories are stated at the lower of cost (first-in, first-
out method) or market. Inventory cost includes the cost of raw materials
and all applicable costs of processing.
Property, Plant and Equipment. Property, plant and equipment are stated at
cost. When assets are sold or retired, the costs of the assets and the
related accumulated depreciation are removed from the accounts and the
resulting gains or losses are recognized. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Interest costs of approximately $6,353,000, $8,066,000 and $4,487,000 were
capitalized during 1997, 1996 and 1995, respectively.
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of." Under the pronouncement, the carrying
value of property, plant and equipment is reviewed for possible impairment
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Assets determined to be impaired based on
estimated future net cash flows are reduced to estimated fair value.
Earnings per Share. Earnings per share are based on the weighted average
number of shares outstanding. The primary earnings per share computation
assumes that outstanding dilutive stock options were exercised and the
proceeds used to purchase common shares. Earnings per share, assuming full
dilution, gives effect to the conversion of outstanding convertible
debentures and the exercise of dilutive stock options.
Excess Cost of Investment Over Net Assets Acquired. The excess cost of
investment over net assets acquired is being amortized over periods ranging
from 33 to 40 years and is evaluated annually for impairment based on
estimated undiscounted cash flows of the acquired entities. Accumulated
amortization was $5,788,000 and $5,273,000 at September 27, 1997 and
September 28, 1996, respectively.
Income Taxes. The Company utilizes the asset and liability approach for
financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are recorded to reflect the expected tax
consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year-end.
Advertising. Advertising costs are expensed in the period incurred. Such
expenses were $10,450,000, $9,893,000 and $7,399,000 for fiscal 1997, 1996
and 1995, respectively.
Fiscal Year. The Company utilizes a 52-53 week accounting period, which
ends on the Saturday closest to September 30.
<TABLE>
<CAPTION>
2. Inventories
Sept. 27, Sept. 28,
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Field inventory - broilers
and breeder stock $46,705 $46,545
Field inventory - turkeys
and breeder stock 13,850 14,705
Feed, eggs and other 33,478 32,273
Finished products 149,882 133,349
- -------------------------------------------------------------------------------------------------------------
Total $243,915 $226,872
- -------------------------------------------------------------------------------------------------------------
</TABLE>
3. Other Current Assets
Other current assets includes $10.3 million of assets held for sale
associated with the Company's sale of its Columbus, Nebraska beef facility
which sale was agreed to on September 25, 1997 and consummated on October
2, 1997. The loss associated with the sale of the Company's beef
operations was $11.8 million comprised of an approximate $4.4 million
reduction of investment in the plant and associated assets to the amount
realized on the sale, approximately $3.6 million related to costs incurred
during the shut-down period (salaries, workers' compensation costs, rental
expense and other operating expenses incurred in August and September
1997), approximately $3.2 million of loss on a minority investment in a
similar beef processing facility and approximately $600,000 of other
related costs. Operating loss for the Nebraska facility totaled
approximately $917,000 for the year ended September 27, 1997, excluding the
$12.5 million of costs related to the recall and the $11.8 million loss on
the sale of the facility.
Also included in other current assets are $31.0 million of grower facility
construction costs incurred by the Company under agreements with individual
growers whereby the growers will purchase the facilities at the Company's
cost upon completion.
<TABLE>
<CAPTION>
4. Property, Plant and Equipment
Sept. 27, Sept. 28,
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $15,005 $13,402
Buildings and improvements 277,389 204,248
Machinery and equipment 232,890 160,807
Construction in progress 36,732 139,888
- -------------------------------------------------------------------------------------------------------------
562,016 518,345
Less accumulated depreciation 172,985 150,745
- -------------------------------------------------------------------------------------------------------------
Total $389,031 $367,600
- -------------------------------------------------------------------------------------------------------------
</TABLE>
5. Financing Arrangements
The Company's line of credit agreement (the"Agreement"), which expires June
30, 2000, provides for aggregate borrowings or letters of credit up to $200
million. At September 27, 1997, the Company had $63.0 million in notes
payable outstanding and had issued $11.2 million in letters of credit. The
Agreement, among other things, limits the payment of dividends to
approximately $2.8 million in any fiscal year and limits annual capital
expenditures and lease obligations. It requires the maintenance of minimum
levels of working capital and tangible net worth, and requires that the
current ratio, leverage ratio and cash flow coverage ratio be maintained at
certain levels. It also limits the creation of new secured debt to $25.0
million and new unsecured short-term debt with parties outside the
Agreement to $20.0 million. Additionally, an event of default will occur
if the aggregate outstanding voting power of James T. Hudson and his
immediate family is reduced below 51%. At September 27, 1997, $125.8
million was unused under the Agreement.
In addition, the Company has three separate unsecured short-term credit
agreements with financial institutions giving the Company the right to
borrow up to $15.0 million each from two institutions and $10.0 million
from the other. At September 27, 1997, the Company had $15.0 million in
notes outstanding under these agreements.
<TABLE>
<CAPTION>
6. Accrued Liabilities
Sept. 27, Sept. 28,
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Payroll and benefits $36,262 $32,952
Beef product recall 6,320 -
Advertising 4,094 4,499
Income, property and other taxes 3,197 3,286
Interest 1,281 1,160
Other 12,988 7,681
- -------------------------------------------------------------------------------------------------------------
Total $64,142 $49,578
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
7. Long-Term Obligations
Sept. 27, Sept. 28,
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
6.69% Notes to insurance companies due Dec. 28, 2005 $55,000 $55,000
6.63% Notes to an insurance company due March 22, 2006 50,000 50,000
6.97% Notes to an insurance company due December 6, 2006 50,000 -
6.90% Notes to an insurance company due June 1, 2005 41,542 45,463
Tax-exempt floating rate bonds (4.20% at Sept. 27, 1997)
due March 1, 2015 25,000 25,000
6.99% Notes to an insurance company due April 11, 2007 20,000 -
9.99% Notes to an insurance company due April 12, 1997 - 15,000
6.45% Note to a bank due Jan. 31, 2006 14,010 14,647
8.99% Note to an insurance company due March 15, 1998 12,677 13,632
7.62% Note to an insurance company due Sept. 1, 2002 8,209 9,835
9.95% Note to a bank due June 30, 1999 5,600 6,150
7.20%-7.64% Notes to a bank due Sept. 1, 2002 5,084 6,084
8.14% Note to an insurance company due March 15, 1998 4,199 4,480
7.68% Note to an insurance company due Sept. 1, 2002 3,125 3,750
Other - 6%-7% Notes due through 2002 546 624
- -------------------------------------------------------------------------------------------------------------
Total 294,992 249,665
- -------------------------------------------------------------------------------------------------------------
Less current portion of long-term obligations 25,676 24,714
- -------------------------------------------------------------------------------------------------------------
Long-term obligations $269,316 $224,951
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Certain of the Company's loan agreements contain restrictive covenants,
which are similar to those required under the $200 million line of credit.
The fair value of the Company's debt obligations is based on discounted
future cash flows using current interest rates. The fair value of the
Company's debt obligations at September 27, 1997 and September 28, 1996,
including current portion and notes payable, is estimated to be
approximately $371 million and $247 million, respectively.
At September 27, 1997, the aggregate amount of long-term obligations, which
will become due during each of the next five fiscal years is as follows:
$25,676,000 in 1998; $13,646,000 in 1999; $29,323,000 in 2000; $31,480,000
in 2001 and $32,056,000 in 2002.
8. Income Taxes
Consolidated income tax expense for each of the three years in the period
ended September 27, 1997 consists of the following:
<TABLE>
<CAPTION>
For the Years Ended Sept. 27, Sept. 28, Sept. 30,
(Dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $(2,231) $9,993 $17,620
State (22) 1,678 2,227
Deferred provision:
Federal (10,203) 3,333 4,250
State (873) 328 387
- -------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $(13,329) $15,332 $24,484
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Reconciliations of the statutory federal income tax rate with the effective income tax rate for each of the
three years in the period ended September 27, 1997 are as follows:
For the Years Ended Sept. 27, Sept. 28, Sept. 30,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate (35.0)% 35.0% 35.0%
State income taxes, net of federal benefit (3.5) 4.0 3.1
Tax credits - (0.6) (0.7)
Other (0.1) 1.6 3.2
- -------------------------------------------------------------------------------------------------------------
Effective income tax (benefit) rate (38.6)% 40.0% 40.6%
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
An analysis of the Company's net current and long-term deferred tax liabilities (assets) at September 27,
1997 and September 28, 1996 is as follows:
Sept. 27, Sept. 28,
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current:
Inventory $17,827 $13,783
Allowance for doubtful accounts (2,253) (703)
Accrued liabilities (6,947) (6,839)
Net operating loss (14,026) -
Other 855 500
- -------------------------------------------------------------------------------------------------------------
Total current deferred income taxes* $(4,544) $6,741
- -------------------------------------------------------------------------------------------------------------
*The Company's net current deferred tax asset has been included in other current assets.
Long-term:
Property, plant and equipment $35,411 $31,274
Change from the cash basis to the accrual basis of
accounting in 1988 for the "Family Farm" subsidiaries 38,315 38,315
Other 4,536 3,263
- -------------------------------------------------------------------------------------------------------------
Total long-term deferred income taxes $78,262 $72,852
- -------------------------------------------------------------------------------------------------------------
</TABLE>
9. Employee Benefit and Compensation Plans
Stock Option Plan. The 1996 Stock Option Plan reserves 1,200,000 and
300,000 shares of the Company's Class A common stock for issuance as
incentive stock options and nonqualified stock options, respectively. The
Company continues to reserve 115,689 shares of Class A common stock for
issuance against outstanding options granted under the Second Amended and
Restated 1985 Stock Option Plan (the "1985 Stock Option Plan") which
expired during fiscal year 1996.
The 1996 Stock Option Plan and the 1985 Stock Option Plan (collectively,
the "Option Plans") provide for the grant of options to key employees upon
terms and conditions determined by a committee of the Board of Directors.
Options expire no later than the tenth anniversary of the date of grant,
and are exercisable at a price which is at least 100% of the fair market
value of such shares on the date of grant (110% in the case of individuals
holding at least 10% of the Company's Class A common stock). The Company
may not issue additional options to any employees under the Agreement and
Plan of Merger between the Company and Tyson (See Note 11 Contingencies).
A summary of stock option activity related to the Option Plans for each of
the three years in the period ended September 27, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
average Number of
Number price shares
of shares per share exercisable
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at 10/1/94 1,032,454 $5.23 723,464
- -------------------------------------------------------------------------------------------------------------
Granted - -
Exercised (484,980) $5.61
Cancelled (10,200) $4.90
- -------------------------------------------------------------------------------------------------------------
Outstanding at 9/30/95 537,274 $4.94 344,284
- -------------------------------------------------------------------------------------------------------------
Granted 30,000 $14.13
Exercised (53,140) $5.07
Cancelled (6,600) $5.04
- -------------------------------------------------------------------------------------------------------------
Outstanding at 9/28/96 507,534 $5.48 396,339
- -------------------------------------------------------------------------------------------------------------
Granted - -
EXERCISED (361,845) $4.98
CANCELLED - -
- -------------------------------------------------------------------------------------------------------------
OUTSTANDING AT 9/27/97 145,689 $6.69 127,689
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Outstanding Options
Weighted Weighted
Average Average
Exercise Number of Remaining Exercise
Prices Shares Contractual Life Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$4.67 - $5.04 115,689 1.7 years $4.76
$14.13 30,000 8.5 years $14.125
<CAPTION>
Exercisable Options
Weighted
Average
Exercise Number of Exercise
Prices Shares Price
- ---------------------------------------------------------------------------------
<S> <C> <C>
$4.67 - $5.04 115,689 $4.76
$14.13 12,000 $14.125
</TABLE>
The Company applies APB 25 in accounting for such stock options.
Accordingly, based on the nature of the Company's grants of options, no
compensation cost has been recognized in 1997, 1996 or 1995. Based on the
provisions of Financial Accounting Standard No. 123, "Accounting for Stock-
Based Compensation," the grant date fair value of these options is not
material and, accordingly, disclosure of pro forma information as required
by this standard has not been presented.
Employee Stock Purchase Plan. The Company's 1990 Employee Stock Purchase
Plan (the "Purchase Plan") makes available to eligible employees a means of
purchasing up to 1,500,000 shares of the Company's common stock at current
market prices. Under the terms of the Purchase Plan, the Company
contributes an amount annually, in cash or Class A stock, equal to 15% of
the undistributed total of participants' contributions for the past ten
years. All full-time employees of the Company (except those owning 10% or
more of the Company's Class A stock) are eligible to participate in the
Purchase Plan.
Retirement Plans. The Company provides a 401(k) Plan and an Executive
Salary Deferral Plan which include Company matching of 50% of contributions
not exceeding 4% of each participant's salary. The Company's contribution
was $1,538,000 in 1997; $1,483,000 in 1996; and $1,393,000 in 1995.
10. International reorganization
During fiscal 1997, the Company recorded charges associated with a
reorganization of its International Division. The reorganization placed
particular emphasis on changes to the Company's Russian market distribution
system. Specifically, the Company elected to discontinue its utilization
of a Russian distributor to market its products throughout Russia and began
to distribute its products directly to customers in Russia. The
distributor previously accounted for the majority of the Company's sales in
Russia. As part of the change, the Company incorporated a subsidiary in
Russia and has initiated the expansion of marketing and other personnel in
Russia. The Company believes that the reorganization will allow it to grow
its customer base by distributing its products into the widespread
geographic markets of Russia. Associated with these changes, the Company
recognized that receivables of $24.2 million and inventory costs of $14.0
million would not be recoverable. The charge associated with receivables
was reported as a loss on international reorganization and the charge
associated with inventory has been included in cost of sales in the
accompanying statement of operations. The Company also recorded
international bad debt expense of $11.0 million that was included in
selling expense.
11. Contingencies
In August 1997, Hudson was requested by the USDA to recall three days'
production of raw ground beef products processed at its Columbus, Nebraska
plant. The recall was requested because of concerns that such production
might be subject to a form of E. coli bacterial contamination. It was
recognized by the USDA that the contamination most likely originated at a
Hudson supplier and not at Hudson's state-of-the-art Nebraska facility.
Subsequently, because of USDA concern that the E. coli contamination could
have spread to additional days of production, the recall was expanded at
the request of the USDA to include all raw ground beef products processed
at the plant. The USDA's concern stemmed from an industry accepted
practice of product rework. Because of the extent of the production
affected by the precautionary recall, the Company determined to close the
plant pending further review. In September 1997, the Company entered into
an agreement, which was consummated in October 1997, to sell the plant and
related assets. Following the announcement of the expanded recall, the
Company's primary customer for frozen beef patties publicly announced that
it had decided not to purchase additional beef products from the Company
even though the customer acknowledged that there was no evidence that any
contaminated product had been delivered to it and was aware that the recall
was a precautionary measure. In the fourth quarter of fiscal 1997, the
Company recorded a special operating charge of $12.5 million, representing
costs expected to be incurred in completing the recall of these products.
The Company also recorded a special charge of $4.0 million which was for
cash payments to be made to the United States as a result of an agreement
between the Company and the Department of Justice for claims of violations
of the Clean Water Act.
In September 1997, the Company learned that the United States Attorney for
the District of Nebraska had begun an investigation into activities
involving the recall of beef products from the Columbus, Nebraska facility.
The Company is cooperating with this investigation. The Company believes
that the source of any contamination was from outside suppliers and did not
originate at the plant.
Certain parties affected by the Company's Beef Recall have notified the
Company that they may make claims against the Company for damages sustained
as a result of the Beef Recall. On November 3, 1997, Todd Allen McDonald
brought an action against the Company on his own behalf (amended November
21, 1997 to add eight additional plaintiffs) and purportedly on behalf of
others similarly situated in the Chancery Court of Pulaski County,
Arkansas. The action alleges, among other things, that the Company was
negligent and failed to exercise ordinary care at its Columbus, Nebraska
plant and seeks, among other remedies, unspecified damages. No other
product liability suits have been filed against the Company as a result of
the Beef Recall, although the Company is evaluating consumer complaints
communicated through the Company's telephone hotline or by mail. With
respect to the parties alleging sickness, the Company's product liability
insurance is anticipated to cover any losses beyond the Company's
deductible. Investigation of these matters is generally in the preliminary
stages. The Company, after consultation with its attorneys, is unable to
reasonably estimate the extent of the Company's liability, if any, at this
time.
The Company is involved in other litigation incidental to its business.
Such litigation is not considered by management to be significant.
12. Proposed Merger with Tyson
In the wake of the raw ground beef product recall and its potential to
negatively impact the Company's other operations, the Company's senior
management decided to explore merger discussions with Tyson. After a
series of meetings between senior management of both companies and their
advisors, the Board of Directors met formally on the morning of September
4, 1997. By a unanimous vote of the members present, the Board of
Directors: 1) approved and adopted the Agreement and Plan of Merger
("Merger Agreement"), 2) recommended submission of the Merger Agreement for
approval and adoption by the Company's stockholders and 3) recommended that
the Company's stockholders vote "for" the proposal to approve and adopt the
Merger Agreement.
Simultaneously with the execution of the Merger Agreement, James T. Hudson
entered into a Stock Voting Agreement ("Voting Agreement") with Tyson. The
Voting Agreement states that Mr. Hudson will vote all shares of Class A
and Class B common stock owned by him, to approve and adopt the Merger
Agreement. The Voting Agreement will terminate on the earlier of : 1) the
effective date of the merger or 2) the termination of the Merger Agreement
in accordance with its terms. The Merger Agreement may be terminated under
certain circumstances, including: 1) by either Tyson or the Company if the
merger has not been consummated on or before February 28, 1998 and (2) by
the Company if the Board of Directors of the Company reasonably determines,
based on certain specified standards, that a written, unsolicited proposal
or offer is made for a business combination or similar transaction with the
Company which is more favorable to the Company and its stockholders than
the merger with Tyson.
The completion of the merger will constitute an event of default under the
Company's credit facilities, but the Company has contacted its lenders
thereunder and believes they will permit Tyson to assume said credit
facilities without resulting in an event of default.
13. Commitments
The Company leases transportation and delivery equipment, poultry farms,
processing equipment and distribution facilities under operating leases
expiring during the next six years. Management expects that in the normal
course of business the leases will be renewed or replaced by other leases.
In November and December 1992, under sale-leaseback agreements, the Company
sold certain equipment with a net book value of $4.5 million for $19.2
million cash. Annual payments under the operating lease agreements are
$3.5 million. The gain of $14.7 million is being amortized over the terms
of the leases. At September 27, 1997 and September 28, 1996, the
unamortized portion of the deferred gain is included in the balance sheet
captions "accrued liabilities" ($411,000 and $2,005,000, respectively) and
"deferred income taxes and deferred gain" ($23,000 and $434,000,
respectively).
Total rental expense (net of amortized gain) was $38,460,000 in 1997;
$35,566,000 in 1996; and $28,378,000 in 1995.
At September 27, 1997, future minimum rental payments required under leases
that have initial or remaining noncancellable terms in excess of one year
are as follows: $32,872,000 in 1998; $26,966,000 in 1999; $21,435,000 in
2000; $13,933,000 in 2001 and $6,900,000 in 2002.
The Company maintains separate self-insurance programs for employee group
health, dental and disability benefits and for workers' compensation costs.
Self-insurance costs are accrued based upon the aggregate of the liability
for reported claims and an estimated liability for claims incurred but not
yet reported.
The Company assists certain of its poultry growers by providing the grower
with extended grow-out contracts and conditional operation of the
facilities should a grower default under their grow-out or loan agreements.
14. Related Party Transactions
Lease payments for transportation equipment made to the Company's chairman
amounted to $3,179,000 in 1997; $3,112,000 in 1996; and $1,708,000 in 1995.
Certain officers and employees of the Company own turkey and broiler farms
and enter into grower contracts with the Company which provide for the
payment of grower fees. The Company's arrangements with these officers and
employees are similar to contracts with unrelated growers and, as such, do
not include an ongoing commitment by the Company. Grower fees paid to
these officers and employees amounted to $793,000 in 1997; $787,000 in
1996; and $803,000 in 1995.
At both September 27, 1997 and September 28, 1996, other current assets
included $223,000 and other assets included $11,271,000 and $9,071,000,
respectively, of accounts and notes receivable from officers and directors
and entities controlled by this person.
15. Impact of New Financial Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128").
FAS 128 will change the computation, presentation and disclosure
requirements for earnings per share. FAS 128 requires the presentation of
"basic" and "diluted" earnings per share, as defined, for all entities with
complex capital structures. FAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, and requires restatement
of all prior period earnings per share amounts. The Company has not yet
determined the impact that FAS 128 will have on its earnings per share when
adopted.
<TABLE>
<CAPTION>
16. Stockholders' Equity
(Dollars in thousands) Common stock
- -------------------------------------------------------------------------------------------------------------
Class A Class B
- -------------------------------------------------------------------------------------------------------------
Additional Retained Treasury
Shares Amount Shares Amount capital earnings stock
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994 9,233,893 $92 8,501,882 $85 $97,505 $122,923 $(11,416)
Net income - - - - - 35,758 -
Stock exchange 2,101,102 21 (2,101,102) (21) - - -
Exercise of stock options 422,455 4 - - 2,333 - -
Conversion of 8% debentures 262,885 3 952 - 5,262 - -
Stock offering 2,500,000 25 - - 51,239 - -
3-for-2 stock split 6,653,539 66 3,200,940 32 (101) - -
Purchase of land 157,500 2 - - 2,371 - -
Issuance of stock under the
Employee Stock Purchase Plan - - - - 233 - 182
Cash dividends:
Class A $.080 per share - - - - - (1,611) -
Class B $.067 per share - - - - - (638) -
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 21,331,374 213 9,602,672 96 158,842 156,432 (11,234)
Net income - - - - - 22,998 -
Stock exchange 150 - (150) - - - -
Exercise of stock options 53,140 1 - - 269 - -
Issuance of stock under the
Employee Stock Purchase Plan - - - - 203 - 377
Cash dividends:
Class A $.080 per share - - - - - (1,639) -
Class B $.067 per share - - - - - (638) -
- -------------------------------------------------------------------------------------------------------------
Balance at September 28, 1996 21,384,664 214 9,602,522 96 159,314 177,153 (10,857)
Net loss - - - - - (21,245) -
Stock exchange 150 (150) - - - -
Exercise of stock options 361,845 3 - - 1,795 - -
Issuance of stock under the
Employee Stock Purchase Plan - - - - 273 - 400
Purchase of stock for
Employee Stock Purchase Plan - - - - - - (747)
Cash dividends:
Class A $.080 per share - - - - - (1,653) -
Class B $.067 per share - - - - - (637) -
- -------------------------------------------------------------------------------------------------------------
Balance at September 27, 1997 21,746,659 $217 9,602,372 $96 $161,382 $153,618 $(11,204)
- -------------------------------------------------------------------------------------------------------------
On February 6, 1987, the Company's Restated Certificate of Incorporation was amended to create two classes
of common stock. The amendment authorized the issuance of up to 40,000,000 shares of Class A common stock,
par value $.01 per share, and 40,000,000 shares of Class B common stock, par value $.01 per share. Upon
adoption of the amendment, each outstanding share of common stock converted automatically into a share of
Class A common stock. During fiscal 1987, the Company concluded a one-time-only exchange offer in which
holders of Class A common stock were given the opportunity to exchange their shares for an equivalent
number of shares of Class B common stock. The Class B common stock has ten votes per share in most matters
submitted to a vote of the Company's stockholders, while the Class A common stock has one vote per share.
As a result of the exchange offer, voting control of the Company rests with the holders of Class B common
stock. In addition, the dividend per share of Class B common stock may not exceed 90 percent of the dividend
per share of Class A common stock. The number of outstanding Class A shares at September 27, 1997 and
September 28, 1996 were 20,860,015 and 20,507,468, respectively.
<CAPTION>
Quarterly Financial Data (unaudited)
(Dollars in thousands except per share data)
Quarter Ended 1997 December 28 March 29 June 28 September 27 Fiscal 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $391,280 $405,117 $435,449 $433,259 $1,665,105
Cost of sales 340,407 358,052 399,713 392,378 1,490,550
- -------------------------------------------------------------------------------------------------------------
Gross profit 50,873 47,065 35,736 40,881 174,555
Selling 26,007 24,912 23,964 36,749(2) 111,632
General and administrative 8,109 7,906 8,207 8,305 32,527
International reorganization - - 24,195(1) - 24,195
Other special charges - - - 28,292(3) 16,502
- -------------------------------------------------------------------------------------------------------------
Operating income (loss) 16,757 14,247 (20, 630) (32, 465) (10,301)
Other expense, net 1,352 3,217 4,204 3,710(4) 24,273
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 15,405 11,030 (24,834) (36,175) (34,574)
Income tax expense (benefit) 6,162 4,412 (9,933) (13,970) (13,329)
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $9,243 $6,618 $(14,901) $(22,205) $(21,245)
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Primary $.30 $.22 $(0.49) $(0.73) $(0.70)
Fully diluted .30 .22 (0.49) (0.73) (0.70)
Dividends:
Class A .0200 .0200 .0200 .0200 .080
Class B .0167 .0167 .0167 .0167 .067
Market price (high-low) $18 3/4-13 1/2 $21 1/4-15 7/8 $17 3/8-14 $21 5/8 -14 1/8 $21 5/8-13 1/2
- -------------------------------------------------------------------------------------------------------------
<FN>
(1) Loss resulting from unrecoverable receivables arising from the reorganization of the Company's
international division.
(2) Includes $11.0 million bad debt expense resulting from the write-off of international receivables.
(3) Includes expenses of $12.5 million expected to be incurred as a result of the Beef Recall,
$4.0 million as a result of an agreement to settle claims of violations of the Clean Water Act
and a loss of $11.8 million from the write-down of the Columbus, Nebraska beef plant and related assets
to the amount realized from the sale finalized in October 1997.
(4) Includes $14.0 million unrecoverable international inventory costs.
</FN>
<CAPTION>
Quarter Ended 1996 December 30 March 30 June 29 September 28 Fiscal 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $340,674 $330,297 $337,234 $370,269 $1,378,474
Cost of sales 293,757 293,369 296,069 328,361 1,211,556
- ----------------------------------------------------------------------------------------------------------------
Gross profit 46,917 36,928 41,165 41,908 166,918
Selling 23,657 24,134 23,440 23,574 94,805
General and administrative 7,121 8,208 8,542 8,369 32,240
- ----------------------------------------------------------------------------------------------------------------
Operating income 16,139 4,586 9,183 9,965 39,873
Other expense (income), net 1,270 1,540 3,778 (5,045) 1,543
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 14,869 3,046 5,405 15,010 38,330
Income tax expense 5,870 1,164 2,096 6,202 15,332
- ----------------------------------------------------------------------------------------------------------------
Net income $8,999 $1,882 $3,309 $8,808 $22,998
- ----------------------------------------------------------------------------------------------------------------
Earnings per share:
Primary $.30 $.06 $.11 $.29 $.76
Fully diluted .30 .06 .11 .29 .76
Dividends:
Class A .0200 .0200 .0200 .0200 .080
Class B .0167 .0167 .0167 .0167 .067
Market price (high-low) $17 1/2-13 5/8 $18 1/8-12 3/4 $15 1/8-11 1/2 $14 1/2 - 12 1/8 $18 1/8-11 1/2
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The Company's By-Laws provide that the number of directors constituting the
Board of Directors shall be not less than three nor more than 15, as
determined by the Board of Directors. The Board's size is currently set at
eight members. The Company's directors each serve for a term of one year
and until their successors shall be elected and qualified. The following
individuals were elected to serve as directors at the Company's most recent
Annual Meeting and are currently serving in such capacity:
<TABLE>
<CAPTION>
Name Age Experience
- ------------------------ --- ------------------------------------------------------------------------------------------------
<S> <C> <C>
James T. Hudson 73 Chairman of the Board of Directors since the Company's organization in February 1972.
Chief Executive Officer from February 1972 until January 1997. President from February 1972
until October 1985. Prior to 1972, was with Ralston Purina for 26 years, the last seven as
Operating Director of the West Central Region. Chairman of the Board of the National Broiler
Council from 1982 to 1984. Past President of the Arkansas Poultry Federation.
Michael T. Hudson 50 Chief Executive Officer since January 1997. President since October 1985; Chief Operating
Officer since August 1987. Prior to joining the Company in 1972, was employed for two years
in the Southeast Region of Ralston Purina's poultry operations. Since joining the Company,
has served as Vice President -- Sales, Vice President--Sales and Marketing and Vice
President - Production. Director since 1972.
Charles B. Jurgensmeyer 54 Chief Financial Officer and Executive Vice President. Prior to joining Hudson in 1972,
was employed in the West Central Region of Ralston Purina's poultry operations for seven years,
primarily in finance and accounting positions. Has previously served as Secretary/Treasurer and
Controller. Director since July 1985.
James R. Hudson 39 Vice President - Director of Transportation since September 1992. Served as the Director of
Fleet Operations from November 1984 until August 1992. Director since November 1992.
Director from July 1985 until December 1985.
Elmer W. Shannon 76 Began service with the Company in 1972 as Marketing Manager. Retired as Vice President and
Director of Marketing in April 1984. Subsequently retained by the Company as a consultant.
Director since December 1986.
Kenneth N. May 67 Consultant. Vice President - Research and Quality Assurance of Holly Farms Foods, Inc. from
September 1973 through September 1985; President and Chief Executive Officer of Holly Farms
Foods, Inc. from October 1985 through January 1988; and Chairman and Chief Executive Officer
of Holly Farms Foods, Inc. from January 1988 through August 1989. Subsequently retained by the
Company as a consultant. Director since December 1989. Dr. May also serves as a director of
Embrex, Inc. and Alcide Corporation.
Jerry L. Hitt 51 Physician. Engaged in family practice at Rogers Medical Center, Rogers, Arkansas since 1971.
Director since November 1989.
Jane M. Helmich 46 Homemaker. Director since November 1992.
</TABLE>
Each director has been employed as described above for at least the past
five years. James T. Hudson is the father of Michael T. Hudson, James R.
Hudson and Jane M. Helmich; there are no other family relationships among
the foregoing nominees. By reason of his ownership, directly and
beneficially, of shares of the Company's Class A common stock and Class B
common stock, James T. Hudson is deemed to be a control person of the
Company. None of the companies or organizations listed opposite the name
of any director above is a parent, subsidiary or affiliate of the Company.
James T. Hudson, Michael T. Hudson, Charles B. Jurgensmeyer, James R.
Hudson, Tommy D. Reynolds, Norbert E. Woodhams, and Bernard F. Leonard
currently serve as executive officers of the Company. The first four named
individuals also serve as directors, and are described above.
Tommy D. Reynolds, age 44, has served as Vice President of Finance since
1997 and as Secretary and Treasurer since 1992. He previously served as
Assistant Secretary and Assistant Treasurer beginning in 1986 and has been
employed by the Company since 1979 in various accounting, auditing and
finance positions. Mr. Reynolds is a certified public accountant in the
state of Arkansas.
Norbert E. Woodhams, age 51, has served as President of the Specialty
Foods Division since the Division's inception in August 1995, and served as
President of the Pierre Frozen Foods Division from March 1994 until August
1995. Prior to joining the Company, he was Group Vice President of Tyson,
Red Meat Division, from 1991 to March 1994 and President and Chief
Executive Officer of Henry House, Inc. from 1987 to 1991.
Bernard F. Leonard, age 44, has served as Vice President-Director of the
Broiler Division since October 1996 and previously served as General
Manager of the Company's Alabama broiler complex after joining the Company
in September 1993. Mr. Leonard was President and Chief Operating Officer
of Southland Foods from October 1990 until his employment with the Company.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own more than 10
percent of a registered class of the Company's equity securities, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (the "SEC") and the New York Stock
Exchange. Such persons are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to fiscal 1997, or written representations from certain reporting
persons, the Company believes that all directors, officers and persons who
own more than 10 percent of a registered class of the Company's equity
securities have complied in a timely fashion with their reporting
obligations under Section 16(a), except that during fiscal 1997, reports on
Form 4 were filed late by Jane M. Helmich and Elmer W. Shannon.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The Company's philosophy is that total compensation programs for its Chief
Executive Officer and other executives should be established by the process
used for its other salaried employees, except that a larger portion of
executive compensation should be tied directly to the performance of the
business.
The Company also believes that executive compensation should be subject to
objective review. It is for this reason that the Compensation Committee of
the Board of Directors (the "Committee") was established. The Committee is
comprised of James T. Hudson (Chairman), Michael T. Hudson and Charles B.
Jurgensmeyer, all executive officers and directors of the Company.
Operating within the guidance provided by the Board of Directors, the
Committee's role is to assure that the compensation strategy of the Company
is aligned with the interest of the stockholders, and the Company's
compensation structure will allow for fair and reasonable base salary
levels and the opportunity for senior executives to earn short-term and
long-term compensation that reflects both Company and individual
performance as well as industry practice.
The following is a report submitted by the above listed committee members
in their capacity as the Board's Compensation Committee, addressing the
Company's compensation policy as it related to the Company's Chief
Executive Officer and its other executive officers for fiscal 1997.
REPORT OF COMPENSATION COMMITTEE
- --------------------------------
Compensation Policy
- -------------------
The goal of the Company's executive compensation policy is to ensure that
an appropriate relationship exists between executive pay and the creation
of stockholder value, while at the same time motivating and retaining key
employees. To achieve this goal, the Company's executive compensation
policies integrate annual base compensation with bonuses based upon
corporate performance and individual initiatives and performance. Base
compensation is designed to ensure that the Company can attract and retain
high caliber executive officers, and reflects the Company's assessment of
compensation levels generally prevailing elsewhere in the market for
services of persons performing similar duties. Measurement of corporate
performance is primarily based on Company goals, industry performance
levels and comparisons with the Company's results in prior years.
Accordingly, in years in which performance goals and industry levels are
achieved or exceeded, or in which the Company's results improve in
comparison to the results of prior years, executive compensation should be
higher than in years in which performance is below expectations. Annual
cash compensation, together with the payment of incentive and deferred
compensation, is designed to attract and retain qualified executives and to
ensure that such executives have a continuing stake in the long-term
success of the Company. All executive officers, and management in general,
are eligible for and do participate in incentive compensation plans.
In evaluating annual executive compensation, the Committee examines the
Company's overall performance, focusing particularly on sales growth, net
margin, return on average stockholders' equity, percentage capitalization
through long-term debt, and the Company's current ratio. These factors are
compared with designated Company performance goals, prior years'
performance and performance of several other publicly-traded companies in
the industry. In addition, other factors are taken into consideration,
such as cost of living increases, competitors' performance, as well as the
individual executive officer's past performance and potential with the
Company. Bonus compensation is also tied to performance goals, some of
which are specific to the performance of various operating divisions within
the Company.
Fiscal 1997 Compensation
- ------------------------
For fiscal 1997, the Company's executive compensation program consisted of
(i) base salary, adjusted from the prior year, (ii) a bonus pool based upon
the performance measurements described above, and (iii) contributions under
the Company's broad-based Employee Stock Purchase Plan. Stock options are
granted from time to time to members of management, based primarily on such
person's potential contribution to the Company's growth and profitability.
The Committee feels that options and other stock-based performance
compensation arrangements are an effective incentive for managers to create
value for stockholders since the value of an option bears a direct
relationship to the Company's stock price. Contributions by the Company to
the Employee Stock Purchase Plan are fixed as a percentage of employee
participant contributions.
The Company's objective is to obtain a financial performance that achieves
several goals over time. Specifically, the Company seeks to achieve, over
a five-year period, an average compound annual sales growth of 15 percent,
an average 3 percent return on sales (net margin), and an average return on
average stockholders' equity of 15 percent. Other financial goals are
maintaining a current ratio of greater than 1.35 to 1 and keeping long-term
obligations less than 50 percent of total capitalization, defined as long-
term obligations plus stockholders' equity. The philosophy underlying
these goals is that unless targets are set aggressively, they will be too
easily met and thus not serve to stimulate the performance the Company
expects of its executives. Consequently, failure to achieve any one or
more targets in a given year may, in the Committee's opinion, be more
reflective of the high standards of achievement set by the Company than
other factors.
During fiscal 1997, the Company achieved sales growth of 20.8 percent over
the prior year, a net margin of (1.3) percent, and a return of (6.7)
percent on average stockholders' equity. At year-end, the Company's
current ratio was 1.90 to 1 and long-term obligations accounted for 47.0
percent of total capitalization. For the five-year period ended with
fiscal 1997, the Company achieved an average compound annual sales growth
of 15.6 percent, an average net margin of 1.5 percent, and an average
return on average stockholders' equity of 7.8 percent. Fiscal 1997
performance achieved three of the five stated goals for the year. The
performance oriented nature of the Company's compensation program is best
exemplified by examining the salary paid to James T. Hudson, the Company's
Chairman and Chief Executive Officer. See "CEO Compensation" below.
CEO Compensation
- ----------------
Mr. James T. Hudson has been Chairman of the Company since its inception
in 1972. Consistent with the other executive officers, the structure of
Mr. Hudson's compensation package reflects the philosophy of "total
compensation and pay for performance" and includes components of both short
and long term Company performance. The components of Mr. Hudson's
compensation package are reviewed annually and adjusted to reflect both the
Company's overall performance and the compensation level perceived by the
Committee to prevail among officers performing similar duties with other
publicly traded companies.
Specific performance targets are not fixed and evaluated, but the Committee
pays special attention to Mr. Hudson's position as Chairman of the
Company, the Company's overall performance and the strategic decisions of
the Company in setting Mr. Hudson's compensation package. The Committee
has the discretion to pay an incentive bonus or option grant, whether or
not any specific performance indicators are met.
Conclusion
- ----------
The Committee believes that linking executive compensation to corporate
performance results in a better alignment of compensation with corporate
goals and stockholder interest. As performance goals are met or exceeded,
resulting in increased value to stockholders, executives are rewarded
commensurately. The Committee believes that compensation levels during
fiscal 1997 adequately reflect the Company's compensation goals and
policies.
James T. Hudson - Chairman
Michael T. Hudson
Charles B. Jurgensmeyer
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Each director on the Compensation Committee is also an executive officer of
the Company.
The Company has entered into grower contracts involving poultry farms owned
by certain of its officers and directors. The contracts provide for the
placement of Company-owned flocks on the farms during the grow-out phase of
production. The contracts are identical to those entered into by the
Company with non-related parties and are terminable at any time by the
Company. The ownership of the farms and the aggregate amounts paid by the
Company to members of the Compensation Committee under the grower contracts
during fiscal 1997 are as follows: James T. Hudson (2 farms), $203,150;
H&G Farms (50 percent owned by James T. Hudson), $235,100; Michael T.
Hudson (1 farm), $124,200; and Charles B. Jurgensmeyer (1 farm), $58,700.
During fiscal 1997, James T. Hudson owned and leased aircraft to the
Company at monthly rates ranging from $90,000 to $160,000. Each lease
provides that the Company shall be responsible for operating costs,
insurance, maintenance and taxes. The Company's Board of Directors has
determined that the aircraft lease arrangements are as favorable to the
Company as those it could otherwise obtain. Mr. Hudson's total payment
from the Company for the aircraft leases was $3,179,000 in fiscal 1997.
The Company has periodically made cash advances to James T. Hudson. Such
advances accrue interest at the cost of the Company's short term borrowings
plus 0.5 percent. The largest aggregate amount of these advances during
fiscal 1997 was $562,900. At September 27, 1997, the balance of these
advances totaled $216,700. Additionally, the Company advances premium
payments on life insurance policies covering James T. Hudson, Michael T.
Hudson, and Charles B. Jurgensmeyer. These premiums will be repaid from
the policy proceeds. At September 27, 1997, the balance of such premium
payment advances for each individual totaled $10,385,000, $356,000, and
$530,000, respectively.
Summary Compensation Table
- --------------------------
The following table sets forth certain summary information concerning the
compensation paid by the Company to its Chairman and each of the four most
highly compensated executive officers other than the Chairman
(collectively, the "named executive officers") during the fiscal years
indicated.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name and Fiscal Long-Term All Other
Principal Position Year Annual Compensation Compensation Compensation(1)
- ------------------ ---- Salary Bonus Other Options (#) --------------
------ ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
James T. Hudson 1997 $575,000 $ - $ 9,150 - $328,600
Chairman 1996 486,500 500,000 14,900 - 279,200
1995 500,000 700,000 24,450 - 96,250
Michael T. Hudson 1997 550,000 - 14,150 - 2,700
President and Chief 1996 500,000 400,000 16,100 - 2,500
Executive Officer 1995 400,000 525,000 24,250 - 2,100
Charles B. Jurgensmeyer 1997 450,000 - 2,300 - 50,100
Chief Financial Officer and 1996 400,000 350,000 5,050 - 50,400
Executive Vice President 1995 350,000 425,000 7,900 - 40,800
Bernard F. Leonard 1997 190,000 157,800 - - 13,000
Vice President - Director of 1996 159,400 51,600 - 10,000 69,400
Broiler Division 1995 131,000 106,900 - - 9,250
Norbert E. Woodhams 1997 235,000 - - - 18,250
President - Specialty Foods 1996 231,000 147,500 - 10,000 15,500
Division 1995 189,000 189,000 - - 8,000
<FN>
(1)Includes the following items of compensation:
</FN>
</TABLE>
(a) Company's contribution to the named individual's deferred compensation
account in the following amounts: Charles B. Jurgensmeyer, $9,000 (1997),
$16,500 (1996), $13,319 (1995); Bernard F. Leonard, $3,800 (1997), $5,330
(1996), $5,330 (1995); and Norbert E. Woodhams, $7,650 (1997), $8,400
(1996), $4,400 (1995).
(b) Dollar value benefit premium payments under split-dollar life
insurance policies covering the named individual for which the Company will
be reimbursed for premiums paid, in the following amounts: James T.
Hudson, $328,600 (1997), $279,200 (1996), $96,250 (1995); Michael T.
Hudson, $2,700 (1997), $2,500 (1996), $2,100 (1995); and Charles B.
Jurgensmeyer, $6,600 (1997), $6,170 (1996), $5,910 (1995).
(c) Company's matching contribution to the named individual under the
Company's Employee Stock Purchase Plan in the following amounts: Charles
B. Jurgensmeyer, $34,500 (1997), $27,750 (1996), $21,570 (1995); Bernard
F. Leonard, $9,200 (1997), $6,310 (1996), $3,920 (1995); and Norbert E.
Woodhams, $10,600 (1997), $7,100 (1996), $3,600 (1995).
(d) Moving expenses paid by the Company on behalf of Bernard F. Leonard,
$57,760 (1996).
Compensation of Directors
- -------------------------
The Board of Directors held 6 meetings in fiscal 1997. Each director was
present for at least 75 percent of such meetings and the meetings held by
all committees of the board on which he or she served. The Company pays
outside directors an annual fee of $10,000 and $500 plus expenses for each
meeting attended.
Compensation Pursuant to Plans
- ------------------------------
Retirement Plan. The Company provides a 401(k) Retirement Plan (the
"Retirement Plan") for the benefit of its employees. Participation in the
Retirement Plan is by voluntary employee contributions. Participants may
contribute up to 15 percent of their base and overtime pay, excluding
bonuses, to the Retirement Plan. The Company will match 50 percent of the
first 4 percent of a participant's contributions from base and overtime
pay. The assets are invested under the terms of a trust administered by
Barclay's Global Investors of San Francisco, California. The Company made
no contributions for executive officers in fiscal 1997. Matching
contributions for all employees (excluding executive officers) were
$1,372,000 in fiscal 1997; $1,289,000 in fiscal 1996; and $1,219,000 in
fiscal 1995.
Executive Salary Deferral Plan. In July of 1992, the Company established
its Executive Salary Deferral Plan, which is a non-qualified deferred
compensation arrangement, exempt from certain restrictions imposed by the
Internal Revenue Code on 401(k) plans. Participation in the Executive
Salary Deferral Plan is limited to select management and highly compensated
employees of the Company. Participants may contribute up to 50 percent of
their base salary and/or 100 percent of their bonuses to the Executive
Salary Deferral Plan. The Company will match 50 percent of the first 4
percent of a participant's contributions from base salary. Assets are held
in individual accounts for each participant and these accounts are held in
a special trust. The trust assets will become subject to the claims of the
Company's general creditors in the event of bankruptcy. The Company's
contributions for all executive officers as a group (7 persons) were
$21,000 in fiscal 1997; $35,000 in fiscal 1996; and $33,000 in fiscal 1995.
Matching contributions for all employees (excluding executive officers)
were $144,000 in fiscal 1997; $159,000 in fiscal 1996; and $141,000 in
fiscal 1995.
Salary Continuation Plan. The Company has entered into agreements with 32
past or present key employees providing for the payment of specified
benefits in the event of the employee's retirement or death. Generally, a
covered employee (or the employee's beneficiary) is entitled to receive a
fixed sum annually for the 15 years following the employee's retirement or
death. Benefits are not paid for an employee's retirement before reaching
age 65, unless the Company's Executive Committee has approved the early
retirement. In the event that voting control of the Company ceases to be
held by the Hudson family, involuntary termination entitles a covered
employee to receive the stated retirement benefits beginning on the later
of the employee's termination or attainment of age 65. As a result of the
proposed merger agreement with Tyson, four key employees will be entitled
to receive the stated retirement benefits immediately upon either voluntary
or involuntary termination. Payments under this plan are funded by life
insurance proceeds and general operating capital.
The Salary Continuation Plan provides annual retirement or death benefits
of $100,000 each for James T. Hudson, Michael T. Hudson, and Charles B.
Jurgensmeyer, and $70,000 each for Norbert E. Woodhams and Bernard F.
Leonard.
Life Insurance. The Company maintains life insurance policies on its
executives, including split-dollar policies on James T. Hudson, Michael T.
Hudson and Charles B. Jurgensmeyer, in which the beneficiaries have been
selected by the executives. Upon the death of each of these executive
officers, the Company will be reimbursed by the policy for the amount of
premiums paid by the Company.
Employee Stock Purchase Plan. The Company's Amended and Restated 1990
Employee Stock Purchase Plan (the "Purchase Plan") allows participating
full-time employees to purchase Class A common stock on the New York Stock
Exchange at market prices. Purchases are made through regular payroll
deductions, which may be a minimum of 1 percent and a maximum of 10 percent
of the participant's gross earnings, including overtime pay but excluding
bonuses. The Company will, subject to certain restrictions in the Purchase
Plan, annually contribute an amount in cash and/or shares of Class A common
stock equal in value to 15 percent of each participant's aggregate
contributions to the Purchase Plan during the preceding ten years, except
with respect to any contributions that have been withdrawn by the
participant. The Company pays all administrative costs and brokerage
commissions for purchases. The Purchase Plan was adopted in July 1990,
became effective on the first day of fiscal 1991 and was amended in
December 1992 to qualify for an exemption from the automatic application of
Section 16 of the Securities Exchange Act.
Of the approximately 12,100 employees eligible to participate in the
Purchase Plan, 1,260 were active participants as of the last day of fiscal
1997. The Company's contributions for all executive officers as a group (7
persons) were $63,000 in fiscal 1997; $58,000 in fiscal 1996; and $56,000
in fiscal 1995. The Company's aggregate matching contributions for all
employees (excluding executive officers) were $752,000 in fiscal 1997;
$616,000 in fiscal 1996; and $538,000 in fiscal 1995.
Stock Option Plan. The 1996 Stock Option Plan reserves 1,200,000 and
300,000 shares of the Company's Class A common stock for issuance as
incentive stock options and non-qualified stock options, respectively. At
the end of fiscal 1997, the Company continued to reserve 115,689 shares of
Class A common stock for issuance against outstanding options granted under
the Second Amended and Restated 1985 Stock Option Plan (the "1985 Stock
Option Plan") which expired during fiscal 1996.
Under the 1996 Stock Option Plan, a committee of the Board of Directors may
grant to "key" employees options to purchase shares of Class A common stock
at a price which is at least 100 percent of the fair market value of such
shares on the date of grant (110 percent in the case of individuals holding
10 percent or more of the Company's Class A common stock). "Key" employees
are determined by the committee, and may include directors, executive
officers, and other officers and employees of the Company and its
subsidiaries. Options expire no later than the tenth anniversary of the
date of grant. Subject to those conditions, the exercise price and the
duration of options granted are set by the committee. The 1985 Stock
Option Plan operated in the same manner during its existence. Under the
Agreement and Plan of Merger between the Company and Tyson, the Company may
not issue additional options to any employees.
During fiscal 1997, the Company did not grant any stock options or make any
awards pursuant to any long-term incentive plans. The Company did not
reprice any of its options during fiscal 1997.
The following table sets forth the options exercised, the value realized
and the fiscal year-end value of unexercised options for each of the named
executive officers.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND FISCAL YEAR-END OPTION VALUES
OPTIONS AT VALUE OF UNEXERCISED
FISCAL YEAR-END IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(2)
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James T. Hudson 9,000 $143,200 - - - -
Michael T. Hudson 43,928 764,700 - - - -
Charles B. Jurgensmeyer 43,928 764,700 - - - -
James R. Hudson 9,000 156,700 - - - -
Norbert E. Woodhams(1) - - 4,000 6,000 $29,750 $44,625
Bernard F. Leonard(1) - - 4,000 6,000 29,750 44,625
<FN>
(1) Norbert E. Woodhams and Bernard F. Leonard's options consist of the following:
10,000 shares granted on April 3, 1996, at $14.125 per share, expiring April 3, 2001, of which 4,000 shares
are exercisable.
(2) Amounts represent the excess of the market value over the exercise price as
of September 27, 1997.
</FN>
</TABLE>
COMPANY PERFORMANCE
The following graph presents a five year comparison of cumulative
total returns for the Company, the Standard & Poor's 500 Stock Index ("S&P
500") and an index of peer companies selected by the Company (the "Peer
Group").
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURNS
[CHART]
Source: Standard & Poor's Compustat
The cumulative total return on investment (change in the year-end
stock price plus reinvested dividends) for each period is based on an
assumed initial investment of $100 in stock or the composite index at the
end of fiscal 1992.
The above graph compares the performance of the Company with that
of the S&P 500, and the Peer Group with the investment weighted on market
capitalization. The Peer Group consists of WLR Foods, Inc., Pilgrim's
Pride Corporation, Sanderson Farms, Inc., Golden Poultry Company, Inc. and
Cagle's, Inc. These companies were approved by the Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of November 18, 1997, the beneficial
ownership of the Company's outstanding Class A common stock and Class B
common stock by each of the Company's directors, each executive officer
listed in the Summary Compensation Table, all directors and officers of the
Company as a group, and each person other than a director known by the
Company to be the beneficial owner of more than 5 percent of its
outstanding Class A common stock or Class B common stock. The address for
all persons listed below is 1225 Hudson Road, Rogers, Arkansas 72756.
<TABLE>
<CAPTION>
CLASS A STOCK(1) CLASS B STOCK(1)
Number of Percent Number of Percent
Shares Owned Shares Owned Owned
Beneficially Beneficially Beneficially Beneficially
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James T. Hudson 8,816,528(2) 30.9% 9,600,000(4) 99.9%
Michael T. Hudson 794,378(5) 3.7 750,000 7.8
Charles B. Jurgensmeyer 749,749(8) 3.6 - -
James R. Hudson 618,700(6) 2.9 600,000 6.3
Elmer W. Shannon 48,943 * - -
Jerry L. Hitt 28,015 * - -
Kenneth N. May 33,997 * - -
Jane M. Helmich 661,825(6)(7) 3.1 600,000 6.3
Bernard F. Leonard 9,107(3) * - -
Norbert E. Woodhams 9,328(3) * - -
The Capital Group Co., Inc. 1,723,500 8.2 - -
Capital Guardian Trust Co. 1,702,500 8.1 - -
The Crabbe Hudson Group, Inc. 1,143,000 5.5 - -
All directors and officers
as a group (11 persons) 11,131,944 36.5 9,600,000 99.9
- --------------------------------------------------------------------------------------------------------
<FN>
* Less than 1 percent of the outstanding shares of the Company's Class A common stock.
Footnotes to Principal Stockholders' Table
(1) Calculated based on 20,967,054 shares of Class A common stock
outstanding and 9,602,372 shares of Class B common stock outstanding as of
December 1, 1997. However, for purposes of computing the beneficial
ownership of any individual, it was assumed that such individual had
exercised all options and/or made all conversions by which that individual
had the right, within the 60 days following November 18, 1997, to acquire
shares of Class A common stock. The group total similarly assumes that all
directors and officers had exercised their options and/or made conversions
for shares of Class A common stock.
(2) James T. Hudson holds 65,028 shares of Class A common stock in his
own name. He has rights under revocable proxies to vote 1,100,000 shares
of Class A common stock, which are held in blocks of 650,000 by Charles B.
Jurgensmeyer and 450,000 by a third party no longer affiliated with the
Company. Mr. Hudson's wife holds 1,500 shares of Class A common stock in
her own name. Because of the revocable proxies and Mrs. Hudson's stock
ownership, Mr. Hudson is considered beneficially to own 1,101,500 shares
of Class A common stock. Mr. Hudson has disclaimed beneficial ownership
of those shares. Mr. Hudson also holds a total of 7,650,000 shares of
Class B common stock, which may be converted at any time into a like number
of shares of Class A common stock, and is thus considered to own the shares
of Class A common stock into which his shares of Class B common stock may
be converted.
(3) Includes shares of Class A common stock that the named individual may
acquire within the next 60 days by exercise of stock options, in the
following amounts: Bernard F. Leonard, 4,000; and Norbert E. Woodhams,
4,000.
(4) James T. Hudson holds 7,650,000 shares of Class B common stock in his
own name. In addition, Mr. Hudson has rights under revocable proxies to
vote another 1,950,000 shares, which are held in blocks of 600,000 each by
James R. Hudson and Jane M. Helmich, and 750,000 shares by Michael T.
Hudson, and thus is considered a beneficial owner of those shares. James
T. Hudson cannot convert those shares of Class B common stock to Class A
common stock and, therefore, such shares are not attributed to him as Class
A common stock. Mr. Hudson has disclaimed beneficial ownership of the
shares for which he holds revocable proxies.
(5) Michael T. Hudson holds 43,928 shares of Class A common stock in his
own name and 450 shares of Class A common stock jointly with his children.
In addition, Mr. Hudson holds 750,000 shares of Class B common stock,
which may be converted at any time into a like number of shares of Class A
common stock. Mr. Hudson is thus considered beneficially to own the
shares of Class A common stock into which his shares of Class B common
stock may be converted.
(6) James R. Hudson and Jane M. Helmich each hold 600,000 shares of
Class B common stock, which may be converted at any time into a like number
of shares of Class A common stock. Mr. Hudson and Ms. Helmich are thus
considered beneficially to own the shares of Class A common stock into
which their shares of Class B common stock may be converted.
(7) Jane M. Helmich holds 450 shares of Class A common stock as custodian
for a minor child, and Ms. Helmich's husband holds 61,375 shares of Class
A common stock in his own name. Because of the custodianship and Mr.
Helmich's stock ownership, Ms. Helmich is considered beneficially to own
61,825 shares of Class A common stock.
(8) Charles B. Jurgensmeyer's wife holds 3,000 shares of Class A common
stock in her own name. Because of Ms. Jurgensmeyer's stock ownership, Mr.
Jurgensmeyer is considered beneficially to own 3,000 shares of Class A
common stock.
(9) According to a Schedule 13G dated February 12, 1997, The Capital Group
Companies, Inc. may be deemed to beneficially own 1,723,400 shares of Class
a common stock, of which 1,702,500 shares of Class A common stock are
beneficially owned by its wholly-owned subsidiary Capital Guardian Trust
Company. The address for each is 333 South Hope Street, Los Angeles,
California 90071.
(10) According to a Schedule 13G dated April 17, 1997, The Crabbe Hudson
Group, Inc. expressly disclaims beneficial ownership of the shares of Class
A common stock. Its address is 121 SW Morrison, Suite 1400, Portland,
Oregon 97204.
On September 4, 1997, James T. Hudson entered into a Stock Voting
Agreement ("Voting Agreement") with Tyson. The Voting Agreement states
that Mr. Hudson will vote all shares of Class A and Class B common stock
owned by him, to approve and adopt the Merger Agreement. The Voting
Agreement will terminate on the earlier of : 1) the effective date of the
merger or 2) the termination of the Merger Agreement in accordance with its
terms. The Merger Agreement may be terminated under certain circumstances,
including: 1) by either Tyson or the Company if the merger has not been
consummated on or before February 28, 1998 and (2) by the Company if the
Board of Directors of the Company reasonably determines, based on certain
specified standards, that a written, unsolicited proposal or offer is made
for a business combination or similar transaction with the Company which is
more favorable to the Company and its stockholders than the merger with
Tyson.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
----------------------------------------------------
See previous discussion of Compensation Committee Interlocks and Insider
Participation.
The Company has entered into grower contracts involving poultry farms owned
by certain of its officers and directors. The contracts provide for the
placement of Company owned flocks on the farms during the grow-out phase of
production. The contracts are identical to those entered into by the
Company with non-related parties and are terminable at any time by the
Company. In addition to the information previously disclosed for members
of the Compensation Committee, the ownership of the farms and the aggregate
amounts paid by the Company under grower contracts during fiscal 1997 are
as follows: James R. Hudson and Larry E. Helmich (1 farm, joint
ownership), $91,000; and Elmer W. Shannon (1 farm), $81,000.
During fiscal 1997, James T. Hudson owned and leased aircraft to the
Company at monthly rates ranging from $90,000 to $160,000. Each lease
provides that the Company shall be responsible for operating costs,
insurance, maintenance and taxes. The Company's Board of Directors has
determined that the aircraft lease arrangements are as favorable to the
Company as those it could otherwise obtain. Mr. Hudson's total payment
from the Company for the aircraft leases was $3,179,000 in fiscal 1997.
The Company has periodically made cash advances to James T. Hudson. Such
advances accrue interest at the cost of the Company's short term borrowings
plus 0.5 percent. The largest aggregate amount of these advances during
fiscal 1997 was $562,900. At September 27, 1997, the balance of these
advances totaled $216,700. Additionally, the Company advances premium
payments on life insurance policies covering James T. Hudson, Michael T.
Hudson, and Charles B. Jurgensmeyer. These premiums will be repaid from the
policy proceeds. At September 27, 1997, the balance of such premium payment
advances for each individual totaled $10,385,000, $356,000, and $530,000,
respectively.
Larry E. Helmich has been an employee of the Company since 1979. For fiscal
1997, Mr. Helmich received salary and bonus totaling $266,800. Mr. Helmich
served as a member of the Board of Directors from July 1985 until December
1985, and continues to serve as the General Manager of the Company's
integrated broiler complex in Noel, Missouri. Mr. Helmich is the husband of
Jane M. Helmich, the son-in-law of James T. Hudson and the brother-in-law of
Michael T. Hudson and James R. Hudson.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Documents filed as a part of this report.
1. Financial statements
Description Page
----------- ----
Report of Independent Accountants 17
Consolidated Statement of Operations 18
Consolidated Balance Sheet 19
Consolidated Statement of Cash Flows 20
Notes to Consolidated Financial Statements 21-29
2. Financial statement schedules
-----------------------------
Schedule No. Description
------------ -----------
II Valuation and Qualifying Accounts 47
3. Exhibits required by Item 601 of Regulation S-K
-----------------------------------------------
Exhibit No Description
---------- -----------
2 Agreement and Plan of Merger among Tyson Foods,
Inc., HFI Acquisition Sub Inc. and Hudson Foods,
Inc. dated as of September 4, 1997.(8)
3a Restated certificate of incorporation of Hudson
Foods, Inc.(1)
3b Restated by-laws of Hudson Foods, Inc., as
amended to date(2)
4a Restated certificate of incorporation of Hudson
Foods, Inc., Section 4(1)
9a Form of revocable proxy held by James T.
Hudson(1)
9b Stock Voting Agreement between James T. Hudson
and Tyson dated as of September 4, 1997(8)
10a Amended and Restated 1985 Stock Option Plan(3)
10b Form of Hudson Foods Stock Option Agreement(4)
10c Form of Hudson Farms Turkey Growing Contract(4)
10d Form of Hudson Farms Broiler Growing Contract(4)
10e Revolving Credit Agreement by and among Hudson
Foods, Inc., Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch, Bank of America
National Trust and Savings Association,
NationsBank of Texas, National Association,
Caisse Nationale De Credit Agricole, "Credit
Agricole," Harris Trust and Savings Bank,
SunTrust Bank, Atlanta, Boatmen's First National
Bank of Kansas City and Cooperatieve Centrale
Raiffeisen-Boerenleenbank, B.A., "Rabobank
Nederland," New York Branch, as Agent and
NationsBank of Texas, N.A., as documentation
agent, dated as of April 30, 1996(9)
10f Hudson Foods, Inc. Note Purchase Agreement
dated as of May 18, 1994, $50,000,000 Fixed Rate
Senior Notes, Guaranteed by Hudson Farms, Inc.(5)
10g Purchase and Supply Agreement (Amended and
Restated), dated April 1, 1996 between Hudson
Foods, Inc. and Boston Chicken, Inc.(6)
10h Supplier Agreement, dated April 26, 1994,
between Hudson Foods, Inc. and Restaurant
Services, Inc., as purchasing agent for the
Burger King System.(7)
10i Hudson Foods, Inc. Note Purchase Agreement
dated December 28, 1995, $55,000,000, 6.69%
Senior Notes due December 28, 2005(9)
10j Hudson Foods, Inc. Note Purchase Agreement
dated March 22, 1996, $50,000,000, 6.63% Senior
Notes Due March 22, 2006(9)
10k Hudson Foods, Inc. 1996 Stock Option Plan (9)
10l Hudson Foods, Inc. Note Purchase Agreement dated
December 6, 1996, $50,000,000, 6.97% Senior Notes
Due December 6, 2006(10)
11 Computation of Earnings Per Share 48
21 Subsidiaries of Hudson Foods, Inc. 49
23 Consent of Independent Accountants 50
27 Financial Data Schedule 51
(b) Reports on Form 8-K
1) 8-K filed on July 11, 1997, International reorganization charge.
2) 8-K filed on August 22, 1997, Ground Beef Recall from Columbus,
NE beef plant.
3) 8-K filed on August 29, 1997, Loss of beef sales to Burger King;
IBP to buy Columbus, NE beef plant.
4) 8-K filed on September 8, 1997, Tyson and Hudson Foods, Inc.
to merge.
<FN>
- ------------
(1) Incorporated by reference from Hudson Foods, Inc. Form S-4 Registration
Statement No. 33-15274, as amended, filed with the Securities and Exchange
Commission on June 23, 1987.
(2) Incorporated by reference from Hudson Foods, Inc., Form S-3 Registration
Statement No. 33-56019, as amended, filed with the Securities and Exchange
Commission on October 13, 1994.
(3) Incorporated by reference from Hudson Foods, Inc. Form S-8 Registration
Statement No. 33-27738, as amended, filed with the Securities and Exchange
Commission on March 23, 1989.
(4) Incorporated by reference from Hudson Foods, Inc. Form S-1 Registration
Statement No. 33-2505, as amended, filed with the Securities and Exchange
Commission on December 31, 1985.
(5) Incorporated by reference from Hudson Foods, Inc. Quarterly Report on Form
10-Q for the quarterly period ended July 2, 1994, filed with the Securities
and Exchange Commission on August 1, 1994.
(6) Incorporated by reference from Hudson Foods, Inc., Form 10-Q for the
quarterly period ended March 30, 1996, filed with the Securities and Exchange
Commission on June 25, 1996.
(7) Incorporated by reference from Hudson Foods, Inc., Form 8-K Current Report
dated October 13, 1994, filed with the Securities and Exchange Commission on
October 13, 1994.
(8) Incorporated by reference from James T. Hudson, Schedule 13D, filed with
the Securities and Exchange Commission on September 12, 1997.
(9) Incorporated by reference from Hudson Foods, Inc., Form 10-K as of
September 28, 1996, filed with the Securities and Exchange Commission on
December 18, 1996.
(10) Incorporated by reference from Hudson Foods, Inc., Form 10-Q as of
December 28, 1996, filed with the Securities and Exchange Commission on
January 29, 1997.
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.
HUDSON FOODS, INC.
December 8, 1997 By /s/ James T. Hudson
----------------------------------
James T. Hudson
Chairman of the Board and Director
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 and on the dates indicated.
December 8, 1997 By /s/ James T. Hudson
----------------------------------
James T. Hudson
Chairman of the Board and Director
December 8, 1997 By /s/ Michael T. Hudson
----------------------------------
Michael T. Hudson
President, Chief Executive Officer
and Director
December 8, 1997 By /s/ Charles B. Jurgensmeyer
----------------------------------
Charles B. Jurgensmeyer
Chief Financial Officer,
Executive Vice President and Director
December 8, 1997 By /s/ James R. Hudson
----------------------------------
James R. Hudson
Vice President-Director of Transportation
and Director
December 8, 1997 By /s/ Jane M. Helmich
----------------------------------
Jane M. Helmich
Director
December 8, 1997 By
----------------------------------
Elmer W. Shannon
Director
December 8, 1997 By
----------------------------------
Jerry L. Hitt
Director
December 8 , 1997 By
----------------------------------
Kenneth N. May
Director
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Hudson Foods, Inc.
Our report on the consolidated financial statements of Hudson Foods, Inc.
and subsidiaries is included on page 17 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the
related financial statement schedule on page 47 of this form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
November 10, 1997
HUDSON FOODS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years in the Period Ended September 27, 1997
(Dollars in Thousands)
</TABLE>
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Write Offs period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 27, 1997 $1,863 $4,641 $16(1) $(667) $5,853
---------------------------------------------------------------------------
Year ended September 28, 1996 $1,775 $563 $24(1) $(499) $1,863
---------------------------------------------------------------------------
Year ended September 30, 1995 $1,463 $707 $16(1) $(411) $1,775
---------------------------------------------------------------------------
<FN>
(1) Collections of previously charged off amounts.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11
CALCULATION OF EARNINGS (LOSS) PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended Twelve Months Ended
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $(22,205) $8,808 $(21,245) $22,998
- -------------------------------------------------------------------------------------------------------------------------
Primary Earnings (Loss) Per Share:
Weighted average number of common
shares outstanding 30,312 30,108 30,234 30,084
Common stock equivalents:
Dilutive options - 305 - 317
- -------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares 30,312 30,413 30,234 30,401
- -------------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) per share $(0.73) $0.29 $(0.70) $0.76
Fully Diluted Earnings (Loss) Per Share:
Weighted average number of common
shares outstanding 30,312 30,108 30,234 30,084
Common stock equivalents:
Dilutive options - 305 - 317
- -------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares 30,312 30,413 30,234 30,401
- -------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) per share $(0.73) $0.29 $(0.70) $0.76
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 21
- ----------
SUBSIDIARIES OF HUDSON FOODS, INC.
- ----------------------------------
1. Hudson Development Company, Inc., an Arkansas corporation.
2. Hudson Foods Foreign Sales, Inc., incorporated under the laws of the U.S.
Virgin Islands.
3. Hudson Foods Poland, Sp. zo.o., a Polish limited liability company.
4. Hudson Midwest Foods, Inc., a Nebraska corporation.
5. Hudson Foods, JSC, a Russian joint stock company.
6. Meat Products Exports, Inc., incorporated under the laws of the U.S. Virgin
Islands.
EXHIBIT 23
- ----------
CONSENT OF INDEPENDENT ACCOUNTANTS
- ----------------------------------
We consent to the incorporation by reference in the registration statements
of Hudson Foods, Inc. on Form S-8 (File Nos. 33-36690 and 33-41839) of our
reports dated November 10, 1997, on our audits of the consolidated
financial statements and financial statement schedule of Hudson Foods, Inc.
as of September 27, 1997, and September 28, 1996, and for each of the three
years in the period ended September 27, 1997, which reports are included in
this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Tulsa, Oklahoma
December 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1
<CASH> 2,753
<SECURITIES> 1
<RECEIVABLES> 134,038
<ALLOWANCES> 5,853
<INVENTORY> 243,915
<CURRENT-ASSETS> 448,272
<PP&E> 562,016
<DEPRECIATION> 172,985
<TOTAL-ASSETS> 887,026
<CURRENT-LIABILITIES> 235,316
<BONDS> 0
<COMMON> 313
0
0
<OTHER-SE> 303,796
<TOTAL-LIABILITY-AND-EQUITY> 887,026
<SALES> 1,665,105
<TOTAL-REVENUES> 1,665,105
<CGS> 1,490,550
<TOTAL-COSTS> 1,687,196
<OTHER-EXPENSES> (881)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,364
<INCOME-PRETAX> (34,574)
<INCOME-TAX> (13,329)
<INCOME-CONTINUING> (21,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,245 )
<EPS-PRIMARY> (0.70 )
<EPS-DILUTED> (0.70 )
</TABLE>
