SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X / Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 31, 1998
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
Commission file number : 0-16567
SANDERSON FARMS, INC.
(Exact name of registrant as specified in its
charter)
Mississippi 64-0615843
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
225 North 13th Avenue
Laurel, Mississippi 39440
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601) 649-4030 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to section 12(g) of the Act:
Common Stock, $1.00 per share par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S- K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Aggregate market value (based on the closing sales price in the NASDAQ
National Market System) of the voting stock held by non-affiliates of the
Registrant as of December 31, 1998:
approximately $________.
Number of Shares outstanding of the Registrant's common stock as of
December 31, 1998: 14,396,238 shares of common stock, $1.00 per share par value.
<PAGE>
Portions of the Registrant's definitive proxy statement filed or to be
filed in connection with its 1999 Annual Meeting of Stockholders are
incorporated by reference into Part III.
INTRODUCTORY
Definitions. Except where the context indicates otherwise, the following
terms have the following respective meanings when used in this Annual Report.
"Registrant" and "Company" mean Sanderson Farms, Inc. and its subsidiaries and
predecessor organizations. "Fiscal year" means the fiscal year ended October 31,
1998, which is the year for which this Annual Report is filed.
Presentation and Dates of Information. Except for Item 4A herein, the
Item numbers and letters appearing in this Annual Report correspond with those
used in Securities and Exchange Commission Form 10-K (and, to the extent that it
is incorporated into Form 10-K, the letters used in the Commission's Regulation
S-K) as effective on the date hereof, which specifies the information required
to be included in Annual Reports to the Commission. Item 4A ("Executive Officers
of the Registrant") has been included by the Registrant in accordance with
General Instruction G(3) of Form 10-K and Instruction 3 of Item 401(b) of
Regulation S-K. The information contained in this Annual Report is, unless
indicated to be given as of a specified date or for the specified period, given
as of the date of this Report, which is January 22, 1999.
PART I
Item 1. Business
(a) GENERAL DEVELOPMENT OF THE REGISTRANT'S BUSINESS
The Registrant was incorporated in Mississippi in 1955, and is a
fully-integrated poultry processing company engaged in the production,
processing, marketing and distribution of fresh and frozen chicken products. In
addition, through its wholly-owned subsidiary, Sanderson Farms, Inc. (Foods
Division), the Registrant is engaged in the processing, marketing and
distribution of processed and prepared food items.
The Registrant sells ice pack, chill pack and frozen chicken, in whole,
cut-up and boneless form, primarily under the Sanderson Farms(R) brand name to
retailers, distributors, and fast food operators principally in the
southeastern, southwestern and western United States. During its fiscal year
ended October 31, 1998, the Registrant processed 233.2 million chickens, or
approximately 795.3 million dressed pounds. According to 1998 industry
statistics, the Registrant was the 8th largest processor of dressed chickens in
the United States based on estimated average weekly processing.
The Registrant's chicken operations presently encompass five
hatcheries, four feed mills, six processing plants and one by-products plant.
The Registrant has contracts with operators of approximately 450 grow-out farms
that provide it with sufficient housing capacity for its current operations. The
Registrant also has contracts with operators of 155 breeder farms.
The Registrant sells over 200 processed and prepared food items
nationally and regionally, primarily to distributors, national food service
accounts, retailers and club stores. These food items include frozen entrees,
such as chicken and dumplings, lasagna, seafood gumbo, and shrimp creole and
specialty products, such as chicken patties and corn dogs. The Registrant also
sells a retail entree line of six different two-pound frozen entrees including
chicken primavera, lasagna with meat,
<PAGE>
seafood gumbo and mexican casserole with beef. This product line is designed as
a convenient, quality product for the family.
Since the Registrant completed the initial public offering of its
common stock through the sale of 1,150,000 shares to an underwriting syndicate
managed by Smith Barney, Harris Upham & Co. Incorporated and Morgan Keegan & Co.
Inc. in May 1987, the Registrant has significantly expanded its operations to
increase production capacity, product lines and marketing flexibility. Through
1995, this expansion included the expansion of the Registrant's Hammond,
Louisiana processing facility, the construction of new waste water facilities at
the Hammond, Louisiana and Collins and Hazlehurst, Mississippi processing
facilities, the addition of second shifts at the Hammond, Louisiana, Laurel,
Mississippi, Hazlehurst, Mississippi, and Collins, Mississippi processing
facilities, expansion of freezer and production capacity at its prepared foods
facility in Jackson, Mississippi, the expansion of freezer capacity at its
Laurel, Mississippi, Hammond, Louisiana and Collins, Mississippi processing
facilities, the addition of deboning capabilities at all of the Registrant's
poultry processing facilities, and the construction and start-up of its Pike
County, Mississippi, production and processing facilities, including a hatchery,
a feed mill, a processing plant, a waste water treatment facility and a water
treatment facility. During 1997, the Registrant completed the construction and
start-up of its Brazos County, Texas production and processing facilities,
including a hatchery, a feed mill located in Robertson County, Texas, a
processing plant, a waste water treatment facility and a water treatment
facility. In addition, since 1987, the Registrant completed the expansion and
renovation of the hatchery at its Hazlehurst, Mississippi production facilities,
and completed the renovation and expansion of its Collins, Mississippi
by-products facility, allowing for the elimination of a smaller by-products
facility at the Laurel, Mississippi plant.
Capital expenditures for fiscal 1998 were funded by working capital and
borrowings under a revolving credit agreement. Effective July 31, 1998, the
Registrant amended and restated its revolving credit agreement to, among other
things, increase the revolving credit available to the Registrant thereunder to
$130.0 million from $125.0 million. The Registrant anticipates that capital
expenditures for fiscal 1999 will be funded by internally generated working
capital and borrowings under the revolving credit agreement.
During fiscal 1997, the Registrant completed the start-up of its Brazos
County, Texas processing facility. During October 1998, the Registrant began
operating one line of its Brazos County, Texas processing facility on a double
shift basis. The Registrant currently has additional processing capacity
available to it through the double shifting of the second line of the Brazos
County, Texas processing facility and through the double shifting of the second
line at its Collins, Mississippi processing facility. At full capacity the Texas
facility will have the capacity to process 1.2 million birds per week and will
employ approximately 1,400 people. In addition, the Registrant continually
evaluates internal and external expansion opportunities to continue its growth
in poultry and/or related food products.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Not applicable.
<PAGE>
(c) NARRATIVE DESCRIPTION OF BUSINESS
REGISTRANT'S BUSINESS
General
The Registrant is engaged in the production, processing, marketing and
distribution of fresh and frozen chicken and the preparation, processing,
marketing and distribution of processed and prepared food items.
The Registrant sells chill pack, ice pack and frozen chicken, both
whole and cut-up, primarily under the Sanderson Farms(R) brand name to
retailers, distributors and fast food operators principally in the southeastern,
southwestern and western United States. During its fiscal year ended October 31,
1998, the Registrant processed approximately 233.2 million chickens, or
approximately 795.3 million dressed pounds. In addition, the Registrant
purchased and further processed 8.1 million pounds of poultry products during
fiscal 1998. According to 1998 industry statistics, the Registrant was the 8th
largest processor of dressed chicken in the United States based on estimated
average weekly processing.
The Registrant conducts its chicken operations through Sanderson Farms,
Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), both
of which are wholly-owned subsidiaries of Sanderson Farms, Inc. The production
subsidiary, Sanderson Farms, Inc. (Production Division), which has facilities in
Laurel, Collins, Hazlehurst and Pike County, Mississippi, and Bryan, Texas, is
engaged in the production of chickens to the broiler stage. Sanderson Farms,
Inc. (Processing Division), which has facilities in Laurel, Collins, Hazlehurst
and Pike County, Mississippi, Hammond, Louisiana, and Bryan, Texas, is engaged
in the processing, sale and distribution of chickens.
The Registrant conducts its processed and prepared foods business
through its wholly-owned subsidiary, Sanderson Farms, Inc. (Foods Division),
which has a facility in Jackson, Mississippi. The Foods Division is engaged in
the processing, marketing and distribution of over 200 processed and prepared
food items, which it sells nationally and regionally, principally to
distributors, national food service accounts, retailers and club stores.
Products
The Registrant has the ability to produce a wide range of processed
chicken products and processed and prepared food items thereby allowing it to
take advantage of marketing opportunities as they arise.
Processed chicken is first saleable as an ice packed whole chicken. The
Registrant adds value to its ice packed whole chickens by removing the giblets,
weighing, packaging and labeling the product to specific customer requirements
and cutting the product based on customer specifications. The additional
processing steps of giblet removal, close tolerance weighing and cutting
increase the value of the product to the customer over whole chickens by
reducing customer handling and cutting labor and capital costs, reducing the
shrinkage associated with cutting, and ensuring consistently sized portions.
With respect to chill pack products, additional value can be achieved
by deep chilling and packaging whole chickens in bags or combinations of fresh
chicken parts in various sized individual
<PAGE>
trays under the Registrant's brand name, which then may be weighed and
prepriced, based on each customer's needs. The chill pack process increases the
value of the product by extending shelf life, reducing customer weighing and
packaging labor, and providing the customer with a wide variety of products with
uniform, well designed packaging, all of which enhance the customer's ability to
merchandise chicken products.
To satisfy some customers' merchandising needs, the Registrant quick
freezes the chicken product, which adds value by meeting the customers'
handling, storage, distribution and marketing needs and by permitting shipment
of product overseas where transportation time may be as long as 25 days.
Value added products usually generate higher sale prices per pound,
exhibit less finished price volatility and generally result in higher and more
consistent profit margins over the long-term than non-value added product forms.
Selling fresh chickens as a prepackaged brand name product has been a
significant step in the development of the value added, higher margin consumer
business. The Registrant evaluates daily the potential profitability of all
product lines and attempts to maximize its profits on a short-term basis by
making strategic changes in its product mix to meet customer demand.
The following table sets forth, for the periods indicated, the
contribution, as a percentage of sales of chicken products, of value added and
non-value added chicken products.
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
1994 1995 1996 1997 1998
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Value added 98.3% 98.2% 98.2% 98.1% 98.6%
Non-value added 1.7% 1.8% 1.8% 1.9% 1.4%
------ ------ ------ ------ -----
Total Registrant
chicken sales . 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
The following table sets forth, for the years indicated, the contribution, as a
percentage of net sales, of each of the Registrant's major product lines.
Fiscal Year Ended October 31,
1994 1995 1996 1997 1998
---- ----- ----- ---- ----
Registrant processed
chicken:
Value added:
Chill pack(1) 18.2% 19.3% 18.6% 20.8% 24.4 %
Fresh bulk pack(1) 56.2 51.6 49.9 45.9 46.6
Frozen 10.2 13.5 17.0 15.7 11.6
----- ---- ---- ---- ----
Subtotal 84.6 84.4 85.5 82.4 82.6
---- ---- ---- ---- ----
Non-value added:
Ice pack 0.9 0.7 0.9 0.9 .7
Frozen 0.6 0.8 0.7 0.7 .5
--- --- --- --- -----
Subtotal 1.5 1.5 1.6 1.6 1.2
--- --- --- --- ----
Total Company
processed chicken 86.1 85.9 87.1 84.0 83.8
Processed and
prepared foods 13.8 14.1 12.9 16.0 16.2
<PAGE>
Other(2) 0.1 0.0 0.0 0.0 0.0
--- ---- ---- ----- ---
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
(1) Vacuum pack poultry products have been restated in 1994 and included in
1994, 1995, 1996 and 1997 as fresh bulk pack, which includes ice pack
and vacuum pack products. The vacuum pack products were classified as
chill pack products in the 1993 Form 10-K.
(2) Consists of sales of poultry products that the Registrant purchases
from other poultry processors for resale, as necessary, to meet
customer demand.
Sales and Marketing
The Registrant's chicken products are sold primarily to retailers
(including national and regional supermarket chains and local supermarkets),
distributors and fast food operators located principally in the southeastern,
southwestern and western United States. The Registrant also sells its chicken
products to governmental agencies and to customers who resell the products
outside of the continental United States. This wide range of customers, together
with the Registrant's broad product mix, provides the Registrant with
flexibility in responding to changing market conditions in its effort to
maximize profits. This flexibility also assists the Registrant in its efforts to
reduce its exposure to market volatility.
Sales and distribution of the Registrant's chicken products are
conducted primarily by sales personnel at the Registrant's general corporate
offices in Laurel, Mississippi and by customer service representatives at each
of its six processing complexes and through independent food brokers. Each
complex has individual on-site distribution centers and uses the Registrant's
truck fleet, as well as contract carriers, for distribution of its products.
Generally, the Registrant prices much of its chicken products based
upon weekly market prices reported by the United States Department of
Agriculture. Consistent with the industry, the Registrant's profitability is
impacted by such market prices, which may fluctuate substantially and exhibit
cyclical characteristics. The Registrant adds a markup to base prices, which
depends upon value added, volume, product mix and other factors. While base
prices may change weekly, the Registrant's markup is generally negotiated from
time to time with the Registrant's customers. The Registrant's sales are
generally made on an as-ordered basis, and the Registrant maintains few
long-term sales contracts with its customers.
The Registrant uses television, radio and newspaper advertising, coupon
promotion, point of purchase material and other marketing techniques to develop
consumer awareness of and brand recognition for its Sanderson Farms(R) products.
The Registrant has achieved a high level of public awareness and acceptance of
its products through television advertising featuring a celebrity as the
Registrant's spokesperson. Brand awareness is an important element of the
Registrant's marketing philosophy, and it intends to continue brand name
merchandising of its products.
The Registrant's processed and prepared food items are sold nationally and
regionally, primarily to distributors, national food service accounts, retailers
and club stores. Sales of such products are handled by independent food brokers
located throughout the United States, primarily in the southeast and southwest
United States, and by sales personnel of the Registrant. Processed
<PAGE>
and prepared food items are distributed from the Registrant's plant in Jackson,
Mississippi, through arrangements with contract carriers.
Production and Facilities
General. The Registrant is a vertically-integrated producer of fresh
and frozen chicken products, controlling the production of hatching eggs,
hatching, feed manufacturing, growing, processing and packaging of its product
lines.
Breeding and Hatching. The Registrant maintains its own breeder flocks
for the production of hatching eggs. The Registrant's breeder flocks are
acquired as one-day old chicks (known as pullets or cockerels) from primary
breeding companies that specialize in the production of genetically designed
breeder stock. As of October 31, 1998, the Registrant maintained contracts with
32 pullet farm operators for the grow-out of pullets (growing the pullet to the
point at which it is capable of egg production, which takes approximately six
months). Thereafter, the mature breeder flocks are transported by Registrant
vehicles to breeder farms that are maintained, as of October 31, 1998, by 123
independent contractors under the Registrant's supervision. Eggs produced by
independent contract breeders are transported to Registrant's hatcheries in
Registrant's vehicles.
The Registrant owns and operates five hatcheries located in Mississippi
and Texas where eggs are incubated and hatched in a process requiring 21 days.
Once hatched, the day-old chicks are vaccinated against common poultry diseases
and are transported by Registrant vehicles to independent contract grow-out
farms. As of October 31, 1998, the Registrant's hatcheries were capable of
producing an aggregate of approximately 5.7million chicks per week.
Grow-out. The Registrant places its chicks on 450 grow-out farms, as of
October 31, 1998, located in Mississippi, Louisiana and Texas where broilers are
grown to an age of approximately six to seven weeks. The farms provide the
Registrant with sufficient housing capacity for its operations, and are
typically family-owned farms operated under contract with the Registrant. The
farm owners provide facilities, utilities and labor; the Registrant supplies the
day-old chicks, feed and veterinary and technical services. The farm owner is
compensated pursuant to an incentive formula designed to promote production cost
efficiency.
Historically, the Registrant has been able to accommodate expansion in
grow-out facilities through additional contract arrangements with independent
growers.
Feed Mills. An important factor in the grow-out of chickens is the rate
at which chickens convert feed into body weight. The Registrant purchases on the
open market the primary feed ingredients, including corn and soybean meal, which
historically have been the largest cost components of the Registrant's total
feed costs. The quality and composition of the feed are critical to the
conversion rate, and accordingly, the Registrant formulates and produces its own
feed. As of October 31, 1998, the Registrant operated four feed mills, three of
which are located in Mississippi and one in Texas. The Registrant's annual feed
requirements for fiscal 1998 were approximately 1,161,000 tons, and it has the
capacity to produce approximately 1,685,000 tons of finished feed annually under
current configurations.
Feed grains are commodities subject to volatile price changes caused by
weather, size of harvest, transportation and storage costs and the agricultural
policies of the United States and foreign governments. On October 31, 1998, the
Registrant had approximately 759,000 bushels of corn storage capacity at its
feed mills, which was sufficient to store all of its weekly requirements for
corn. Generally, the Registrant purchases its corn and other feed supplies at
current prices from suppliers and, to a limited extent, direct from farmers.
Feed grains are available from an adequate number of sources. Although the
Registrant has not experienced and does not anticipate problems
<PAGE>
in securing adequate supplies of feed grains, price fluctuations of feed grains
can be expected to have a direct and material effect upon the Registrant's
profitability. Although the Registrant sometimes purchases grains in forward
markets, it cannot eliminate the potentially adverse effect of grain price
increases. During the fall of 1998, market prices for corn and soy meal reached
levels that prompted the Company to buy a significant portion of its 1999
requirements on a forward basis. As a result of these purchases, the Company has
substantially reduced its expenses to the risk of material increases in feed
grain prices during its fiscal year ending October 31, 1999.
Processing. Once the chicks reach processing weight, they are
transported to the Registrant's processing plants. These plants use modern,
highly automated equipment to process and package the chickens. The Registrant's
Pike County, Mississippi processing plant, which currently operates two
processing lines on a double shift basis, is currently processing approximately
1.2 million chickens per week. The Registrant's Collins, Mississippi processing
plant, which is currently operating one of its two lines on a double shift basis
and one line on a single shift basis, is currently processing approximately
950,000 chickens per week. The Registrant's Brazos County, Texas processing
plant, which is currently operating one line on a single shift basis and one
line on a double shift basis, is currently processing approximately 950,000
chickens per week. The Registrant's Laurel and Hazlehurst, Mississippi and
Hammond, Louisiana processing plants currently operate on a double shift basis,
and have the capacity to process an aggregate of approximately 1,875,000
chickens per week. The Registrant also has the capabilities to produce deboned
product at five of its six processing facilities. At October 31, 1998, five of
these deboning facilities were operating on a double shifted basis resulting in
a combined capacity to process approximately 5.0 million pounds of product per
week at all deboning facilities.
Sanderson Farms, Inc. (Foods Division). The facilities of Sanderson
Farms, Inc. (Foods Division) are located in Jackson, Mississippi in a plant with
approximately 75,000 square feet of refrigerated manufacturing and storage
space. The plant uses highly automated equipment to prepare, process and freeze
food items. The Registrant could increase significantly its production of
processed and prepared food items without incurring significant capital
expenditures or delays.
Executive Offices; Other Facilities. The Registrant's corporate offices
are located in Laurel, Mississippi. As of October 31, 1998, the Registrant
operated one by-products plant, and six automotive maintenance shops which
service approximately 471 Registrant over-the-road and farm vehicles. In
addition, the Registrant has one child care facility located near its Collins,
Mississippi, processing plant currently serving over 184 children.
Quality Control
The Registrant believes that quality control is important to its
business and conducts quality control activities throughout all aspects of its
operations. The Registrant believes these activities are beneficial to efficient
production and in assuring its customers wholesome, high quality products.
From the corporate offices, the Director of Technical Services
supervises the operation of a modern, well-equipped laboratory which, among
other things, monitors sanitation at the hatcheries, quality and purity of the
Registrant's feed ingredients and feed, the health of the Registrant's breeder
flocks and broilers, and conducts microbiological tests of live chickens,
facilities and finished products. The Registrant conducts on-site quality
control activities at each of the five processing plants and the processed and
prepared food plant.
<PAGE>
Regulation
The Registrant's facilities and operations are subject to regulation by
various federal and state agencies, including, but not limited to, the federal
Food and Drug Administration ("F.D.A."), the United States Department of
Agriculture ("U.S.D.A."), the Environmental Protection Agency, the Occupational
Safety and Health Administration and corresponding state agencies. The
Registrant's chicken processing plants are subject to continuous on-site
inspection by the U.S.D.A. The Sanderson Farms, Inc. (Foods Division) processing
plant operates under the U.S.D.A.'s Total Quality Control Program which is a
strict self-inspection plan written in cooperation with and monitored by the
U.S.D.A. The F.D.A. inspects the production of the Registrant's feed mills.
Compliance with existing regulations has not had a material adverse
effect upon the Registrant's earnings or competitive position in the past and is
not anticipated to have a materially adverse effect in the future. Management
believes that the Registrant is in substantial compliance with existing laws and
regulations relating to the operation of its facilities and does not know of any
major capital expenditures necessary to comply with such statutes and
regulations.
The Registrant takes extensive precautions to ensure that its flocks
are healthy and that its processing plants and other facilities operate in a
healthy and environmentally sound manner. Events beyond the control of the
Registrant, however, such as an outbreak of disease in its flocks or the
adoption by governmental agencies of more stringent regulations, could
materially and adversely affect its operations.
Competition
The Registrant is subject to significant competition from regional and
national firms in all markets in which it competes. Some of the Registrant's
competitors have greater financial and marketing resources than the Registrant.
The primary methods of competition are price, product quality, number
of products offered, brand awareness and customer service. The Registrant has
emphasized product quality and brand awareness through its advertising strategy.
See "Business - Sales and Marketing". Although poultry is relatively inexpensive
in comparison with other meats, the Registrant competes indirectly with the
producers of other meats and fish, since changes in the relative prices of these
foods may alter consumer buying patterns.
Sources of Supply
During fiscal 1998, the Registrant purchased its pullets and its
cockerels from six (6) major breeders. The Registrant has found the genetic
cross of the breeds supplied by these companies to produce chickens most
suitable to the Registrant's purposes. The Registrant has no written contracts
with these breeders for the supply of breeder stock. Other sources of breeder
stock are available, and the Registrant continually evaluates these sources of
supply. Should breeder stock from its present suppliers not be available for any
reason, the Registrant believes that it could obtain adequate breeder stock from
other suppliers.
Other major raw materials used by the Registrant include feed grains,
cooking ingredients and packaging materials. The Registrant purchases these
materials from a number of different vendors and believes that its sources of
supply are adequate for its present needs. The Registrant does not anticipate
any difficulty in obtaining these materials in the future.
<PAGE>
Seasonality
The demand for the Registrant's chicken products generally is greatest
during the spring and summer months and lowest during the winter months.
Trademarks
The Registrant has registered with the United States Patent and
Trademark Office the trademark Sanderson Farms(R) which it uses in connection
with the distribution of its premium grade chill pack products. The Registrant
considers the protection of this trademark to be important to its marketing
efforts due to consumer awareness of and loyalty to the Sanderson Farms(R)
label. The Registrant also has registered with the United States Patent and
Trademark Office seven other trademarks which are used in connection with the
distribution of chicken and other products and for other competitive purposes.
The Registrant has registered with the United States Patent and
Trademark Office the trademark Sanderson Farms(R) which it uses in connection
with the distribution of its prepared foods and two pound frozen entree
products, as well as in connection with the distribution of its premium grade
chill pack chicken products.
The Registrant, over the years, has developed important non-public
proprietary information regarding product related matters. While the Registrant
has internal safeguards and procedures to protect the confidentiality of such
information, it does not generally seek patent protection for its technology.
Employees and Labor Relations
As of October 31, 1998, the Registrant had 6358 employees, including
705 salaried and 5653 hourly employees. A collective bargaining agreement with
the United Food and Commercial Workers International Union covering 579 hourly
employees who work at the Registrant's processing plant in Hammond, Louisiana
expired on November 30, 1998. That contract was renegotiated and executed on
November 1, 1998, and has been extended to November 30, 2001.The collective
bargaining agreement has a grievance procedure and no strike-no lockout clauses
that should assist in maintaining stable labor relations at the Hammond plant.
A collective bargaining agreement with the Laborers' International
Union of North America, Professional Employees Local Union #693, AFL-CIO,
covering 322 hourly employees who work at the Registrant's processing plant in
Hazlehurst, Mississippi was negotiated and signed by the union and the
Registrant effective July 15, 1995. This Agreement will expire on June 30, 1999.
This collective bargaining agreement has a grievance procedure and no strike-no
lockout clauses that should assist in maintaining stable labor relations at the
Hazlehurst plant.
A collective bargaining agreement with the Laborers' International
Union of North America, Professional Employees Local Union #693, AFL-CIO,
covering 1126 hourly employees who work at the Registrant's processing plant in
Collins, Mississippi was negotiated and signed by the union and the Registrant
effective September 9, 1995, and will expire on December 30, 1999. This
collective bargaining agreement also has a grievance procedure and no strike-no
lockout clauses that should assist in maintaining stable labor relations at the
Collins, Mississippi processing plant.
<PAGE>
On January 9, 1998, the United Food and Commercial Workers Union Local
#408, AFL-CIO filed its petition with the National Labor Relations Board seeking
representation of the Registrant's full-time and part-time production,
maintenance and clean-up employees at its Brazos County, Texas poultry
processing facility. At a hearing held on January 20, 1998, the National Labor
Relations Board set February 25, 1998 as the date for an election on this matter
by the Registrant's Brazos County, Texas employees. On that date, the employees
at the Registrant's Brazos County, Texas processing facility voted 271 to 118
not to be represented by the union.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES
The Registrant engages in no material foreign operations, and no
material portion of its revenues was derived from customers in foreign
countries.
Item 2. Properties.
The Registrant's principal properties are as follows:
Use Location (City, State)
Poultry complex, including Laurel, Mississippi
poultry processing plant,
hatchery and feedmill
Poultry complex, including Pike County, Mississippi
poultry processing plant,
hatchery and feedmill
Poultry complex, including Hazlehurst, Mississippi
poultry processing plant,
hatchery and feedmill
Poultry complex, including Brazos and Robertson Counties,
poultry processing plant, Texas
hatchery and feedmill
Poultry processing plant Hammond, Louisiana
Poultry processing plant, Collins, Mississippi
hatchery and by-products
plant
Prepared food plant Jackson, Mississippi
Corporate general offices Laurel, Mississippi
The Registrant owns substantially all of its major operating facilities
with the following exceptions: one processing plant and feed mill complex is
leased on an annual renewal basis
<PAGE>
through 2063 with an option to purchase at a nominal amount, at the end of the
lease term. One processing plant complex is leased under four leases, which are
renewable annually through 2061, 2063, 2075 and 2073, respectively. Certain
infrastructure improvements associated with a processing plant are leased under
a lease which expires in 2012 and is thereafter renewable annually through 2091.
All of the foregoing leases are capital leases.
There are no material encumbrances on the major operating facilities
owned by the Registrant, except that the plant of Sanderson Farms, Inc. (Foods
Division) is encumbered by a mortgage which collateralizes a note with an
outstanding principal balance of $1.2 on December 31, 1998, which bears interest
at the rate of 5% per annum and is payable in equal annual installments through
2009. In addition, under the terms of the revolving credit agreement effective
July 29, 1996, as amended, and under the $20 million long-term fixed rate loan
agreement effective in February 1993, the Registrant may not pledge any
additional assets as collateral other than fixed assets up to 15% of its
tangible assets.
Management believes that the Company's facilities are suitable for its
current purposes, and believes that current renovations and expansions will
enhance present operations and allow for future internal growth.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than routine
litigation incidental to the Registrant's business, to which the Registrant is a
party or of which its property is the subject, and no such proceedings are known
by the Registrant to be contemplated by governmental authorities.
Item 4. Submission of Matters to
a Vote of Security Holders.
No matters were submitted to a vote of the Registrant's security
holders, through the solicitation of proxies or otherwise, during the fourth
quarter of the Fiscal Year.
<PAGE>
Item 4A. Executive Officers of the Registrant.
Executive
Name Age Office Officer Since
Joe F. Sanderson, Jr. 52 Chairman of the Board, 1984 (1)
President and
Chief Executive
Officer
D. Michael Cockrell 41 Treasurer and Chief 1994 (2)
Financial Officer,
Board Member
James A. Grimes 50 Secretary and 1994 (3)
Chief Accounting Officer
Lampkin Butts 47 Vice President - Sales, 1996 (4)
Board Member
(1) Joe F. Sanderson, Jr. has served as President and Chief Executive
Officer of the Registrant since November 1, 1989, and as Chairman of
the Board since January 8, 1998. From January 1984, to November 1989,
Mr. Sanderson served as Vice-President, Processing and Marketing of the
Registrant.
(2) D. Michael Cockrell became Treasurer and Chief Financial Officer of the
Registrant effective November 1, 1993, and was elected to the Board of
Directors on February 19, 1998. Prior to that time, for more than five
years, Mr. Cockrell was a member and shareholder of the Jackson,
Mississippi law firm of Wise Carter Child & Caraway, Professional
Association.
(3) James A. Grimes became Secretary of the Registrant effective November
1, 1993. Mr. Grimes also serves as Chief Accounting Officer, which
position he has held since 1985.
(4) Lampkin Butts became Vice President - Sales of the Registrant effective
November 1, 1996, and was elected to the Board of Directors on February
19, 1998. Prior to that time, Mr. Butts served the Registrant in
various capacities since 1973.
Executive officers of the Company serve at the pleasure of the Board of
Directors. There are no understandings or agreements relating to any person's
service or prospective service as an executive officer of the Registrant.
<PAGE>
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters.
The Company's common stock is traded on the NASDAQ National Market
System under the symbol SAFM. The number of stockholders as of December 31,
1998, was 1,250.
The following table shows quarterly cash dividends and quarterly high
and low prices for the common stock for the past two fiscal years. National
Market System quotations are based on actual sales prices.
<TABLE>
Stock Price
Fiscal Year 1998 High Low Dividends
-----------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
First Quarter $15.50 $11.88 $.05
Second Quarter $14.00 $10.50 $.05
Third Quarter $15.38 $11.44 $.05
Fourth Quarter $17.13 $11.88 $.05
Stock Price
Fiscal Year 1997 High Low Dividends
---------------------------------------------------------------------
First Quarter $18.75 $12.875 $.05
Second Quarter $19.25 $14.00 $.05
Third Quarter $18.25 $13.50 $.05
Fourth Quarter $16.25 $13.00 $.05
</TABLE>
On December 31, 1998 the closing sales price for the common stock was $15.375
per share.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended October 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 521,394 $ 481,789 $ 455,100 $ 392,896 $ 371,502
Operating income 31,822 7,467 1,189 21,239 28,184
Income (loss) before
extraordinary gain 15,256 558 (2,443) 10,856 15,479
Net income (loss) 15,256 1,234 (2,443) 10,856 15,479
Basic and diluted earnings (loss)
per share before extraordinary gain(1) 1.06 .04 (.18) .80 1.14
Basic and diluted earnings (loss)
per share(1) 1.06 .09 (.18) 0.80 1.14
Working capital 59,665 66,751 60,826 47,605 45,843
Total assets 265,671 264,893 237,226 193,197 181,709
Long-term debt, less
current maturities 95,695 118,782 90,102 54,806 56,176
Stockholders' equity 129,482 116,771 118,250 114,319 106,187
Cash dividends declared
per share(1) $ .20 $ .20 $ .20 $ .20 $ .20
</TABLE>
(1)Earnings and dividends per share have been adjusted to reflect the 3 for 2
stock split effected in the form of a stock dividend in February 1995.
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 113,674 $ 128,582 $ 136,287 $ 142,851
Operating income (loss) (4,344) 5,687 10,680 19,799
Net income (loss) (3,950) 2,292 5,540 11,374
Basic and diluted
earnings (loss) per share $ (.27) $ .16 $ .39 $ .79
Fiscal Year 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
(Unaudited)
Net sales $ 115,647 $ 117,410 $ 121,895 $ 126,837
Operating income (loss) 6,757 287 (2,417) 2,840
Income (loss) before
extraordinary gain 3,578 (751) (2,705) 436
Net income (loss) 3,578 (751) (2,029) 436
Basic and diluted earnings (loss)
per share before
extraordinary gain .25 (.05) (.19) .03
Basic and diluted earnings (loss)
per share $ .25 $ (.05) $ (.14) $ .03
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT
FUTURE PERFORMANCE
This Annual Report contains certain forward-looking statements about the
business, financial condition and prospects of the Company. The actual
performance of the Company could differ materially from that indicated by the
forward-looking statements because of various risks and uncertainties,
including, without limitation, changes in the market price for the Company's
finished products and for feed grains, both of which may fluctuate substantially
and exhibit cyclical characteristics typically associated with commodity
markets, as described below; changes in competition and economic conditions;
various inventory risks due to changes in market conditions; changes in
governmental rules and regulations applicable to the Company and the poultry
industry; and other risks described below. These risks and uncertainties can not
be controlled by the Company. When used in this Annual Report, the words
"believes," "estimates," "plans," "expects," "should," "outlook," and
"anticipates," and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
GENERAL
The Company's poultry operations are integrated through its control of all
functions relative to the production of its chicken products, including hatching
egg production, hatching, feed manufacturing, raising chickens to marketable age
("grow-out"), processing and marketing. Consistent with the poultry industry,
the Company's profitability is substantially impacted by the market price for
its finished products and feed grains, both of which may fluctuate substantially
and exhibit cyclical characteristics typically associated with commodity
markets. Other costs, excluding feed grains, related to the profitability of the
Company's poultry operations, including hatching egg production, hatching,
growing, and processing cost, are responsive to efficient cost containment
programs and management practices. Over the past three fiscal years, these other
production costs have averaged approximately 58.3% of the Company's total
production costs.
The Company believes that value-added products are subject to less price
volatility and generate higher, more consistent profit margin than whole
chickens ice packed and shipped in bulk form. To reduce its exposure to market
cyclicality that has historically characterized commodity chicken market prices,
the Company has increasingly concentrated on the production and marketing of
value-added product lines with emphasis on product quality, customer service,
and brand recognition. The Company adds value to its poultry products by
performing one or more processing steps beyond the stage where the whole chicken
is first saleable as a finished product, such as cutting, deep chilling,
packaging and labeling the product. The Company believes that one of its major
strengths is its ability to change its product mix to meet customer demands.
<PAGE>
The Company's processed and prepared foods product line includes over 200
institutional and consumer packaged food items that it sells nationally,
primarily to distributors, food service establishments and retailers. A majority
of the prepared food items are made to the specifications of food service users.
Poultry prices per pound, as measured by the Georgia dock price, fluctuated
during the three years ended October 31, 1998 as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Fiscal 1998
High $.5850 $.5775 $.6825 $.7150*
Low $.5550* $.5550 $.5775 $.6875
Fiscal 1997
High $.6600* $.6325 $.6275 $.6325
Low $.6375 $.6125 $.6075 $.5900*
Fiscal 1996
High $.6000 $.5825 $.6650 $.6675*
Low $.5825 $.5500* $.5675 $.6525
*Year High/Low
During the first quarter of fiscal 1997, the Company experienced improved
selling prices of chicken products and lower average cost of feed grains.
However, later during fiscal 1997, lower market prices for poultry products, the
adverse effect of a change in the Company's feed formulation, and additional
cost associated with the start-up of the new complex in Texas partially offset
the favorable market prices for poultry products during the first quarter of
fiscal 1997 and the overall lower average feed costs during fiscal 1997. During
fiscal 1998, favorable grain prices, improved market prices for poultry products
during the second half of fiscal 1998 and the benefits of our ongoing expansion
program improved operating margins as compared to fiscal 1997.
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
For the year ended October 31, 1998, net sales were $521.4 million, an increase
of $39.6 million or 8.2% over fiscal 1997. Increases in the pounds of poultry
products sold and prepared food products sold of 8.0% and 9.2%, respectively,
were the primary reason for the increase in net sales. The additional poultry
pounds were produced by the Company's new complex in Brazos and Robertson
counties, Texas. The Company's average sale price of poultry products decreased
1.6% during fiscal 1998 as compared to fiscal 1997. A simple average of the
Georgia dock prices for fiscal 1998 as compared to fiscal 1997 decreased 1.7%.
Net sales of prepared food products increased $14.4 million or 18.9% over the
previous fiscal year. This increase resulted from an of increase of 9.2% in the
pounds of prepared food products sold and an increase in the pounds sold of
cooked chicken products, which have a higher average selling price than the
prepared food division's average product mix during fiscal 1997.
<PAGE>
During fiscal 1998, cost of sales increased $14.2 million, or 3.1%, as compared
to fiscal 1997. Cost of sales of poultry products decreased $1.5 million or .4%
despite an increase in the pounds of poultry products sold of 8.0%. During
fiscal 1998, the Company benefitted from lower cost of feed grains. A simple
average of the corn and soybean meal cash market prices reflected decreases of
11.0% and 33.3%, respectively. Cost of sales of prepared food products increased
$15.7 million or 23.1% during the twelve months ended October 31, 1998 as
compared to the twelve months ended October 31, 1997. This increase in cost of
sales of prepared food products was the result of the additional pounds of
prepared food products sold and the change in the product mix.
Selling, general and administrative expenses for fiscal 1998 increased $1.1
million, or 5.7%, as compared to fiscal 1997. During fiscal 1998 the Company
contributed $1.1 million to the Employees Stock Ownership Plan. The Company did
not contribute to the Employees Stock Ownership Plan during fiscal 1997.
The Company's operating income for fiscal 1998 was $31.8 million, an increase of
$24.4 million over the fiscal 1997 operating income of $7.5 million. The strong
results for the fiscal year reflected favorable grain prices, a much improved
poultry market in the second half of fiscal 1998 and the benefits of our ongoing
expansion program.
Interest expense increased approximately $1.1 million during fiscal 1998 as
compared to fiscal 1997. During fiscal 1997, the Company capitalized interest
cost of approximately $0.5 million associated with the construction of the new
complex in Texas. The Company did not capitalize any interest cost during fiscal
1998. The Company expects interest expense to be lower during fiscal 1999 as
compared to the current fiscal year, reflecting lower outstanding debt during
the year.
The effective tax rate during fiscal 1998 was approximately 37.4% as compared to
39.5% during fiscal 1997. The decreased effective rate is the result of the
change in nondeductible expenses as a percentage of pretax income.
Fiscal 1997 Compared to Fiscal 1996
Net sales for the year ended October 31, 1997, were $481.8 million, an increase
of $26.7 million, or 5.9%, over net sales of $455.1 million for the year ended
October 31, 1996. The increase in net sales resulted from an increase in net
sales of poultry products of $10.5 million, or 2.7%, and a corresponding
increase in net sales of prepared food products of $16.2 million, or 26.9%. The
increase in net sales of poultry products was the result of a 6.3% increase in
the pounds of poultry products sold and a decrease of 3.4% in the average sale
price of poultry products. During fiscal 1997 as compared to fiscal 1996, the
Company produced additional poultry volume internally from its expansion of the
McComb, Mississippi poultry complex during fiscal 1996, and the start-up of the
new complex in Texas during fiscal 1997. These increases were partially offset
by fewer pounds purchased from external sources which have a higher average sale
price and cost of sales per pound than the Company's normal product mix. The
increase in the net sales of prepared food products was due to an increase of
15.0% in the pounds of prepared food products sold and an increase in the amount
sold of cooked chicken products, which have a higher average selling price than
the prepared food division's average product mix during fiscal 1996.
Cost of sales for fiscal 1997 as compared to fiscal 1996 increased $18.5
million, or 4.2%. During the same period, cost of sales of poultry products
increased $2.7 million, or 0.7% due to the increase in the pounds sold of
poultry products and a decrease in the average cost of feed grains. A simple
average of the corn and soy meal cash market prices for the twelve-month periods
ended October
<PAGE>
31, 1997 and 1996, reflected a decrease of 29.5% and an increase of 10.7%,
respectively. Cost of sales of prepared food products increased $15.8 million,
or 30.3%, as a result of an increase of 15.0% in the pounds of prepared food
products sold and an increase in the amount of cooked chicken products sold
which have a higher average cost of sales than the prepared food division's
product mix during the previous fiscal year.
Selling, general and administrative expenses for the twelve months ended October
31, 1997, increased $1.9 million, or 11.3%, as compared to fiscal 1996. The
primary factor for this increase was additional selling and administrative cost
associated with the construction and start-up of the new complex in Texas during
fiscal 1997.
For the fiscal year ended October 31, 1997 as compared to the fiscal year ended
October 31, 1996, the Company's operating income increased $6.3 million
primarily as a result of lower average cost of feed grains. In addition, during
the second quarter of fiscal 1997, the Company altered the formulation of the
feed used for its broiler chickens. The altered feed formulation resulted in
poor grow-out performance and a decrease in the bird weight delivered to our
processing plants. The lower bird weight processed by the Company during the
third quarter resulted in lower margins per pound. The feed formulation was
corrected and the negative effects of the change worked their way completely out
of the Company's operations during the fourth quarter of fiscal 1997. Also, the
Company incurred additional costs associated with the start-up of the new
complex in Texas during fiscal 1997.
Interest expense increased approximately $2.3 million during fiscal 1997 as
compared to the previous fiscal year. During the first four months of fiscal
1997, the Company capitalized interest costs of approximately $0.5 million
associated with the construction of the new complex in Texas. Accordingly, upon
completion and start-up of the new complex during the second quarter of fiscal
1997, the Company no longer capitalized interest cost and, as a result, incurred
increased interest expense. The Company's effective tax rate was approximately
39.5% during fiscal 1997. During fiscal 1996, the Company recorded a tax benefit
of approximately 23.9%. The increased effective tax rate is the result of the
change in nondeductible expenses as a percentage of pretax income (loss).
In January 1997, a fire damaged sections of the Pike County, Mississippi,
processing plant, including some equipment and refrigeration. Substantially all
of the cost of repairs and reconstruction of the new plant were covered by
insurance. Certain costs associated with the plant's downtime were also covered
by insurance. The excess of $1.1 million of the insurance proceeds received over
the book value of the assets destroyed, before income taxes of $.4 million, has
been accounted for as an extraordinary gain in the accompanying consolidated
statements of income.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company's working capital was $59.7 million and its
current ratio was 3.3 to 1, as compared to working capital of $66.8 million and
current ratio of 4.8 to 1 at October 31, 1997. The Company's capital budget for
fiscal 1998 was increased to $24.1 million from $12.0 million at November 1,
1997. Included in the capital budget for fiscal 1998 are the anticipated cost of
adding a second shift to the Texas complex, approximately $1.9 million relating
to fiscal 1997 items that were completed or started and other items that include
cost of renovations, changes and additions to existing processing facilities to
allow better product flows and product mix for more product flexibility.
<PAGE>
The capital budget for fiscal 1999 is approximately $21.5 million. Included in
the fiscal 1999 budget is approximately $.8 million relating to fiscal 1998
budget items that were not completed or started during fiscal 1998. Also
included in fiscal 1999 budget are items that include cost of renovations,
changes and additions to existing processing facilities to allow better product
flows and product mix for more product flexibility.
The Company believes that anticipated capital expenditures for fiscal 1999 will
be funded from working capital and by cash flows from operations; however, if
needed the Company has $57.0 million available under its revolving credit
agreement as of October 31, 1998. As of July 31, 1998, the Company increased its
revolving credit facility by $5.0 million to $130.0 million and extended the
revolving credit maturity date by one year.
Impact of Year 2000 Issues
The Company is continuing to assess the impact of the Year 2000 issue on its
computer systems and believes that certain software currently in use will have
to be modified or replaced. In addition to computer equipment, the Company is
assessing possible problems with micro-processors embedded within operating
equipment in its hatcheries, feed mills and processing plants. The Company
estimates the cost of modifications to existing software and conversions to new
software to be approximately $.5 million and will be substantially completed by
January 31, 1999. With the modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant operational problems
for the Company's computer systems. However, if such modifications and
conversions are not made or are not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company. In addition,
approximately $.4 million is projected to be capitalized because certain
personal computers are being replaced in the normal course of business.
The Company is examining the impact of the Year 2000 issue on suppliers, vendors
and equipment manufacturers by contacting them in order to evaluate their
response capabilities and readiness for year 2000. Presently, the Company has no
reason to believe that its suppliers, vendors and equipment manufacturers will
not be Year 2000 compliant. However, in the event their responses are not
satisfactory, the Company will consider new business relationships with
alternate suppliers or vendors as necessary to the extent alternatives are
available.
The Company is in the process of developing a contingency plan for Year 2000
issues, and intends to have such a plan established by May 31, 1999. The
planning effort includes critical Company areas such as the availability of feed
ingredients, electrical power and transportation.
The costs of the modifications and the dates which the Company believes it will
have this completed are based on management's best estimates, which were derived
utilizing numerous assumption's of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Market Risk
<PAGE>
The Company's interest expense is sensitive to changes in the general level of
U.S. interest rates. The Company maintains certain of its debt as fixed rate in
nature to mitigate the impact of fluctuations in interest rates. The fair value
of the Company's fixed rate debt approximates the carrying amount at October 31,
1998. Management believes the potential effects of near-term changes in interest
rates on the Company's fixed rate debt is not material.
The Company is a party to no other market risk sensitive instruments
requiring disclosure.
Item 8. Financial Statements and Supplementary Data.
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31
1998 1997
---- ----
<S> <C> <C>
(In thousands)
Assets
Current assets:
Cash and temporary cash investments $ 3,626 $ 1,531
Accounts receivables, less allowance of $249,000 in
1998 and $233,000 in 1997 31,023 30,934
Inventories (Note 2) 42,879 44,210
Refundable income taxes -0- 2,112
Prepaid expenses 7,664 5,535
Total current assets 85,192 84,322
Property, plant and equipment (Note 3):
Land and buildings 122,209 119,065
Machinery and equipment 202,863 189,867
Construction in process 7,913 1,789
-------- ---------
332,985 310,721
Accumulated depreciation (153,897) (132,533)
------- -------
179,088 178,188
Other assets 1,391 2,383
-------- ---------
Total assets $265,671 $264,893
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,893 $ 5,612
Income taxes payable 4,210 -0-
Accrued expenses (Note 8) 11,396 8,845
Current maturities of long-term debt 4,028 3,114
-------- ---------
Total current liabilities 25,527 17,571
Long-term debt, less current maturities (Note 3) 95,695 118,782
Claims payable (Note 8) 1,100 700
Deferred income taxes (Note 4) 13,867 11,069
Stockholders' equity (Note 7):
Preferred Stock:
Series A Junior Participating Preferred Stock, $100
par value: authorized shares-500,000; none issued
Par value to be determined by the Board of Directors:
authorized shares-4,500,000; none issued
Common Stock, $1 par value: authorized shares-100,000,000;
issued and outstanding shares-14,373,580 in 1998 and
14,367,580 in 1997 14,374 14,368
Paid-in capital 11,770 11,447
Retained earnings 103,338 90,956
------- --------
Total stockholders' equity 129,482 116,771
------- -------
Total liabilities and stockholders' equity $265,671 $264,893
======= =======
</TABLE>
See accompanying notes.
<PAGE>
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended October 31
1998 1997 1996
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales $ 521,394 $ 481,789 $ 455,100
Cost and expenses:
Cost of sales 469,429 455,274 436,799
Selling, general and administrative 20,143 19,048 17,112
--------- --------- ---------
489,572 474,322 453,911
--------- --------- ---------
Operating income 31,822 7,467 1,189
Other income (expense):
Interest income 341 156 157
Interest expense (7,721) (6,652) (4,383)
Other (86) (13) (173)
--------- --------- ---------
(7,466) (6,509) (4,399)
--------- --------- ---------
Income (loss) before income taxes and extraordinary gain 24,356 958 (3,210)
Income tax expense (benefit) (Note 4) 9,100 400 (767)
--------- --------- ---------
Income (loss) before extraordinary gain 15,256 558 (2,443)
Extraordinary gain(net of income
taxes of $406,000) (Note 8) -0- 676 -0-
--------- --------- ---------
Net income (loss) $ 15,256 $ 1,234 $ (2,443)
========= ========= =========
Basic and diluted net income (loss) per share:
Income (loss) per share before
extraordinary gain $ 1.06 $ .04 $ (.18)
Extraordinary gain per share -0- .05 -0-
--------- --------- ---------
Net income (loss) per share $ 1.06 $ .09 $ (.18)
========= ========= =========
Weighted average shares outstanding:
Basic 14,369 14,365 13,843
========= ========= =========
Diluted 14,426 14,453 13,843
========= ========= =========
See accompanying notes.
</TABLE>
<PAGE>
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
(In thousands, except shares)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance at November 1, 1995 13,613,080 $ 13,613 $ 2,871 $ 97,835 $114,319
Net loss for year (2,443) (2,443)
Cash dividends ($.20 per share) (2,797) (2,797)
Issuance of common stock to ESOP 750,000 750 8,421 9,171
Balance at October 31, 1996 14,363,080 14,363 11,292 92,595 118,250
Net income for year 1,234 1,234
Cash dividends ($.20 per share) (2,873) (2,873)
Issuance of common stock 4,500 5 45 50
Principal payments received on note
receivable from ESOP 110 110
Balance at October 31, 1997 14,367,580 14,368 11,447 90,956 116,771
Net income for year 15,256 15,256
Cash dividends ($.20 per share) (2,874) (2,874)
Issuance of common stock 6,000 6 58 64
Principal payments received on note
receivable from ESOP 265 265
Balance at October 31, 1998 14,373,580 $ 14,374 $ 11,770 $103,338 $129,482
See accompanying notes.
</TABLE>
<PAGE>
SANDERSON FARMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended October 31
1998 1997 1996
---- ---- ----
(In thousands)
<CAPTION>
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 15,256 $ 1,234 $ (2,443)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 23,241 21,367 19,744
Provision for losses on accounts receivable 240 142 172
Deferred income taxes 2,710 200 150
Change in assets and liabilities:
Increase in accounts receivable (329) (3,415) (5,209)
Decrease (increase) in inventories 1,331 (5,150) (5,785)
Decrease (increase)in prepaid expenses 63 (1,370) (1,671)
Decrease (increase) in other assets 329 (1,756) (240)
Increase in accounts payable 281 644 763
Increase in accrued expenses and claims payable 7,161 75 541
-------- -------- --------
Total adjustments 35,027 10,737 8,465
-------- -------- --------
Net cash provided by operating activities 50,283 11,971 6,022
Investing activities
Net proceeds from sale of property and equipment 202 846 96
Capital expenditures (23,673) (42,147) (46,230)
-------- -------- --------
Net cash used in investing activities (23,471) (41,301) (46,134)
Financing activities
Long-term borrowings -0- 4,794 2,406
Net change in revolving credit (19,000) 27,000 36,000
Principal payments on long-term debt (2,998) (2,934) (81)
Principal payments on capital lease (174) (165) (155)
Principal payments received on note
receivable from ESOP 265 110 -0-
Dividends paid (2,874) (2,873) (2,797)
Net proceeds from issuance of common stock to ESOP -0- -0- 9,171
Net proceeds from common stock issued 64 50 -0-
-------- -------- --------
Net cash provided by (used in) financing activities (24,717) 25,982 44,544
-------- -------- --------
Net increase (decrease) in cash and temporary cash investments 2,095 (3,348) 4,432
Cash and temporary cash investments
at beginning of year 1,531 4,879 447
-------- -------- --------
Cash and temporary cash investments
at end of year $ 3,626 $ 1,531 $ 4,879
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 2,834 $ 2,940 $ 1,991
======== ======== ========
Income taxes refunded $ 2,474 $ 1,368 $ -0-
======== ======== ========
Interest paid $ 7,880 $ 7,378 $ 4,600
======== ======== ========
See accompanying notes.
</TABLE>
<PAGE>
Sanderson Farms, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of Sanderson Farms, Inc. (the "Company") and its wholly-owned
subsidiaries. All significant intercompany transactions and accounts have been
eliminated in consolidation.
Business: The Company is engaged in the production, processing, marketing and
distribution of fresh and frozen chicken and other prepared food items. The
Company's net sales and cost of sales are significantly affected by market price
fluctuations of its principal products sold and of its principal ingredients,
corn and other grains.
The Company sells to retailers, distributors and fast food operators primarily
in the southern and western United States. Revenue is recognized when product is
shipped to customers. Management periodically performs credit evaluations of its
customers' financial condition and generally does not require collateral.
Credit losses have consistently been within management's expectations.
Use of Estimates: The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Temporary Cash Investments: Temporary cash investments include investment
agreements for securities purchased under agreements to resell with a maturity
of one day.
Inventories: Processed food and poultry inventories and inventories of feed,
eggs, medication and packaging supplies are stated at the lower of cost
(first-in, first-out method) or market.
Live poultry inventories of broilers are stated at the lower of cost or market
and breeders at cost less accumulated amortization. The costs associated with
breeders, including breeder chicks, feed, medicine and grower pay, are
accumulated up to the production stage and amortized over nine months using the
straight-line method.
Property, Plant and Equipment: Property, plant and equipment is stated at cost.
Depreciation of property, plant and equipment is provided by the straight-line
and units of production methods over the estimated useful lives of 19 to 39
years for buildings and 3 to 7 years for machinery and equipment.
Impairment of Long-Lived Assets: The Company continually reevaluates the
carrying value of its long-lived assets for events or changes in circumstances
which indicate that the carrying value may not be recoverable. As part of this
reevaluation, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposal. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized through a charge
to operations.
Income Taxes: Deferred income taxes are accounted for using the liability method
and relate principally to cash basis temporary differences and depreciation
expense accounted for differently for financial and income tax purposes.
Effective November 1, 1988, the Company changed from the cash to the accrual
<PAGE>
basis of accounting for its farming subsidiary. The Taxpayer Relief Act of 1997
(the "Act") provides that the taxes on the cash basis temporary differences as
of that date are payable over 20 years beginning in fiscal 1998 or in the first
fiscal year in which the Company fails to qualify as a "Family Farming
Corporation." The Company will continue to qualify as a "Family Farming
Corporation" provided there are no changes in ownership control, which
management does not anticipate during fiscal 1999.
Stock Based Compensation: The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to or above the fair value of
the shares at the date of the grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the stock
option grants.
Earnings Per Share: In fiscal 1998, the Company adopted the provisions of FASB
Statement No. 128, "Earnings per Share". Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All net income (loss) per share amounts for all periods have
been presented to conform to the Statement 128 requirements. There are no
required restatements of net income (loss) per share for the periods presented.
Fair Value of Financial Instruments: The carrying amounts for cash and temporary
cash investments approximate their fair values. The carrying amounts of the
Company's borrowings under its credit facilities and long-term debt also
approximate the fair values based on current rates for similar debt.
Impact of Recently Issued Accounting Standards: Effective for fiscal 1999, FASB
No. 130,, "Reporting Comprehensive Income", requires that items required to be
recognized as components of comprehensive income be reported in a financial
statement displayed with the same prominence as other financial statements.
Management does not expect FASB No. 130 to have a significant impact on the
financial statements of the Company in fiscal 1999.
Effective in fiscal 1999, FASB No. 131, "Disclosures about Segments of an
Enterprise and Related Information", requires that companies report financial
and descriptive information about their reportable operating segments.
Management does not expect FASB No. 131 to have a significant impact on the
financial statements of the Company in fiscal 1999.
Effective in fiscal 2000, FASB No. 133, "Accounting for Derivative Instruments
and Hedging Activities", requires all derivatives to be recorded on the balance
sheet at fair value. Management does not expect FASB No. 133 to have a
significant impact on the financial statements of the Company in fiscal 2000.
Reclassifications: Certain reclassifications have been made to the fiscal 1997
financial statements to conform with the fiscal 1998 presentation.
<PAGE>
2. Inventories
Inventories consisted of the following:
October 31
1998 1997
---- ----
(In thousands)
Live poultry-broilers and breeders $26,970 $24,980
Feed, eggs and other 5,676 5,790
Processed poultry 3,522 5,238
Processed food 3,029 5,234
Packaging materials 3,682 2,968
------ ------
$42,879 $44,210
====== ======
3. Long-term Credit Facilities and Debt Long-term debt consisted of the
following:
October 31
1998 1997
(In thousands)
Revolving credit agreement with banks
(weighted average rate of 6.52% at
October 31, 1998) $73,000 $ 92,000
Term loan with an insurance company,
accruing interest at 7.49%; due in
annual principal installments of $2,850,000 14,300 17,150
Note payable, accruing interest at 5%;
due in annual installments of $161,400,
including interest, maturing in 2009 1,363 1,452
6% Mississippi Business Investment Act
bond-capital lease obligation 3,860 4,035
Robertson County, Texas, Industrial
Revenue Bonds accruing interest
at variable rate, (3.35% at October
31, 1998); due in annual principal
installments of $900,000 7,200 7,200
Notes payable to an insurance company,
accruing interest at 5% -0- 59
----------- ----------
99,723 121,896
Less current maturities of long-term debt 4,028 3,114
------- ---------
$95,695 $118,782
====== =======
The Company has a $130.0 million ($57.0 million available at October 31, 1998)
revolving credit agreement with five banks. The revolver extends to fiscal 2001,
when the outstanding borrowings may be converted to a term loan payable in equal
semiannual installments over four years. Borrowings are
<PAGE>
at prime or below and may be prepaid without penalty. A commitment fee of .20%
is payable quarterly on the unused portion of the revolver. Covenants related to
the revolving credit and the term loan agreements include requirements for
maintenance of minimum consolidated net working capital, tangible net worth,
debt to total capitalization and current ratio. The agreements also establish
limits on dividends, assets that can be pledged and capital expenditures.
Property, plant and equipment with a carrying value of approximately $6,100,000
is pledged as collateral to a note payable and the capital lease obligation.
Interest cost of $480,000 and $775,000 was capitalized in fiscal 1997 and 1996,
respectively. No interest cost was capitalized in fiscal 1998.
<PAGE>
The aggregate annual maturities of long-term debt at October 31, 1998 (assuming
borrowings under the revolver will be converted to a term loan in fiscal 2001)
are as follows (in thousands):
Fiscal Year Amount
1999 $ 4,028
2000 4,043
2001 11,558
2002 11,578
2003 11,644
Thereafter 56,872
----------
$99,723
4. Income Taxes
Income tax expense (benefit) consisted of the following:
Years Ended October 31
1998 1997 1996
-----------------------------------------
(In thousands)
Current:
Federal $5,900 $ 216 $(692)
State 490 390 (225)
------ ----- ------
6,390 606 (917)
Deferred:
Federal 2,197 470 115
State 513 (270) 35
------ ----- -----
2,710 200 150
------ ----- -----
9,100 806 (767)
Less income tax expense applicable to
extraordinary gain -0- 406 -0-
------ ----- -----
Income tax expense (benefit) applicable
to income before extraordinary gain $9,100 $ 400 $(767)
====== ===== =====
<PAGE>
Significant components of the Company's deferred tax assets and liabilities were
as follows:
October 31,
1998 1997
(In thousands)
Deferred tax liabilities:
Cash basis temporary differences $ 3,698 $ 3,900
Property, plant and equipment 10,002 8,400
Prepaid and other assets 746 654
------- -------
Total deferred tax liabilities 14,446 12,954
Deferred tax assets
Accrued expenses 1,407 1,218
Alternative minimum tax credit carry forward -0- 1,012
State net operating loss carryforward 29 424
------- -------
Total deferred tax assets 1,436 2,654
------- -------
Net deferred tax liabilities $13,010 $10,300
======= =======
Current deferred tax assets
(included in prepaid expenses) $ 857 $ 769
Long-term deferred tax liabilities 13,867 11,069
------- -------
Net deferred tax liabilities $13,010 $10,300
======= =======
The differences between the consolidated effective income tax rate and the
federal statutory rate are as follows:
Years Ended October 31
1998 1997 1996
Taxes at statutory rate $8,525 $694 $(1,091)
State income taxes 1,041 79 (113)
State income tax credit (389) (91) 60
Other, net (77) 124 377
------ ------ ------
Income tax expense (benefit) $9,100 $806 $ (767)
====== ====== ======
5. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan ("ESOP") covering substantially
all employees. Contributions to the ESOP are determined at the discretion of the
Company's Board of Directors. Total contributions to the ESOP were $1,100,000 in
fiscal 1998. The Company did not contribute to the ESOP during fiscal 1997 and
1996.
The Company has a 401(k) plan which covers substantially all employees after six
months of service. Participants in the plan may contribute up to the maximum
allowed by IRS regulations.
<PAGE>
6. Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Under the Company's Stock Option Plan, 750,000 shares of Common Stock have been
reserved for grant to key management personnel. All options granted prior to
fiscal 1997 have six-year terms and vest over four years beginning one year from
the date of grant. Options granted in fiscal 1997 and 1998 have ten-year terms
and vest over four years beginning one year after the date of grant.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 4.4% in fiscal 1998 and 6% in fiscal 1997 and 1996; dividend
yields of 1.54% for fiscal 1998, 1.33% for fiscal 1997, and 1.84% for fiscal
1996; volatility factors of the expected market price of the Company's common
stock of .260 for fiscal 1998, .235 for fiscal 1997 and .191 for fiscal 1996;
and a weighted-average expected life of the options of four years.
The weighted-average fair value of options granted in fiscal 1998, 1997 and 1996
was $3.14, $3.76 and $2.28, respectively. The pro forma effect of the estimated
fair value of the options granted was insignificant to the Company's net income
(loss) and net income (loss) per share in fiscal 1998, 1997 and 1996.
A summary of the Company's stock option activity and related information is as
follows:
Weighted-Average
Shares Exercise Price
Outstanding at November 1, 1995 235,500 $11.05
Granted 124,000 10.88
-------
Outanding at October 31, 1996 359,500 10.99
Granted 207,500 15.00
Exercised (3,500) 11.15
Forfeited (25,500) 11.47
-------
Outstanding at October 31, 1997 538,000 12.51
Granted 194,000 13.00
Exercised (7,000) 10.77
Forfeited (29,000) 12.87
-------
Outstanding at October 31, 1998 696,000 12.64
=======
<PAGE>
The exercise price of the options outstanding as of October 31, 1998 ranged from
$10.67 to $15.00 per share. At October 31, 1998, the weighted average remaining
contractual life of the options outstanding was 6.2 years and 284,625 options
were exercisable.
7. Shareholder Rights Agreement
On April 21, 1989, the shareholders of the Company approved a shareholders
rights agreement (the "Agreement") under which one share purchase right
("right") was declared as a dividend for each share of the Company's Common
Stock outstanding on May 31, 1989. The rights do not become exercisable and
certificates for the rights will not be issued until ten business days after a
person or group acquires or announces a tender offer for the beneficial
ownership of 20% or more of the Company's Common Stock. Special rules set forth
in the Agreement apply to determine beneficial ownership for members of the
Sanderson family. Under these rules, such a member will not be considered to
beneficially own certain shares of Common Stock, the economic benefit of which
is received by any member of the Sanderson family, and certain shares of Common
Stock acquired pursuant to profit sharing plans of the Company.
The exercise price of a right has been established at $35 7/8. Once exercisable,
each right would entitle the holder to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $100 per share. The
rights may be redeemed by the Board of Directors at $.01 per right prior to an
acquisition, through open market purchases, a tender offer or otherwise, of the
beneficial ownership of 20% or more of the Company's Common Stock, or by
two-thirds of the Directors who are not the acquirer, or an affiliate of the
acquirer, prior to the acquisition of 50% or more of the Company's Common Stock
by such acquirer. The rights expire on April 21, 1999.
8. Other Matters
The Company self-insures for losses related to workers' compensation claims with
excess coverage by underwriters on a per claim and aggregate basis. Claims
payable are based upon estimates of the ultimate cost of reported claims by the
Company's claims administrator and totaled $3,140,000 and $2,644,000 at October
31, 1998 and 1997, respectively. Claims payable of $2,040,000 and $1,944,000 at
October 31, 1998 and 1997, respectively, are included in accrued expenses in the
accompanying consolidated balance sheets because the amounts are expected to be
paid within one year from the respective balance sheet dates. The ultimate cost
for outstanding claims may vary significantly from current estimates.
No customer accounted for more than 10% of consolidated sales for the years
ended October 31, 1998, 1997 and 1996. Export sales were less than 10% of
consolidated sales in each year presented.
On July 12, 1996, the Company sold 750,000 shares of its common stock at $13 per
share (based on an independent valuation of the stock as of that date) to the
ESOP in a private placement. The net proceeds from the sale were $9,171,000 plus
a $500,000 note receivable from the ESOP.
In January 1997, the Company had a fire in an area of the Pike County,
Mississippi processing plant housing packaging and supplies. Substantially all
of the cost of repairs and reconstruction of the plant were covered by
insurance. Certain costs associated with the plant's downtime were also covered
by insurance. The excess of $1,082,000 of the insurance proceeds received over
the book value of the assets destroyed, before income taxes of $406,000, has
been accounted for as an extraordinary gain in the accompanying consolidated
statements of income.
<PAGE>
See Item 6 for Quarterly Financial Data.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive
Officers of the Registrant.
As permitted by General Instruction G(3) to Form 10-K,
reference is made to the information concerning the Directors of the Registrant
and the nominees for election as Directors appearing in the Registrant's
definitive proxy statement filed or to be filed with the Commission pursuant to
Rule 14a-6(b). Such information is incorporated herein by reference to the
definitive proxy statement.
Information concerning the executive officers of the Registrant
is set forth in Item 4A of Part I of this Annual Report.
Item 11. Executive Compensation.
As permitted by General Instruction G(3) to Form 10-K,
reference is made to the information concerning remuneration of Directors and
executive officers of the Registrant appearing in the Registrant's definitive
proxy statement filed or to be filed with the Commission pursuant to Rule
14a-6(b). Such information is incorporated herein by reference to the definitive
proxy statement.
Item 12. Security Ownership of Certain
Beneficial Owners and Management.
As permitted by General Instruction G(3) to Form 10-K,
reference is made to the information concerning beneficial ownership of the
Registrant's Common Stock, which is the only class of the Registrant's voting
securities, appearing in the Registrant's definitive proxy statement filed or to
be filed with the Commission pursuant to Rule 14a-6(b). Such information is
incorporated herein by reference to the definitive proxy statement.
Item 13. Certain Relationships
and Related Transactions.
As permitted by General Instruction G(3) to Form 10-K,
information, if any, required to be reported by Item 13 of Form 10-K, with
respect to transactions with management and others, certain business
relationships, indebtedness of management, and transactions with promoters, is
set forth in the Registrant's definitive proxy statement filed or to be filed
with the Commission pursuant to Rule 14a- 6(b). Such information, if any, is
incorporated herein by references to the definitive proxy statement.
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K.
(a)1. FINANCIAL STATEMENTS:
<PAGE>
The following consolidated financial statements of the
Registrant are included in Item 8:
Consolidated Balance Sheets - October 31, 1998 and 1997
Consolidated Statements of Income - Years ended October 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity - Years ended
October 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended October 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements - October 31, 1998
(a)2. FINANCIAL STATEMENT SCHEDULES:
The following consolidated financial statement schedules of the Registrant are
included in Item 8:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted as they are not applicable or
the required information is set forth in the Financial Statements or notes
thereto.
(a)3. EXHIBITS:
The following exhibits are filed with this Annual Report or are
incorporated herein by reference:
Exhibit Brief
Number Description
(1) 3-A - Copy of Articles of Incorporation of the Registrant, as
amended.
3-B - Copy of Restated By-Laws of the Registrant as of January 8,
1998.
(1) 4 - Copy of Certificate of Designations of Series A Junior
Participating Preferred Stock of the Registrant
(2) 10-A - Copy of Agreement of Purchase and Sale of Assets dated
March 10, 1986 among the Registrant, National Prepared
Foods, Inc., Trend Line Corporation, Business Advisors and
Investor, Inc., W. T. Hogg, Jr., W. T. Hogg, Jr. Trust for
Grandchildren, Noreen Mary Hogg Case Trust Under
<PAGE>
Agreement December 20, 1972 and Sherri Ann Hogg Ford
Trust Under Agreement December 20, 1972.
(2) 10-B - Copy of Contract dated July 31, 1964 between the Registrant
and the City of Laurel, Mississippi.
(2) 10-B-1 - Copy of Contract Amendment dated December 1, 1970
between the Registrant and the City of Laurel, Mississippi.
(2) 10-B-2 - Copy of Contract Amendment dated June 11, 1985 between
the Registrant and the City of Laurel, Mississippi.
(2) 10-B-3 - Copy of Contract Amendment dated October 7, 1986
between the Registrant and the City of Laurel, Mississippi.
(8) 10-B-4 - Copy of Contract Amendment dated August 16, 1994
between the Registrant and the City of Laurel, Mississippi.
(2) 10-C - Copy of Lease Agreement dated May 19, 1964 among the
Town of Collins, Covington County, Mississippi and
Mississippi Federated Cooperatives AAL.
(2) 10-C-1 - Copy of Assignment of Lease and Leasehold Estate, and
Conveyance of Leaseholder Improvements and Other
Properties, Reserving a Purchase Money Security Interest,
dated December 21, 1981 between MFC Services (AAL) and
Sanderson Farms, Inc. (Processing Division).
(2) 10-D - Copy of Lease Agreement dated November 28, 1962
between the Board of Supervisors of Covington County,
Mississippi acting for and on behalf of Supervisors Districts
1, 2, 3 and 5 of Covington County, Mississippi and
Mississippi Federated Cooperatives, AAL.
(2) 10-D-1 - Copy of Contract dated October 2, 1972 between the Board
of Supervisors of Covington County, Mississippi, acting for
and on behalf of Covington County, Mississippi and MFC
Services (AAL).
(2) 10-D-2 - Copy of Lease Agreement dated May 1, 1976 between
Supervisors Districts
One, Two, Three and Five
of Covington County,
Mississippi and MFC
Services (AAL).
(2) 10-D-3 - Copy of Assignment of Leases and Leasehold Estate, and
Conveyance of Leasehold Improvements and Other
Properties, Reserving a Purchase Money Security Interest,
dated December 21, 1981 between MFC Services (AAL) and
Sanderson Farms, Inc. (Processing Division).
<PAGE>
(2) 10-E - Copy of Agreement dated December 1, 1986, between
Sanderson Farms, Inc. (Hammond Processing Division) and
United Food and Commercial Workers Local Union 210
affiliated with the United Food and Commercial Workers
International Union.
(5) 10-E-1 - Copy of Agreement dated February 14, 1990 between
Sanderson Farms, Inc. (Hammond Processing Division) and
United Food and Commercial Workers Local Union 210,
affiliated with the United Food and Commercial Workers
International Union.
(8) 10-E-2 - Copy of Agreement effective November 6, 1994 between
Sanderson Farms, Inc. (Hammond Processing Division) and
United Food and Commercial Workers Local Union 210,
affiliated with the United Food and Commercial Workers
International Union.
(9) 10-E-3 - Copy of Agreement effective July 15, 1995 between
Sanderson Farms, Inc. (Hazlehurst Processing Division) and
Laborers' International Union of North America, Professional
Employees Local Union #697, AFL-CIO.
(9) 10-E-4 - Copy of Agreement effective September 9, 1995 between
Sanderson Farms, Inc. (Collins Processing Division) and
Laborers' International Union of North America, Professional
Employees Local Union #697, AFL-CIO.
(2) 10-F - Copy of Employee Stock Ownership Plan and Trust
Agreement of Sanderson Farms, Inc. and Affiliates.
(2) 10-F-1 - Copy of Amendment One to the Employee Stock Ownership
Plan and Trust Agreement of Sanderson Farms, Inc. and
Affiliates.
(3) 10-F-2 - Copy of Amendment Two to the Employee Stock Ownership
Plan and Trust Agreement of Sanderson Farms, Inc. and
Affiliates.
(2) 10-G - Copy of General Employee's Profit Sharing-Retirement Trust
Agreement of Sanderson Farms, Inc. and Affiliates.
(6) 10-H - Copy of Sanderson Farms, Inc. Performance Incentive
Program effective January 1, 1991.
(6) 10-H-1 - Copy of Sanderson Farms, Inc. Performance Incentive
Program for Sanderson Farms, Inc. (Foods Division) effective
November 1, 1990.
<PAGE>
(6) 10-H-2 - Copy of Sanderson Farms, Inc. Performance Incentive
Program for Sanderson Farms, Inc. (Foods Division) Retail
Entree effective November 1, 1990.
(8) 10-H-3 - Copy of Sanderson Farms, Inc. Bonus Award Program
effective November 1, 1993.
(10) 10-I - Copy of Sanderson Farms, Inc. and Affiliates Stock Option
Plan.
(5) 10-J - Copy of Memorandum of Agreement dated as of June 13,
1989, between Pike County, Mississippi and the Registrant.
(6) 10-K - Copy of Wastewater Treatment Agreement between the City
of Magnolia, Mississippi and the Registrant dated August 19,
1991.
(6) 10-L - Copy of Memorandum of Agreement and Purchase Option
between Pike County, Mississippi and the Registrant dated
May, 1991.
(7) 10-M - Copy of Lease Agreement between Pike County, Mississippi
and the Registrant dated as of November 1, 1992.
21 - List of subsidiaries of the Registrant.
23 - Consent of Independent Auditors
27 - Copy of Financial Data Schedule
(2) 28-A - Copy of Certificate of Registration of Trademark "Miss
Goldy".
(2) 28-B - Copy of Certificate of Registration of Trademark "Wise
Choice".
(2) 28-C - Copy of Certificate of Registration of Trademark "Buttercup
Farms".
(2) 28-D - Copy of Certificate of Registration of Trademark
"Collinswood".
(2) 28-E - Copy of Certificate of Registration of Trademark "Covington
Farms".
(2) 28-F - Copy of Certificate of Registration of Trademark "Smart
Cuts".
<PAGE>
(4) 28-G - Copy of Certificate of Registration of Trademark "Kettle
Classics".
(5) 28-H - Copy of Certificate of Registration of Trademark "Sanderson
Farms".
(1) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1989, and incorporated herein
by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (Commission File No. 33-13141) and incorporated herein by
reference.
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1987, and incorporated herein
by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1988, and incorporated herein
by reference.
(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1990, and incorporated herein
by reference.
(6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1991, and incorporated herein
by reference.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1992, and incorporated herein
by reference.
(8) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1994 and incorporated herein
by reference.
(9) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1995 and incorporated herein
by reference.
(b) REPORTS ON FORM 8-K:
No reports on From 8-K were filed during the fourth quarter of the Fiscal Year
ended October 31, 1996.
(c) Agreements Available Upon Request by the Commission.
The Registrant is a party to various agreements defining the rights of holders
of long-term debt of the Registrant, but no single agreement authorizes
securities in an amount which exceeds 10% of the total assets of the Company.
Upon request of the Commission, the Registrant will furnish a copy of any such
agreement to the Commission. Accordingly, such agreements are omitted as
exhibits as permitted by Item 601(b)(4)(iii) of Regulation S-K.
<PAGE>
QUALIFICATION BY REFERENCE
Information contained in this Annual Report as to the contents of any contract
or other document referred to or evidencing a transaction referred to is
necessarily not complete, and in each document filed as an exhibit to this
Annual Report or incorporated herein by reference, all such information being
qualified in its entirety by such reference.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sanderson Farms, Inc.
We have audited the accompanying consolidated balance sheets of Sanderson Farms,
Inc. and subsidiaries as of October 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended October 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sanderson Farms,
Inc. and subsidiaries at October 31, 1998 and 1997, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1998, in conformity with generally accepted accounting
principles.
/s/Ernst & Young LLP
Jackson, Mississippi
December 8, 1998
<PAGE>
<TABLE>
<CAPTION>
Sanderson Farms, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Schedule II
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End of
Classification of Period Expenses Accounts Describe(1) Period
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1998
Deducted from accounts
receivable:
Allowance for doubtful
accounts
Totals $233 $240 $224 $249
Year ended October 31, 1997
Deducted from accounts
receivable:
Allowance for doubtful
accounts $167 $142 $76 $233
Totals
Year ended October 31, 1996
Deducted from accounts
receivable:
Allowance for doubtful
accounts
Totals $130 $172 $135 $167
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SANDERSON FARMS, INC.
Date: January 26, 1999. /s/Joe F. Sanderson, Jr.
Joe F. Sanderson, Jr.
Chairman of the Board
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities as of the dates indicated.
/s/ Joe F. Sanderson, Jr. 1/26/99 /s/ John H. Baker, III 1/26/99
- ------------------------------------ --------------------------------
Joe F. Sanderson, Jr., John H. Baker, III
Chairman of the Board, President Director
and Chief Executive Officer
/s/ William R. Sanderson 1/26/99 /s/ Charles W. Ritter, Jr. 1/26/99
William R. Sanderson, Director Charles W. Ritter, Jr.,
Director of Marketing Director
/s/ Dewey R. Sanderson, Jr. 1/26/99 /s/ Rowan H. Taylor 1/26/99
- ------------------------------------ -----------------------------------
Dewey R. Sanderson, Jr., Rowan H. Taylor,
Director Director
/s/ Donald W. Zacharias 1/26/99 /s/ Robert Buck Sanderson 1/26/99
- ------------------------------------ -----------------------------
Donald W. Zacharias, Robert Buck Sanderson,
Director Corporate Live Production Assistant
/s/ Phil K. Livingston 1/26/99 /s/ Lampkin Butts 1/26/99
Phil K. Livingston, Lampkin Butts, Director
Director Vice President - Sales
/s/ D. Michael Cockrell 1/26/99 /s/ James A. Grimes 1/26/99
- ------------------------------------- ----------------------------------
D. Michael Cockrell, James A. Grimes,
Director, Treasurer and Chief Secretary and Chief Accounting Officer
Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000812128
<NAME> Sanderson Farms, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 1 Year
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1.0
<CASH> 3,626
<SECURITIES> 0
<RECEIVABLES> 31,272
<ALLOWANCES> 249
<INVENTORY> 42,879
<CURRENT-ASSETS> 85,192
<PP&E> 332,985
<DEPRECIATION> 153,897
<TOTAL-ASSETS> 265,671
<CURRENT-LIABILITIES> 25,527
<BONDS> 95,695
0
0
<COMMON> 14,374
<OTHER-SE> 115,108
<TOTAL-LIABILITY-AND-EQUITY> 265,671
<SALES> 521,394
<TOTAL-REVENUES> 521,394
<CGS> 469,429
<TOTAL-COSTS> 489,572
<OTHER-EXPENSES> 86
<LOSS-PROVISION> 240
<INTEREST-EXPENSE> 7,721
<INCOME-PRETAX> 24,356
<INCOME-TAX> 9,100
<INCOME-CONTINUING> 15,256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,256
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in Post Effective Amendment
No. 1 to Registration Statement (Form S-8 No. 33-67474) pertaining to the
Sanderson Farms, Inc. and Affiliates Stock Options Plan of our report dated
December 8, 1998, with respect to the consolidated financial statements and
schedule of Sanderson Farms, Inc. included on the Annual Report (Form 10-K) for
the year ended October 31, 1998.
/s/Ernst & Young LLP
Jackson, Mississippi
January 26, 1999
