2000
[LOGO OF THE SMITHFIELD COMPANIES]
The Smithfield Companies, Inc. is a diversified producer of specialty food
products. The Company markets its products primarily to the retail grocery, food
service and gourmet food industries as well as through its own retail outlets
and consumer catalogs. Its five operating units are The Smithfield Ham and
Products Co., V. W. Joyner & Co., Pruden Packing Co., The E. M. Todd Company
and Williamsburg Foods.
INCOME FROM CONTINUING
OPERATIONS NET SALES
(in thousands) (in thousands)
[GRAPH] [GRAPH]
2000 $ 909 2000 $20,021
1999 $1,462 1999 $21,195
1998 $1,077 1998 $20,425
1997 $ 911 1997 $19,481
1996 $ 809 1996 $18,180
BOOK VALUE PER SHARE REGULAR DIVIDENDS
[GRAPH] [GRAPH]
2000 $6.89 2000 $0.14
1999 $6.72 1999 $0.13
1998 $6.23 1998 $0.12
1997 $5.88 1997 $0.11
1996 $5.61 1996 $0.11
CONTENTS
Letter to Shareholders 2
Selected Financial Data 4
Management's Discussion and Analysis 5
Consolidated Financial Statements 7
Report of Independent Accountants 15
Quarterly Results of Operations 15
Directors, Executive Officers and Management 16
Corporate Information 16
The Smithfield Companies, Inc. 2000 Annual Report
1
<PAGE>
2000
TO OUR FELLOW SHAREHOLDERS
[PHOTO]
Richard S. Fuller
President and Chief Executive Officer
Although fiscal 2000 was a disappointing year for The Smithfield Companies,
significant progress was made toward the long term growth of your Company. The
previously reported factors that led to lower sales and earnings results
obscured the solid performance of our core brands and product lines.
Smithfield's lower earnings were a direct reflection of a significant capital
investment made to build future growth and profitability. Our vision and
strategies have always been long term even if short terms costs were necessary
in order to meet our goals.
At the beginning of our just completed fiscal year, we began production in
our new state of the art frozen food processing plant in Smithfield. This $3
million facility replaced an old and inefficient plant which could not meet
current and future production needs and new product development requirements.
The start up costs of the plant were significantly higher and longer in duration
than anticipated, which negatively affected earnings much of the year. By the
fourth quarter planned productivity levels were achieved and we can look forward
to the benefits of the new plant in the years ahead.
Comparable sales and earnings results also declined during the year due to
a $1.1 million one time seasonal sale to a national club store chain which the
Company enjoyed in fiscal 1999. It is important to note that in the seasonally
important third quarter, core product sales were up 6%.
Net sales for the year ended March 31, 2000, fell to $20.0 million compared
to $21.2 million a year earlier. Net income also fell to $909,000, a 38% decline
from $1,462,000 earned in fiscal 1999. Diluted earnings per share were $.40, 35%
below $.62 per share in the previous year.
Total assets for the year were $19.1 million of which $8.5 million was
cash, cash equivalents and equity investments. Current assets exceeded current
liabilities by a ratio of 9.4 to 1. Shareholder equity was $15.0 million, while
book value of our stock was a record $6.89 per share.
Smithfield's financial position and cash flow remain very solid. These
resources will continue to fund both internal and external growth opportunities.
In a response to what we believe is an undervalued market price of our
stock, we continued our open market purchases of Smithfield Companies' shares.
During fiscal year 2000 we acquired 168,317 shares. We have repurchased
approximately 1,208,000 shares since early 1990 at an average cost of $5.00 per
share. Although the Company has no definitive policy to purchase addi-
2000 Annual Report The Smithfield Companies, Inc.
2
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2000
tional shares, it may do so when it is deemed to be in the best interest of its
shareholders.
The Smithfield Companies regular dividends paid increased to $.14 per
share, an 8% increase from $.13 per share paid the previous year. Fiscal 2000
marks the ninth consecutive year that regular dividends paid have increased. The
Company's policy is to continue to pay cash dividends. The amount of such
dividends will depend on earnings of the Company, cash requirements and other
factors considered relevant by your Board of Directors.
Our management team will remain the critical ingredient in Smithfield's
success. Over time we have been fortunate to attract some extremely talented
executives to key positions. This past year we were pleased to welcome Donald
Burke as our executive vice president of marketing and sales. Don adds depth and
experience to our senior management team and brings a highly successful career
of growing specialty brands and product lines.
In the past fiscal year, Alton H. Gwaltney retired as executive vice
president of our Smithfield Ham and Products business. Alton's career with this
Company spanned fifty-four years. His contributions and successes were numerous
and much of what is the foundation of our growing barbeque and chili business
today was accomplished through his leadership and vision. From all of us at
Smithfield, we offer him our heartfelt thanks and best wishes for a healthy and
happy retirement.
We believe we are doing the right things, both tactically and
strategically, for the future success of the Company. We will continue to pursue
an aggressive program of providing the highest quality products at the lowest
possible cost for our customers. Our solid financial position, the power of our
brands and the initiatives we have underway will help take us to a new level of
strength and leadership. As owners of The Smithfield Companies' stock, the
interests of the Board, the management team and the employees are directly
aligned with those of outside investors. Enhancing shareholder value through the
improvement of our performance remains the commitment of everyone at Smithfield.
We wish to thank our shareholders, employees, customers and suppliers for
their support and their contributions to Smithfield during a year of challenge
and achievement. We remain confident about the Company's future and the growth
of your investment in The Smithfield Companies.
/s/ Richard S. Fuller
Richard S. Fuller
President and Chief
Executive Officer
Smithfield's financial position and cash flow remain very solid. These resources
will continue to fund both internal and external growth opportunities.
The Smithfield Companies, Inc. 2000 Annual Report
3
<PAGE>
2000
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For The Year Ended March 31
(in thousands, except per share amounts) 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 20,021 $ 21,195 $ 20,425 $ 19,481 $ 18,180
Cost of goods sold 13,227 13,773 13,893 12,999 11,527
-------------------------------------------------------------------------------------------------------------
Gross profit 6,794 7,422 6,532 6,482 6,653
Other operating revenue 74 80 100 87 54
Selling, general and administrative expenses 5,808 5,600 5,293 5,519 5,750
-------------------------------------------------------------------------------------------------------------
Operating income 1,060 1,902 1,339 1,050 957
Other income 359 264 246 284 286
Interest expense (133) (9) (3) (3) (39)
-------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 1,286 2,157 1,582 1,331 1,204
Income taxes 377 695 505 420 395
-------------------------------------------------------------------------------------------------------------
Income from continuing operations 909 1,462 1,077 911 809
Income from discontinued operations -- -- -- -- 1,843
-------------------------------------------------------------------------------------------------------------
Net income $ 909 $ 1,462 $ 1,077 $ 911 $ 2,652
=============================================================================================================
Diluted earnings per share:
Continuing operations $ 0.40 $ 0.62 $ 0.45 $ 0.35 $ 0.28
Discontinued operations -- -- -- -- 0.64
-------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.40 $ 0.62 $ 0.45 $ 0.35 $ 0.92
=============================================================================================================
Dividends per share of common stock $ 0.19 $ 0.13 $ 0.12 $ 0.11 $ 0.16
=============================================================================================================
Balance Sheet Data (at year end):
Working Capital $ 11,103 $ 12,038 $ 10,758 $ 9,755 $ 11,980
Total Assets 19,102 20,160 15,831 15,909 17,679
Long-term Debt 2,800 2,800 -- -- --
Stockholders' Equity 14,977 15,741 14,599 14,310 15,894
</TABLE>
2000 Annual Report The Smithfield Companies, Inc.
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<PAGE>
2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company produces and markets branded foods primarily to the retail
grocery, food service and gourmet food industries. The Company also markets its
products through direct mail and its own retail outlets. The Company's business
is somewhat seasonal with its direct mail and gourmet food operations having
disproportionate sales during the Christmas season. This traditionally makes the
Company's third quarter sales and income the highest of the fiscal year.
RESULTS OF CONTINUING OPERATIONS
The following table shows, for the periods indicated, items included in
Selected Financial Data as a percentage of sales and the percentage changes in
the dollar amounts of such items compared to the prior period.
Percentage Period to
of Sales Period Change
Fiscal Years Fiscal Years
Ended Ended
March 31 March 31
---------------------------- -----------------
2000 1999
vs vs
2000 1999 1998 1999 1998
---------------------------- -----------------
Net sales 100.0% 100.0% 100.0% (5.5)% 3.8%
Cost of goods sold 66.1 65.0 68.0 (4.0) (0.9)
---------------------------- -----------------
Gross profit 33.9 35.0 32.0 (8.5) 13.6
Other operating
revenue 0.4 0.4 0.5 (7.2) (19.8)
Selling, general and
administrative
expenses 29.0 26.4 25.9 3.7 5.8
---------------------------- -----------------
Income from
operations 5.3 9.0 6.6 (44.3) 42.1
Other income 1.8 1.2 1.2 35.9 218.8
Interest expense (0.7) (0.0) (0.0) 1,294.1 7.3
---------------------------- -----------------
Income before
income taxes 6.4 10.2 7.8 (40.4) 36.3
Income taxes 1.9 3.3 2.5 (45.8) 37.6
---------------------------- -----------------
Net income 4.5% 6.9% 5.3% (37.8) 35.7
============================
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales in 2000 were $20.0 million compared to $21.2 million in 1999. The
decrease in net sales for the year ended March 31, 2000 is primarily due to a
$1.1 million one-time seasonal sale to a national club store chain made during
the second quarter of fiscal 1999. Cost of sales increased as a percentage of
net sales to 66.1% for the year ended March 31, 2000 from 65.0% for the year
ended March 31, 1999. The lower gross profit margins were primarily the result
of additional production costs related to the Company's new frozen food
processing plant.
Selling expenses increased as a percentage of net sales to 15.9% for the
year ended March 31, 2000 from 14.2% for the year ended March 31, 1999. This
increase was a conscious effort by the Company to increase its marketing effort
associated with the frozen food business. The Company's new frozen food
processing facility has significantly increased plant capacity that should help
future growth in this area.
General and administrative expenses remained relatively constant during the
two years ended March 31, 2000.
Net interest income decreased 11.3% during the year ended March 31, 2000
compared to the prior year. Net invested balances during fiscal 2000 were lower
than fiscal 1999 due primarily to the significant amount of repurchased stock
during the year. Average interest rates were higher during the current year to
partially offset the effect of lower balances.
Income tax expense as a percentage of income before income taxes was 29.3%
in 2000 compared to 32.2% in 1999. Tax-exempt interest income as a percentage of
income before income taxes was higher in 2000 compared to 1999 thereby
decreasing the overall average tax rate. Income tax rates are lower than
statutory rates primarily because of income from tax-exempt municipal bond
funds.
Net income decreased to $908,870 or $.40 per share in 2000 compared to
$1,461,710 or $.62 per share in 1999. The difference in weighted average shares
The Smithfield Companies, Inc. 2000 Annual Report
5
<PAGE>
2000
outstanding between 2000 and 1999 is due to the repurchase of 168,317 shares in
fiscal 2000. The difference in basic and diluted earnings per share is due to
exercisable stock options.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales in 1999 were $21.2 million compared to $20.4 million in 1998. The
improvement in sales was due to increases in unit sales across most of the
Company's product lines coupled with a significant seasonal sale to a national
club store chain. Unit sales increases were partially offset by lower selling
prices due to lower pork related raw material costs. Cost of sales decreased as
a percentage of net sales to 65.0% for the year ended March 31, 1999 from 68.0%
for the year ended March 31, 1998. The higher gross profit margins were
primarily due to lower costs for pork related products.
Selling expenses increased as a percentage of net sales to 14.2% for the
year ended March 31, 1999 from 13.3% for the year ended March 31, 1998. The
Company increased some marketing and promotional expenses during the year as a
result of higher margins to help increase sales distribution. These additional
selling expenses helped increase tonnage during the year.
General and administrative expenses remained relatively constant during the
two years ended March 31, 1999.
Net interest income increased 4.7% during the year ended March 31, 1999
compared to the prior year. Higher average balances in interest bearing
instruments were somewhat offset by lower interest rates in 1999 compared to
1998.
Income tax expense as a percentage of income before income taxes was
slightly higher in 1999. Tax-exempt interest income as a percentage of income
before income taxes was lower in 1999 compared to 1998 thereby increasing the
overall average tax rate. Income tax rates are lower than statutory rates
because of income from tax-exempt municipal bond funds.
Net income increased to $1,461,710 or $.62 per share in 1999 compared to
$1,077,115 or $.45 per share in 1998. The difference in weighted average shares
outstanding between 1999 and 1998 is due to the repurchase of 2,367 shares in
fiscal 1999. The difference in basic and diluted earnings per share is due to
exercisable stock options.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had an Industrial Development Revenue Bond
(the Bond) in the amount of $2,800,000 outstanding. The Bond matures in the year
2014 and has principle payments of $500,000 due in 2004 and 2009.
At March 31, 2000, the Company had approximately $6.8 million invested in
short-term highly liquid debt instruments and a certificate of deposit in the
amount of $1.0 million. In addition, the Company has an unused $10 million line
of credit loan with a bank bearing interest at the LIBOR market rate plus .50%
which expires on July 31, 2000.
The Company believes its liquidity and capital resources to be excellent.
Current cash flow and ~available funds are sufficient to satisfy existing cash
requirements.
The Company will continue its strategy of looking for growth through
acquisitions in higher margin segments of the food industry. Having a
significant amount of cash on hand, as well as available funds on its credit
line, the Company believes it is in excellent position to invest in assets that
will increase shareholder value over time.
Management believes the Company's capital resources are sufficient to meet
all of its working capital requirements into the foreseeable future.
IMPACT OF INFLATION
Over the past three years, the effects of inflation on the Company's
operations have been minimal. If inflation rises substantially, competitive
pressures may make it difficult for the Company to pass the increases to the
consumer.
FORWARD-LOOKING INFORMATION
This report may contain "forward-looking" information within the meaning of
the federal securities laws. The forward-looking information may include
statements concerning the Company's outlook for the future, as well as other
statements of beliefs, future plans and strategies or anticipated events, and
similar expressions concerning matters that are not historical facts.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in, or implied by
the statements.
2000 Annual Report The Smithfield Companies, Inc.
6
<PAGE>
2000
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 6,844,346 $ 9,728,710
Certificate of deposit 1,038,529 --
Trade receivables, less allowance for doubtful
accounts of $70,000 in 2000 and $79,000 in 1999 1,157,744 1,060,459
Inventories 3,228,829 2,717,850
Prepaid expenses 59,225 36,217
Deferred income taxes 100,000 115,000
-----------------------------------------------------------------------------------------------------
Total Current Assets 12,428,673 13,658,236
Property and Equipment
Land 346,342 346,342
Buildings 5,208,407 3,516,539
Machinery and equipment 3,046,409 1,886,245
Delivery equipment 275,526 269,201
Office furniture and equipment 618,171 600,440
Construction in progress -- 2,201,088
-----------------------------------------------------------------------------------------------------
9,494,855 8,819,855
Less accumulated depreciation 3,977,784 3,577,974
-----------------------------------------------------------------------------------------------------
5,517,071 5,241,881
Other Assets
Marketable securities 575,840 575,840
Trademarks, net of accumulated amortization 122,572 141,486
Other intangibles, primarily customer lists,
net of accumulated amortization 277,160 310,909
Bond issuance costs, net of accumulated amortization 70,839 102,136
Deferred income taxes 110,000 130,000
-----------------------------------------------------------------------------------------------------
1,156,411 1,260,371
-----------------------------------------------------------------------------------------------------
$19,102,155 $20,160,488
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 627,174 $ 594,569
Accrued compensation 161,556 326,662
Accrued expenses 465,024 425,851
Income taxes payable 71,842 272,864
-----------------------------------------------------------------------------------------------------
Total Current Liabilities 1,325,596 1,619,946
Long-Term Debt 2,800,000 2,800,000
Stockholders' Equity
Preferred stock, $100 par value, authorized 250,000 shares;
none issued
Common stock, no par value, authorized 5,000,000 shares;
outstanding 2,172,744 shares and 2,341,061 shares 1,238,570 2,488,492
Retained earnings 13,737,989 13,252,050
-----------------------------------------------------------------------------------------------------
14,976,559 15,740,542
-----------------------------------------------------------------------------------------------------
$19,102,155 $20,160,488
=====================================================================================================
</TABLE>
See notes to consolidated financial statements.
The Smithfield Companies, Inc. 2000 Annual Report
7
<PAGE>
2000
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For The Year Ended March 31
2000 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 20,020,769 $ 21,195,201 $ 20,425,385
Cost of goods sold 13,226,655 13,772,895 13,893,306
----------------------------------------------------------------------------------------------------
Gross profit 6,794,114 7,422,306 6,532,079
Other operating revenue 74,083 79,839 99,524
----------------------------------------------------------------------------------------------------
6,868,197 7,502,145 6,631,603
Operating expenses:
Selling 3,189,965 3,018,289 2,720,254
General and administrative 2,618,383 2,581,966 2,572,636
----------------------------------------------------------------------------------------------------
5,808,348 5,600,255 5,292,890
----------------------------------------------------------------------------------------------------
Operating income 1,059,849 1,901,890 1,338,713
Nonoperating income (expense):
Other income, primarily interest 359,272 264,378 246,400
Interest expense (133,251) (9,558) (2,998)
----------------------------------------------------------------------------------------------------
226,021 254,820 243,402
----------------------------------------------------------------------------------------------------
Income before income taxes 1,285,870 2,156,710 1,582,115
Federal and state income taxes 377,000 695,000 505,000
----------------------------------------------------------------------------------------------------
Net income $ 908,870 $ 1,461,710 $ 1,077,115
====================================================================================================
Basic earnings per share $ 0.41 $ 0.62 $ 0.45
====================================================================================================
Diluted earnings per share $ 0.40 $ 0.62 $ 0.45
====================================================================================================
Weighted average shares--Basic 2,223,235 2,342,589 2,368,004
====================================================================================================
Weighted average shares--Diluted 2,264,292 2,362,260 2,381,539
====================================================================================================
</TABLE>
See notes to consolidated financial statements.
2000 Annual Report The Smithfield Companies, Inc.
8
<PAGE>
2000
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Year Ended March 31
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 908,870 $ 1,461,710 $ 1,077,115
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 649,027 441,406 444,225
Gain on disposal of property and
equipment (7,394) (14,825) (3,918)
Provision for deferred income taxes 35,000 (35,000) 90,000
Changes in assets and liabilities:
Trade receivables (97,285) 198,134 292,790
Inventories (510,979) 182,818 107,557
Prepaid expenses (23,008) 14,243 20,922
Accounts payable and accrued
compensation and expenses (93,328) 251,643 (166,068)
Income taxes payable (201,022) 136,466 (106,862)
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 659,881 2,636,595 1,755,761
INVESTING ACTIVITIES
Proceeds from the sale of New Orleans 205,332
Acquisition:
Intangible assets (22,235)
Inventories (127,752)
Equipment (50,050)
Purchase of certificate of deposit (1,038,529)
Purchase of marketable securities (575,840)
Purchase of property and equipment (876,363) (2,437,770) (307,249)
Proceeds from sale of long-term assets 43,500 50,500 353,264
-----------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,871,392) (2,963,110) 51,310
FINANCING ACTIVITIES
Proceeds from long-term debt 2,800,000
Bond issuance costs paid (104,744)
Cash dividends paid (422,931) (304,561) (284,181)
Repurchase of common stock (1,249,922) (15,377) (503,742)
-----------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (1,672,853) 2,375,318 (787,923)
-----------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (2,884,364) 2,048,803 1,019,148
Cash and cash equivalents at beginning
of year 9,728,710 7,679,907 6,660,759
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 6,844,346 $ 9,728,710 $ 7,679,907
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
The Smithfield Companies, Inc. 2000 Annual Report
9
<PAGE>
2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE SMITHFIELD COMPANIES, INC. - MARCH 31, 2000
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of The Smithfield Companies, Inc. and its wholly owned subsidiaries
(The Company). All significant intercompany balances and transactions have been
eliminated.
Cash Equivalents: The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Segment Information: The Smithfield Companies, Inc. and its subsidiaries
are engaged principally in a single business segment designated as "food
processing". As a federally inspected food processor, the Company is engaged in
the processing and/or distribution of cured meats, smoked meats and other food
products.
Revenue Recognition: Revenue is recognized at the time of title transfer,
which ordinarily occurs at the time of shipment. Revenue from retail stores is
recognized in the period which the products are sold.
Advertising Costs: Advertising costs are expensed in the period incurred.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods presented. Actual results could differ from those estimates.
Concentrations of Credit Risk: Financial instruments that potentially
subject the Company to credit risk consist primarily of cash equivalents and
trade receivables. All of the Company's cash equivalents are in highly liquid
short-term municipal bond funds. The carrying amount of these cash equivalents
approximate fair value because of their short maturities and fluctuating
interest rates. Credit risk with respect to trade receivables is limited as the
Company has a large number of diverse customers, thus spreading the trade credit
risk. No single customer accounts for more than 10% of net sales.
Stock-Based Compensation: Stock-based compensation is determined using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25. Required disclosures determined under the fair value method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," are presented in Note E.
New Accounting Standards: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This standard, as amended by SFAS No. 137, is effective for fiscal
years beginning after June 15, 2000. The Company does not expect that SFAS No.
133 will have a material effect on its financial condition or results of
operations.
Inventories: Inventories are valued at lower of cost (determined on the
first-in, first-out method) or market.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the assets using the
straight-line and accelerated methods (buildings 10-40 years; machinery and
equipment 7-10 years; delivery equipment 3-10 years; office furniture and
equipment 5-10 years). Accelerated methods are used for income tax purposes.
Gains and losses from dispositions or retirements of property and equipment are
recognized currently.
Marketable Securities and Comprehensive Income: Investments in marketable
securities are reported at fair market value based on quoted market prices, with
unrealized gains or losses, net of tax, recorded as a separate component of
stockholders' equity, if material.
Bond Issuance Costs: Bond issuance costs have been capitalized and are
being amortized over the life of the bonds. Accumulated amortization of bond
issuance costs is $33,905 and $2,608 at March 31, 2000 and 1999, respectively.
Amortization of Intangibles: Intangibles include goodwill, trademarks,
brand names and customer lists. Goodwill is being amortized over twenty years
using the straight-line method. Trademarks, brand names and customer lists are
being amortized over their estimated useful lives of four to twenty years using
the straight-line method. Accumulated amortization of intangibles is $500,919
and $448,256 at March 31, 2000 and 1999, respectively.
Income Taxes: Taxes are provided on substantially
2000 Annual Report The Smithfield Companies, Inc.
10
<PAGE>
2000
all income and expense items included in earnings, regardless of the period in
which such items are recognized for tax purposes. The Company uses an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the estimated future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, the Company generally considers all expected future
events other than enactments of changes in the tax laws or rates.
Earnings Per Share: Earnings per share are computed based upon the weighted
average number of common shares outstanding and common equivalent shares in the
form of stock options.
NOTE B -- INVENTORIES
Inventories at March 31, 2000 and 1999 consisted of the following:
2000 1999
--------------------------------------------------------------------------------
Finished goods $1,295,332 $1,197,108
Production materials:
Meats 1,245,700 931,928
Other ingredients 197,833 207,138
Packing materials 489,964 381,676
--------------------------------------------------------------------------------
$3,228,829 $2,717,850
================================================================================
NOTE C -- LONG-TERM DEBT
On March 4, 1999, the Company obtained, through its subsidiary The
Smithfield Ham and Products Company, Incorporated, an Industrial Development
Revenue Bond (IRB) in the amount of $2,800,000 from The Industrial Development
Authority of the County of Isle of Wight. The interest rate on the bonds is
variable and is adjusted weekly in accordance with the Bond Indenture by the
Remarketing Agent. In no event shall the interest exceed 10%. At March 31, 2000,
the variable interest rate on the bonds was 4.10%. The only collateral for the
bonds is an irrevocable letter of credit from a bank. The letter of credit
expires on February 15, 2001 and is subject to renewal.
Principal payments on the bonds are as follows: $500,000 in 2004, $500,000
in 2009 and $1,800,000 in 2014. Interest is payable monthly. The Smithfield
Companies, Inc. has guaranteed all principle and interest payments due under the
bonds.
Under terms of the IRB, the Company, among other things, agrees to maintain
a current ratio of 3:1 and a debt service coverage ratio, as defined, of 1.5:1.
The Company paid $98,927 in interest on the IRB in 2000. $9,204 was accrued on
the bonds at March 31, 2000 and $6,632 was accrued at March 31, 1999.
NOTE D -- LINE OF CREDIT
The Company has a line of credit agreement with a bank. The agreement
provides the Company with a $10 million line of credit loan that can be used for
all general corporate uses including acquisitions of companies in the food
business. The line bears interest at the LIBOR market rate plus .50% and is
subject to renewal on July 31, 2000. The line of credit is unsecured. The
Company did not have any outstanding balance on this facility during the year
ended March 31, 2000.
NOTE E -- STOCKHOLDERS' EQUITY
Capital Stock
The Company is authorized to issue up to 5,250,000 shares of stock of all
classes, of which 5,000,000 shares are to be designated Common Stock and 250,000
shares are to be designated Preferred Stock. The Company's Common Stock has no
par value. The Company's Preferred Stock (none outstanding) has a par value of
$100 per share.
The Company's Preferred Stock may be issued in one or more series, with
each series to have distinctive serial designations and such preferences,
limitations, and relative rights as shall be permitted by law and established by
resolution of the Board of Directors providing for the issue of such Preferred
Stock. Each series of Preferred Stock may have the number of shares, voting
powers, redemption provisions, dividend rights, liquidation preferences,
convertibility features, and sinking fund entitlements as shall be set forth in
such Board resolution.
The Smithfield Companies, Inc. 2000 Annual Report
11
<PAGE>
2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE SMITHFIELD COMPANIES, INC. - MARCH 31, 2000
On July 31, 1991, the Board of Directors authorized 100,000 shares of
voting Series A Junior Participating Cumulative ($300 per share semi-annually)
Preferred Stock pursuant to the Shareholder Rights Plan discussed below.
The issuance of Preferred Stock may have the effect of delaying, deferring,
or preventing a change in control of the Company without any further action by
holders of the Company's Common Stock and may adversely affect the rights of
existing stockholders.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee stock options. In electing to account for its stock options under APB
25, the Company is required by SFAS No. 123 to provide pro forma information
regarding net income and earnings per share.
Under the Company's Stock Option Plan, selected employees of the Company
may be granted options to purchase Common Stock. Such options may be designated
Incentive Stock Options, as defined under the Internal Revenue Code, or
Nonstatutory Stock Options at the time the option is granted. The exercise price
of the options may not be less than 100% of the fair market value of the
Company's Common Stock on the date of grant of such options, and the options
must be exercised within ten years. Other terms of the options will be
determined at the date of grant. The termination of the Stock Option Plan does
not effect the validity of options outstanding on the date of termination. The
options are exercisable two years from the date of grant. At March 31, 2000, the
weighted average remaining contractual life of the options is 7.0 years. The
Company had 117,500, 40,000 and 34,000 shares which were exercisable at March
31, 2000, 1999 and 1998, respectively. At March 31, 2000, the weighted average
exercise price of those shares is $4.93.
The following is a summary of transactions for the Stock Option Plan:
Weighted
Average
Number of Per Share Exercise
Shares Range Price
--------------------------------------------------------------------------------
Options outstanding
at March 31, 1997 48,000 $ 3.38-5.50 $ 3.83
Granted 87,500 $ 5.50-5.88 $ 5.57
Retired (8,000) $ 3.38-5.50 $ 4.41
--------------------------------------------------------------------------------
Options outstanding
at March 31, 1998 127,500 $ 3.38-5.88 $ 4.99
Repurchased (10,000) $ 5.63 $ 5.63
--------------------------------------------------------------------------------
Options outstanding
at March 31, 1999 117,500 $ 3.38-5.88 $ 4.93
Granted 42,500 $ 7.13-7.75 $ 7.20
--------------------------------------------------------------------------------
Options outstanding
at March 31, 2000 160,000 $ 3.38-7.75 $ 5.53
================================================================================
The fair value of each stock option granted in fiscal 2000 and 1998 is
estimated using the Black-Scholes option model with the following weighted
average assumptions for both years: dividend yield of 2% and expected lives of
eight years. The weighted average risk-free interest rate was 6.72% in fiscal
2000 and 5.65% in fiscal 1998. The expected volatility is 0.5% in fiscal 2000
and 4.0% in 1998. The weighted average fair value of options granted is $1.88
and $1.25 in fiscal 2000 and 1998, respectively. Had compensation cost for the
Company's stock options been determined based on the fair value at the grant
dates for awards consistent with the method of SFAS No. 123, the Company's pro
forma net income would have decreased by $50,000, or $.02 per share for the year
ended March 31, 2000 and $68,000 or $.03 for the year ended March 31, 1998. No
stock options were issued during the year ended March 31, 1999.
Shareholder Rights Plan
On July 31, 1991, the Board of Directors adopted a Shareholder Rights Plan
(Rights Plan) and declared a dividend of one Right for each outstanding share of
Common Stock. Under the terms of the Rights Plan, the Rights will be exercisable
only if a person, group or other entity that was not a 10% shareholder as of
July 1, 1991, becomes a 15% or more shareholder. Each
2000 Annual Report The Smithfield Companies, Inc.
12
<PAGE>
2000
Right will entitle the holder, upon payment of the exercise price of $29.50, to
acquire one ten-thousandths of a share (a "unit") of Series A Junior
Participating Cumulative Preferred Stock. Each unit has the same voting rights
as one share of Common Stock. At the discretion of the Board of Directors, the
Company will be entitled to redeem the Rights for $.01 per Right at any time
before announcement that a 15% position has been acquired, and for 10 days after
the announcement.
If the Rights have not been redeemed, and any person, group or entity
becomes a 20% or more shareholder, each Right will entitle the holder, except
the acquiring person, group, or entity, upon payment of the exercise price, to
acquire Preferred Stock or Common Stock at the option of the Company, each
having a value equal to twice the Right's exercise price. Also, if the Company
were acquired in a merger or other business combination by such persons, group
or entity, or if 50% of its earning power or assets were sold in one transaction
or series of transactions, each Right would entitle the holder, except the
acquiring person, group or entity, to purchase securities of the surviving
company having a market value equal to twice the Right's exercise price. The
Rights will expire on July 31, 2001 unless previously exercised or redeemed by
the Board of Directors.
An analysis of changes in Common Stock and Retained Earnings follow:
Common Retained
Stock Earnings
--------------------------------------------------------------------------------
Balance at April 1, 1997 $ 3,007,611 $11,301,967
Net Income 1,077,115
Dividends ($.12 per share) (284,181)
Repurchase of 397,222
shares of Common Stock (503,742)
--------------------------------------------------------------------------------
Balance at March 31, 1998 $ 2,503,869 $12,094,901
Net Income 1,461,710
Dividends ($.13 per share) (304,561)
Repurchase of 2,367 shares
of Common Stock (15,377)
--------------------------------------------------------------------------------
Balance at March 31, 1999 $ 2,488,492 $13,252,050
Net Income 908,870
Dividends ($.19 per share) (422,931)
Repurchase of 168,317
shares of Common Stock (1,249,922)
--------------------------------------------------------------------------------
Balance at March 31, 2000 $ 1,238,570 $13,737,989
NOTE F - SALE OF ASSETS
Because of the termination of its retail lease and the fact that the
business was no longer compatible with the Company's strategy as a manufacturer
and marketer of specialty food products, the Company sold the operations of The
New Orleans School of Cooking on July 22, 1997. The sale of this business did
not have a material effect on income during the year ended March 31, 1998.
NOTE G - EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company's profit sharing plan is a voluntary, defined contribution plan
which covers virtually all employees. The Company may contribute annually up to
a certain percentage of employee compensation to the plan. Effective January 1,
1997 the Company added a 401(k) feature to its profit sharing plan. The Company
makes contributions to the plan based on 50% of the participants' contributions,
which can range from 1% to 6% of their total compensation subject to certain
limitations. Company matching contributions to the 401(k) plan were $44,534,
$45,240 and $42,373 for the years ended March 31, 2000, 1999 and 1998,
respectively.
Employee Stock Ownership Plan
The Company's Employee Stock Ownership Plan (the Plan) covers all employees
who have attained the required minimum age and length of service, except those
covered by a collective bargaining agreement. Contributions to the Plan, which
will be invested in the Company's Common Stock, are made as determined by the
Board of Directors and are limited to certain percentages of the eligible
employees' compensation. The Company contributed $55,000, $50,000 and $43,000
into the Plan for the years ended March 31, 2000, 1999 and 1998, respectively.
The Smithfield Companies, Inc. 2000 Annual Report
13
<PAGE>
2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE SMITHFIELD COMPANIES, INC. - MARCH 31, 2000
NOTE H - INCOME TAXES
Significant components of the Company's deferred tax assets as of March 31,
2000 and 1999 are as follows:
2000 1999
--------------------------------------------------------------------------------
Deferred tax assets:
Accrued liabilities $ 62,000 $ 75,000
Inventory cost 15,000 13,000
Accounts receivable
allowance 22,000 25,000
Book over tax depreciation 101,000 123,000
Book over tax amortization 10,000 9,000
--------------------------------------------------------------------------------
Total deferred tax assets $ 210,000 $ 245,000
================================================================================
The provision for income taxes consists of the following:
2000 1999 1998
--------------------------------------------------------------------------------
Currently payable:
Federal $ 296,000 $ 633,000 $ 359,000
State 46,000 97,000 56,000
--------------------------------------------------------------------------------
342,000 730,000 415,000
Deferred:
Federal 30,000 (29,000) 76,000
State 5,000 (6,000) 14,000
--------------------------------------------------------------------------------
35,000 (35,000) 90,000
--------------------------------------------------------------------------------
$ 377,000 $ 695,000 $ 505,000
================================================================================
The provision for income taxes varies from that computed using federal
statutory rates of 34%, as follows:
For the Year Ended March 31
2000 1999 1998
--------------------------------------------------------------------------------
Federal taxes at
statutory rate $ 437,000 $ 733,000 $ 538,000
State taxes net of
federal benefit 30,000 60,000 42,000
Trademark and
goodwill
amortization 5,000 5,000 6,000
Tax-exempt interest (82,000) (92,000) (88,000)
Other (13,000) (11,000) 7,000
--------------------------------------------------------------------------------
$ 377,000 $ 695,000 $ 505,000
================================================================================
The Company made income tax payments of $543,022 in 2000, $593,534 in 1999
and $521,862 in 1998.
NOTE I - OTHER FINANCIAL INFORMATION
Commitments and Contingencies
Employment agreements have been established with certain officers of the
Company. These agreements include clauses relating to salary and severance. The
Company also has incentive arrangements with certain officers of the Company.
Leases
The Company's operating leases consist primarily of retail facilities, some
of which contain escalation clauses and renewal options for up to five years.
At March 31, 2000, aggregate minimum rental commitments under
non-cancelable operating leases having remaining terms of more than one year
were $226,000 and are payable as follows: 2001, $109,000; 2002, $68,000; 2003,
$49,000.
Contingent rentals relate to retail sales space based on gross sales. Rent
expense is summarized as follows:
For the Year Ended March 31
2000 1999 1998
--------------------------------------------------------------------------------
Minimum rentals $147,884 $150,715 $152,968
Contingent rentals 27,358 26,048 25,096
--------------------------------------------------------------------------------
TOTAL $175,242 $176,763 $178,064
================================================================================
Related Party Transactions
A member of the Board of Directors is an attorney with the Company's law
firm. The Company paid $5,199, $7,397 and $29,996 to the law firm in 2000, 1999
and 1998, respectively. Another member of the Board of Directors is chairman of
a company which supplied packaging materials to the Company in the amount of
$10,779, $14,488 and $6,759 in 2000, 1999 and 1998, respectively. During 1999,
the Company invested $80,000 to acquire 8,000 shares of Common Stock in
TowneBank (the Bank). The Company's President and CEO is on the Board of
Directors of the Bank and a member of the Company's Board of Directors is
President and Senior Loan Officer of the Bank. In April 1999 the Company
purchased a Certificate of Deposit (CD) from the Bank. During the year ended
March 31, 2000, the Company earned $50,705 on the CD which had a balance of
$1,038,529 at March 31, 2000.
NOTE J - SUBSEQUENT EVENT
Subsequent to March 31, 2000, the Company purchased and retired 22,000
shares of its Common Stock at a cost of $145,125.
2000 Annual Report The Smithfield Companies, Inc.
14
<PAGE>
2000
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholders and Board of Directors
The Smithfield Companies, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and cash flows present fairly, in all
material respects, the financial position of The Smithfield Companies, Inc. and
Subsidiaries (the "Company") at March 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Virginia Beach, Virginia
May 24, 2000
QUARTERLY RESULTS OF OPERATIONS
The following table presents quarterly results of operations for the years
ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
(In thousands, except per share data)
(Unaudited) Fiscal 2000 Fiscal 1999
-------------------------------------------------- --------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 4,056 $ 4,395 $ 8,474 $ 3,095 $ 3,787 $ 6,122 $ 7,992 $ 3,295
Cost of goods sold 2,616 2,990 5,568 2,051 2,418 4,177 4,974 2,204
------------------------------------------------------------------------------------------------------------------------------------
Gross profit 1,440 1,405 2,906 1,044 1,369 1,945 3,018 1,091
Other operating revenue 19 18 18 19 22 20 13 25
------------------------------------------------------------------------------------------------------------------------------------
1,459 1,423 2,924 1,063 1,391 1,965 3,031 1,116
Selling, general and
administrative expenses 1,233 1,290 2,054 1,231 1,170 1,382 1,971 1,078
------------------------------------------------------------------------------------------------------------------------------------
Operating income 226 133 870 (168) 221 83 1,060 38
Interest, net 52 62 53 58 70 55 67 62
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 278 195 923 (110) 291 638 1,127 100
Income taxes 78 50 310 (61) 81 211 387 16
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 200 $ 145 $ 613 $ (49) $ 210 $ 427 $ 740 $ 84
====================================================================================================================================
Basic earnings per share: $ 0.09 $ 0.06 $ 0.28 $ (0.02) $ 0.09 $ 0.18 $ 0.32 $ 0.04
====================================================================================================================================
Diluted earnings per share: $ 0.09 $ 0.06 $ 0.27 $ (0.02) $ 0.09 $ 0.18 $ 0.31 $ 0.04
====================================================================================================================================
</TABLE>
The Smithfield Companies, Inc. 2000 Annual Report
15
<PAGE>
2000
DIRECTORS
Bernard C. Baldwin, III
Partner
Edmunds & Williams
Frank H. Buhler
Chairman
Old Dominion Box
Company
James L. Cresimore
Chairman
The Smithfield
Companies, Inc.
Chairman
Allegiance Brokerage
Company
Richard S. Fuller
President and
Chief Executive Officer
R. Scott Morgan
President and Senior
Loan Officer
TowneBank
Peter D. Pruden, III
Executive Vice President
and Secretary
EXECUTIVE OFFICERS
Richard S. Fuller
President and
Chief Executive Officer
Peter D. Pruden, III
Executive Vice President
and Secretary
Mark D. Bedard
Chief Financial Officer
and Treasurer
MANAGEMENT
Donald B. Burke
Executive Vice President
The Smithfield Ham
& Products Co.
Larry R. Santure
Senior Vice President
and General Manager
V. W. Joyner & Co.
Charles I. Penick, Jr.
Vice President and
General Manager
Williamsburg Foods
James S. Groves
Vice President of Retail
Sales
The Smithfield Ham
& Products Co.
Howard J. Newton
Vice President/National
Accounts
The Smithfield Ham
& Products Co.
R. Steven Jordan
Corporate Controller
Kevin A. Jones
General Manager
Pruden Packing Co.
MAIL ORDER CATALOGS
Your Company publishes two unique full color consumer catalogs each fall. We
hope that you will consider these when planning your personal or corporate
giving as well as your own fine dining and entertaining needs. For your
catalog(s), call us TOLL FREE.
The Smithfield Collection/Fin 'n Feather
1-800-628-2242
www.smithfieldcollection.com
The Peanut Shop of Williamsburg
1-800-637-3268
www.thepeanutshop.com
You can also visit the Company's primary website
www.smithfield-companies.com
CORPORATE INFORMATION
Executive Offices:
The Smithfield Building
311 County Street, Suite 203
Portsmouth, Virginia 23704
Transfer Agent: Registrar and Transfer Company
Nasdaq Symbol: HAMS
Counsel:
Edmunds & Williams
800 Main Street
Lynchburg, Virginia 24505
Auditors:
PricewaterhouseCoopers LLP
One Columbus Center, Suite 400
Virginia Beach, Virginia 23462
Annual Meeting:
The Annual Meeting of Stockholders will be held on Thursday, July 27, 2000 at
9:00 a.m. at The Wachovia Bank Building, 200 High Street, Suite 203, Portsmouth,
VA
Form 10-K Report:
Copies of the Company's Annual Report on Form 10-K are available without charge,
upon written request to:
The Smithfield Companies, Inc.
The Smithfield Building
311 County Street, Suite 203
Portsmouth, VA 23704
Market for Smithfield Common Stock:
The Company's common stock is traded in the NASDAQ Small Cap Market under the
symbol HAMS. The following table sets forth the quarterly high and low market
prices and dividends paid for each quarter of fiscal 2000 and 1999.
Fiscal 2000 High Low
--------------------------------------------------------------------------------
First Quarter 8 7 1/8
Second Quarter 8 7/8 7 7/16
Third Quarter 8 1/8 7 1/2
Fourth Quarter 7 1/4 6 5/8
Fiscal 1999 High Low
--------------------------------------------------------------------------------
First Quarter 7 1/2 6
Second Quarter 8 6 3/4
Third Quarter 8 6 1/4
Fourth Quarter 8 5/8 7 3/8
Dividends 2000 1999
--------------------------------------------------------------------------------
First Quarter $0.035 $0.030
Second Quarter $0.085 $0.030
Third Quarter $0.035 $0.035
Fourth Quarter $0.035 $0.035
--------------------------------------------------------------------------------
$0.190 $0.130
================================================================================
On June 2, 2000 there were 134 holder's of record of the Company's common stock.
In addition, over 200 beneficial shareholders are estimated.
2000 Annual Report The Smithfield Companies, Inc.
16
