SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
Amendment No. 1 to
FORM 10-K
------------------------------------
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended May 3, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-2258
SMITHFIELD FOODS, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-0845861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Commerce Street
Smithfield, Virginia 23430
(Address of principal executive offices) (Zip Code)
(757) 365-3000
(Registrant's telephone number, including area code)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of Registrant's Common Stock
held by non-affiliates as of July 10, 1998 was approximately $844,100,548. This
figure was calculated by multiplying (i) the $29-5/16 last sales price of
Registrant's Common Stock as reported on The Nasdaq National Market on July 10,
1998 by (ii) the number of shares of Registrant's Common Stock not held by any
officer or director of the Registrant or any person known to the Registrant to
own more than five percent of the outstanding Common Stock of the Registrant.
Such calculation does not constitute an admission or determination that any such
officer, director or holder of more than five percent of the outstanding shares
of Common Stock of the Registrant is in fact an affiliate of the Registrant.
At July 10, 1998, 37,537,362 shares of the Registrant's Common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 27, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Annual Report on Form 10-K/A for the fiscal year ended May 3, 1998
is being filed solely to insert a cross-reference to Note 12 by the caption for
the Nonrecurring Charge on the Consolidated Statement of Income. The amended
Consolidated Statement of Income is presented on page F-4.
SIGNATURE
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.
<TABLE>
<CAPTION>
<S> <C>
SMITHFIELD FOODS, INC.
Date: September 23, 1998 By: /s/ AARON D. TRUB
-------------------------------
Aaron D. Trub
Vice President, Chief Financial
Officer and Secretary
</TABLE>
- 1 -
<PAGE>
SMITHFIELD FOODS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE(S)
-------------
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Public Accountants ............................................ F-2
Consolidated Balance Sheets for the Fiscal Years Ended April 27, 1997,
and May 3, 1998 .................................................................. F-3
Consolidated Statements of Income for the Fiscal Years 1998, 1997, and 1996 ......... F-4
Consolidated Statements of Cash Flows for the Fiscal Years 1998, 1997, and 1996 ..... F-5
Consolidated Statements of Shareholders' Equity for the Fiscal Years ended April 28,
1996, April 27, 1997, and May 3, 1998 ............................................ F-6
Notes to Consolidated Financial Statements .......................................... F-7 to F-22
FINANCIAL STATEMENT SCHEDULE
Independent Public Accountants' Report on Financial Statement Schedule .............. F-23
Schedule I -- Condensed Financial Information of Registrant ......................... F-24 to F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF SMITHFIELD FOODS, INC.:
We have audited the accompanying consolidated balance sheets of Smithfield
Foods, Inc. (a Virginia corporation) and subsidiaries as of May 3, 1998, and
April 27, 1997, and the related consolidated statements of income, cash flows,
and shareholders' equity for each of the three years in the period ended May 3,
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 an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Smithfield Foods, Inc. and
subsidiaries as of May 3, 1998 and April 27, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
May 3, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
June 10, 1998
F-2
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
MAY 3, APRIL 27,
1998 1997
--------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 60,522 $ 25,791
Accounts receivable less allowances of $1,541 and $1,499 ...................... 156,091 166,094
Inventories ................................................................... 249,511 253,276
Prepaid expenses and other current assets ..................................... 44,999 43,217
----------- ----------
Total current assets ........................................................ 511,123 488,378
----------- ----------
Property, plant and equipment:
Land .......................................................................... 15,157 13,964
Buildings and improvements .................................................... 240,032 205,523
Machinery and equipment ....................................................... 418,810 344,328
Construction in progress ...................................................... 31,873 50,578
----------- ----------
705,872 614,393
Less accumulated depreciation ................................................. (233,652) (187,518)
----------- ----------
Net property, plant and equipment ........................................... 472,220 426,875
----------- ----------
Other assets:
Investments in partnerships ................................................... 49,940 44,582
Goodwill, net of accumulated amortization of $1,964 and $1,716 ................ 12,360 4,062
Other ......................................................................... 38,002 31,357
----------- ----------
Total other assets .......................................................... 100,302 80,001
----------- ----------
$ 1,083,645 $ 995,254
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................................. $ - $ 77,500
Current portion of long-term debt and captial lease obligations ............... 8,511 7,800
Accounts payable .............................................................. 118,909 132,268
Accrued expenses and other current liabilities ................................ 124,515 106,498
----------- ----------
Total current liabilities ................................................... 251,935 324,066
----------- ----------
Long-term debt and capital lease obligations ................................... 407,272 288,486
----------- ----------
Other noncurrent liabilities:
Pension and postretirement benefits ........................................... 38,486 55,320
Deferred income taxes ......................................................... 11,745 7,260
Other ......................................................................... 13,197 12,636
----------- ----------
Total other noncurrent liabilities .......................................... 63,428 75,216
----------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares ................. - -
Common stock, $.50 par value, 100,000,000 and 25,000,000 shares authorized;
37,537,362 and 19,196,681 issued ............................................ 18,769 9,598
Additional paid-in capital .................................................... 96,971 113,661
Retained earnings ............................................................. 245,270 191,870
Treasury stock, at cost, 437,000 shares ....................................... - (7,643)
----------- ----------
Total shareholders' equity .................................................. 361,010 307,486
----------- ----------
$ 1,083,645 $ 995,254
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------------------------
1998 1997 1996
---------------- ---------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales ......................................................... $ 3,867,442 $ 3,870,611 $ 2,383,893
Cost of sales ................................................. 3,479,828 3,549,673 2,203,626
------------ ------------ -----------
Gross profit ................................................. 387,614 320,938 180,267
Selling, general and administrative expenses .................. 219,861 191,225 103,095
Depreciation expense .......................................... 42,300 35,825 25,979
Interest expense .............................................. 31,891 26,211 20,942
Nonrecurring charge (Note 12).................................. 12,600 - -
------------ ------------ -----------
Income from continuing operations before income taxes ......... 80,962 67,677 30,251
Income taxes .................................................. 27,562 22,740 10,465
------------ ------------ -----------
Income from continuing operations ............................. 53,400 44,937 19,786
Loss from discontinued operations, net of tax ................. - - (3,900)
------------ ------------ -----------
Net income .................................................... $ 53,400 $ 44,937 $ 15,886
============ ============ ===========
Net income available to common shareholders ................... $ 53,400 $ 43,699 $ 14,734
============ ============ ===========
Income (loss) per basic share:
Continuing operations ........................................ $ 1.42 $ 1.21 $ .55
Discontinued operations ...................................... - - (.11)
============ ============ ===========
Net income ................................................... $ 1.42 $ 1.21 $ .44
============ ============ ===========
Income (loss) per diluted share:
Continuing operations ........................................ $ 1.34 $ 1.17 $ .53
Discontinued operations ...................................... - - (.11)
============ ============ ===========
Net income ................................................... $ 1.34 $ 1.17 $ .42
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------
1998 1997 1996
------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 53,400 $ 44,937 $ 15,886
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................... 45,872 39,057 28,299
Deferred income taxes ............................................. 14,752 7,810 (27,059)
(Gain) loss on sale of property and equipment ..................... 216 (3,288) 2,168
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable .............................................. 15,115 (12,606) (9,251)
Inventories ...................................................... 11,672 (30,008) (41,316)
Prepaid expenses and other current assets ........................ (10,550) (1,605) 1,535
Other assets ..................................................... (7,746) (10,410) 22,682
Accounts payable, accrued expenses and other liabilities ......... (25,194) 9,377 19,166
---------- ---------- ---------
Net cash provided by operating activities ............................ 97,537 43,264 12,110
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures ................................................ (92,913) (69,147) (74,888)
Business acquisitions, net of cash acquired ......................... (7,810) (34,835) (14,079)
Investments in partnerships ......................................... (5,357) (7,293) (2,486)
Net advances to joint hog production arrangements ................... - (113) 6,464
Proceeds from sale of property and equipment ........................ 1,153 4,141 82
---------- ---------- ---------
Net cash used in investing activities ................................ (104,927) (107,247) (84,907)
---------- ---------- ---------
Cash flows from financing activities:
Net (repayments) borrowings on notes payable ........................ (75,000) (33,063) 33,592
Proceeds from issuance of long-term debt ............................ 450,050 171,250 50,000
Principal payments on long-term debt and capital lease obligations (333,053) (76,974) (16,672)
Proceeds from issuance of preferred stock ........................... - - 20,000
Exercise of common stock options .................................... 124 1,270 768
Dividends on preferred stock ........................................ - (1,238) (1,152)
---------- ---------- ---------
Net cash provided by financing activities ............................ 42,121 61,245 86,536
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents ................. 34,731 (2,738) 13,739
Cash and cash equivalents at beginning of year ....................... 25,791 28,529 14,790
---------- ---------- ---------
Cash and cash equivalents at end of year ............................. $ 60,522 $ 25,791 $ 28,529
========== ========== =========
Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized ............................ $ 31,428 $ 25,751 $ 20,684
---------- ---------- ---------
Income taxes paid ................................................... $ 10,179 $ 15,043 $ 1,685
---------- ---------- ---------
Non-cash investing and financing activities:
Refinancing of long-term debt ..................................... $ - $ 59,707 $ -
---------- ---------- ---------
Conversion of preferred stock to common stock ..................... $ - $ 20,000 $ 10,000
---------- ---------- ---------
Common stock issued for acquisition ............................... $ - $ - $ 33,000
---------- ---------- ---------
Conversion of net advances to joint hog production
arrangements to investments in partnerships ...................... $ - $ 7,691 $ -
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED TREASURY
SHARES PAR VALUE CAPITAL EARNINGS STOCK
---------- ----------- ----------- ------------ -------------
(IN THOUSANDS)
<S> <C>
Balance, April 30, 1995 ..................... 16,834 $ 8,417 $ 49,804 $ 133,437 $ (7,643)
Net income ................................. - - - 15,886 -
Common stock issued for acquisition of
John Morrell & Co. ....................... 1,094 547 32,453 - -
Conversion of preferred stock .............. 465 233 9,767 - -
Exercise of stock options .................. 60 30 738 - -
Dividends on preferred stock ............... - - - (1,152) -
------ -------- -------- --------- ---------
Balance, April 28, 1996 ..................... 18,453 9,227 92,762 148,171 (7,643)
Net income ................................. - - - 44,937 -
Conversion of preferred stock .............. 667 333 19,667 - -
Exercise of stock options .................. 77 38 1,232 - -
Dividends on preferred stock ............... - - - (1,238) -
------ -------- -------- --------- ---------
Balance, April 27, 1997 ..................... 19,197 9,598 113,661 191,870 (7,643)
Net income ................................. - - - 53,400 -
Two-for-one stock split .................... 19,200 9,600 (9,600) - -
Exercise of stock options .................. 14 8 116 - -
Reclassification of treasury stock ......... (874) (437) (7,206) - 7,643
------ -------- -------- --------- ---------
Balance, May 3, 1998 ........................ 37,537 $ 18,769 $ 96,971 $ 245,270 $ -
====== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Smithfield Foods, Inc. and subsidiaries (the "Company") operate as a
producer, manufacturer, marketer, seller and distributor of fresh pork and
processed meats. The Company's principal hog slaughtering and further
processing operations are conducted through five wholly-owned subsidiaries:
Gwaltney of Smithfield, Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"),
Lykes Meat Group, Inc. ("Lykes"), Patrick Cudahy Incorporated ("Patrick
Cudahy") and The Smithfield Packing Company, Incorporated ("Smithfield
Packing"). The Company also conducts hog production operations, principally
through its 86%-owned subsidiary, Brown's of Carolina, Inc. ("Brown's").
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company after elimination of all material intercompany balances and
transactions. Investments in partnerships are accounted for using the equity
method of accounting.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in these
financial statements. Actual results could differ from those estimates.
FISCAL YEAR
The Company's fiscal year is the 52- or 53-week period ending on the Sunday
nearest April 30. The fiscal year ended May 3, 1998 includes 53 weeks while the
fiscal years ended April 27, 1997 and April 28, 1996 each include 52 weeks.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying value
of cash equivalents approximates market value. At May 3, 1998, cash and cash
equivalents include $30,100,000 in short-term marketable debt securities.
INVENTORIES
The Company's inventories are valued at the lower of first-in, first-out
cost or market. Cost includes direct materials, labor and applicable
manufacturing and production overhead. Inventories consist of the following:
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Fresh and processed meats ......... $ 171,090 $ 183,480
Hogs on farms ..................... 49,263 44,563
Manufacturing supplies ............ 18,538 15,732
Other ............................. 10,620 9,501
--------- ---------
$ 249,511 $ 253,276
========= =========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated over the
estimated useful lives of the assets. Buildings and improvements are
depreciated over periods from 20 to 40 years. Machinery and equipment is
depreciated over periods from 2 to 20 years. Repair and maintenance charges are
expensed as incurred. Improvements that materially extend the life of the asset
are capitalized. Gains and losses from dispositions or retirements of property,
plant and equipment are recognized currently.
Interest on capital projects is capitalized during the construction
period. Total interest capitalized was $2,530,000 in fiscal 1998, $2,640,000 in
fiscal 1997 and $2,021,000 in fiscal 1996. Repair and maintenance expenses
totaled $106,481,000, $89,670,000 and $59,951,000 in fiscal 1998, 1997 and
1996, respectively.
F-7
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
OTHER ASSETS
Goodwill is being amortized over no more than 40 years. Organization costs
are amortized over a five-year period. Deferred debt issuance costs are
amortized over the terms of the related loan agreements.
REVENUE RECOGNITION
Revenues from product sales are recorded upon shipment to customers.
PRICE-RISK MANAGEMENT
Substantially all of the Company's products are manufactured from
commodity-based raw materials, primarily live hogs. The cost of live hogs is
subject to wide fluctuations due to unpredictable factors such as the price of
corn and soybean meal (the principal feed ingredients for a hog), weather
conditions, economic conditions, government regulation and other unforeseen
circumstances. The pricing of the Company's fresh pork and processed meats are
monitored and adjusted upward and downward in reaction to changes in the cost of
the underlying raw materials. The unpredictability of the raw material costs
limit the Company's ability to forward price fresh pork and processed meat
products without the use of commodity contracts through a program of price-risk
management. The Company uses price-risk management to enhance its ability to
engage in forward sales contracts, where prices for future deliveries are fixed,
by purchasing (or selling) commodity contracts for future periods to reduce or
eliminate the effect of fluctuations in future raw material costs on the
profitability of the related sales. While this may tend to limit the Company's
ability to participate in gains from favorable commodity price fluctuations, it
also tends to reduce the risk of loss from adverse changes in raw material
prices. In addition, the Company utilizes commodity contracts for live hogs and
corn to manage hog production margins when management determines that conditions
are appropriate for such hedges. The particular hedging methods employed and the
time periods for the contracts depend on a number of factors, including the
availability of adequate contracts for the respective periods for the hedges.
The Company attempts to closely match the commodity contract expiration periods
with the dates for product sale and delivery. As a result, gains and losses from
hedging transactions are recognized when the related sales are made and the
hedges are lifted.
As of May 3, 1998 and April 27, 1997, the Company had deferred $1,867,000
and $2,183,000, respectively, of unrealized hedging gains on outstanding futures
contracts. As of May 3, 1998 and April 27, 1997, the Company had open futures
contracts with fair values of $59,645,000 and $44,291,000, respectively. As of
May 3, 1998 and April 27, 1997, the Company had deposits with brokers for
outstanding futures contracts of $10,888,000 and $3,512,000 respectively,
included in prepaid expenses and other current assets.
For open futures contracts, the Company uses a sensitivity analysis
technique to evaluate the effect that changes in the market value of commodities
will have on these commodity derivative instruments. As of May 3, 1998, the
potential change in fair value of open futures contracts, assuming a 10% change
in the underlying commodity price, was $2,124,000.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current or future operations are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments and cleanups are probable and the cost can be reasonably estimated.
Generally, the timing of these accruals coincides with the Company's commitment
to a formal plan of action (see Note 12).
SELF-INSURANCE PROGRAMS
The Company is self-insured for certain levels of general and vehicle
liability, workers' compensation and health care coverage. The cost of these
self-insurance programs is accrued based upon estimated settlements for known
and anticipated claims. Any resulting adjustments to previously recorded
reserves are reflected in current operating results.
F-8
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" ("SFAS 128"), effective for fiscal 1998.
SFAS 128 requires a dual computation and presentation of income per share (see
Note 13). The basic computation is based on average common shares outstanding
during the period. The diluted computation reflects the potentially dilutive
effect of common stock equivalents such as options and convertible preferred
stock during the period. All income per share amounts for all periods are
presented to conform to the SFAS 128 requirements. On September 26, 1997, a
two-for-one stock split of the Company's common stock was effected in the form
of a stock dividend. Accordingly, all historical share and per share amounts
have been restated to reflect the stock split.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. Adoption of SFAS 130 in fiscal 1999 will have no impact on the
Company's net income or shareholders' equity.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for determining an entity's operating segments and for
disclosure of financial information on such segments. Adoption of SFAS 131 in
fiscal 1999 will have no impact on the Company's financial position or results
of operations, but will require expanded disclosure for identified operating
segments.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits -- an amendment of FASB
Statements No. 87, 88 and 106" ("SFAS 132"). In June, 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 132 and SFAS 133 are not required to be adopted until fiscal
2000. The Company has not completed all of the analysis required to estimate
the impact of these statements.
NOTE 2 -- ACQUISITIONS
In November 1996, the Company acquired substantially all of the assets and
business of Lykes from Lykes Bros. Inc. for $34,835,000 in cash and the
assumption of $10,616,000 of current liabilities.
The following unaudited pro forma information combines the operating
results of the Company and Lykes, assuming the acquisition had been made as of
the beginning of each of the periods presented:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Sales ..................................... $ 3,948,091 $ 2,630,031
Income from continuing operations ......... 33,839 12,291
Net income ................................ 33,839 8,391
Income per basic share:
Continuing operations ................... $ .90 $ .33
Net income .............................. .90 .21
Income per diluted share:
Continuing operations ................... $ .88 $ .32
Net income .............................. .88 .21
</TABLE>
The preceding pro forma amounts are not intended to be projections of
future results or trends and do not purport to be indicative of what actual
consolidated results of operations might have been if the acquisitions had been
effective as of the beginning of the periods presented.
The Company made several acquisitions in fiscal 1998 which, in the
aggregate, would not have a material effect on pro forma results.
F-9
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- ACQUISITIONS -- Continued
The Company accounted for the Lykes and other acquisitions using the
purchase method of accounting. The results of operations of these acquired
businesses are included in the accompanying consolidated statements of income
from the respective dates of acquisition.
NOTE 3 -- JOINT HOG PRODUCTION ARRANGEMENTS
SMITHFIELD-CARROLL'S
The Company has an arrangement with certain affiliates of Carroll's Foods,
Inc. ("CFI") to produce hogs for the Company's meat processing plants in North
Carolina and Virginia. The arrangement ("Smithfield-Carroll's") involves: (1)
Smithfield-Carroll's Farms, a partnership owned jointly by the Company and
Carroll's Farms of Virginia, Inc. ("CFAV"), which owns the hog raising
facilities, and (2) a long-term purchase contract between the Company and
Carroll's Foods of Virginia, Inc. ("CFOV"), which leases and operates the
facilities, obligating the Company to purchase all the hogs produced by CFOV at
prices equivalent to market at the time of delivery. A director of the Company
is the president and a director of CFI, CFAV and CFOV. In addition, the Company
has a long-term agreement to purchase hogs from CFI at prices which, in the
opinion of management, are equivalent to market.
As of May 3, 1998 and April 27, 1997, the Company had investments of
$29,357,000 and $27,943,000, respectively, in the Smithfield-Carroll's
partnership. Profits and losses are shared equally under the arrangement.
During fiscal 1997, the Company converted net advances to the arrangement of
$7,691,000 to investments in the arrangement.
Substantially all revenues of the partnership consist of lease payments
from CFOV which cover debt service, depreciation charges and other operating
expenses. For the fiscal years 1998, 1997 and 1996, revenues were $7,386,000,
$8,227,000 and $8,912,000, respectively.
Pursuant to the long-term purchase contract, the Company purchased
$79,087,000, $93,049,000 and $70,540,000 of live hogs from CFOV in fiscal 1998,
1997 and 1996, respectively. The contract resulted in decreased raw material
costs (as compared to market costs) of $359,000, $5,245,000 and $2,617,000 in
fiscal 1998, 1997 and 1996, respectively. In fiscal 1997, the Company received
$6,905,000 from CFOV in repayment of all outstanding demand loans. Pursuant to
the agreement with CFI, the Company purchased $246,371,000, $269,499,000 and
$201,878,000 of hogs in fiscal 1998, 1997 and 1996, respectively.
CIRCLE FOUR
The Company has an arrangement with certain of its principal hog suppliers
to produce hogs in the state of Utah for sale to an unrelated party. The chief
executive officers of two of the suppliers and the president of another served
as directors of the Company during fiscal 1998. As of May 3, 1998, the Company
had a 37% interest in the arrangement. As of May 3, 1998 and April 27, 1997,
the Company had investments of $16,198,000 and $12,673,000, respectively, in
the arrangement.
B&G
Brown's has an arrangement with a company owned by the daughter and
son-in-law of the chairman and chief executive officer of the Company. The
arrangement, B&G Farms LLC ("B&G"), involves the leasing of hog production
facilities to Brown's and the production of hogs by Brown's on a contractual
basis. In addition, the Company has a contract to purchase all of the hogs
produced by B&G at prices which, in the opinion of management, are equivalent
to market. Profits and losses are shared equally under the arrangement. As of
May 3, 1998 and April 27, 1997, B&G had advanced $1,504,000 and $1,430,000,
respectively, to Brown's for working capital. As of May 3, 1998 and April 27,
1997, the Company had investments of $1,147,000 and $1,291,000, respectively,
in B&G.
B&G's revenues consist of lease payments from Brown's, which cover debt
service and depreciation charges, and the profits or losses on the sale of
hogs. Pursuant to the contract, the Company purchased $7,944,000, $6,439,000
and $7,990,000 of hogs in fiscal 1998, 1997 and 1996, respectively.
F-10
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- JOINT HOG PRODUCTION ARRANGEMENTS -- Continued
The following summarized financial information represents an aggregation
of the financial position of the unconsolidated hog production operations of
Smithfield-Carroll's, Circle Four and B&G:
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Current assets ...................... $ 25,738 $ 17,116
Property and equipment, net ......... 147,171 134,937
Other assets ........................ 1,988 6,978
--------- ---------
$ 174,897 $ 159,031
========= =========
Current liabilities ................. $ 21,773 $ 15,721
Long-term debt ...................... 72,290 71,094
Equity .............................. 80,834 72,216
--------- ---------
$ 174,897 $ 159,031
========= =========
</TABLE>
NOTE 4 -- DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
7.625% senior subordinated notes, due February 2008 ......... $ 200,000 $ -
8.52% senior notes, due August 2006 ......................... 100,000 100,000
8.34% senior notes, due August 2003 ......................... 40,000 40,000
8.41% senior notes, payable through August 2004 ............. 14,779 14,779
9.85% senior notes, payable through November 2006 ........... 11,333 13,000
8.41% senior notes, payable through August 2006 ............. 9,853 9,853
9.80% senior notes, payable through August 2003 ............. 7,500 8,437
10.75% senior notes, payable through August 2005 ............ 7,250 8,500
Long-term credit facility ................................... - 75,000
Other long-term debt ........................................ 6,126 4,036
--------- ---------
396,841 273,605
Less current portion ........................................ (7,020) (5,949)
--------- ---------
$ 389,821 $ 267,656
========= =========
</TABLE>
Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Fiscal year
1999 ................... $ 7,020
2000 ................... 2,915
2001 ................... 3,170
2002 ................... 3,083
2003 ................... 10,473
Thereafter ............. 370,180
--------
$396,841
========
</TABLE>
In July 1997, the Company entered into loan agreements with a bank group
for $350,000,000 in revolving credit facilities, consisting of a five-year
$300,000,000 revolving credit facility and a 364-day $50,000,000 revolving
credit facility. In connection with this refinancing, the Company repaid all
borrowings under its previous $300,000,000 credit facilities, which
F-11
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- DEBT -- Continued
were terminated. The borrowings are prepayable and bear interest, at the
Company's option, at various rates based on margins over the federal funds rate
or Eurodollar rate. The Company pays a commitment fee on the unused portion.
The 364-day $50,000,000 revolving credit facility was terminated in February
1998.
In February 1998, the Company issued $200,000,000 in aggregate principal
amount of 10-year 7.625% senior subordinated notes. The net proceeds from the
sale of the notes were used to repay indebtedness under the Company's revolving
credit facility with the balance invested in short-term marketable debt
securities.
In fiscal 1997, the Company privately placed $140,000,000 of senior
secured notes with a group of institutional lenders. The placement consisted of
$40,000,000 of seven-year 8.34% notes and $100,000,000 of 10-year 8.52% notes.
The proceeds of the financing were used to repay $65,200,000 of long-term bank
debt and to reduce short-term borrowings. In conjunction with the placement of
the senior secured notes, the Company refinanced $59,707,000 of existing
institutional long-term debt with the same institutional lenders. The
refinancing resulted in revised maturity dates and repayment schedules for the
refinanced debt; however, no additional proceeds resulted from this
refinancing.
Average borrowings under credit facilities were $149,723,000 in fiscal
1998, $165,071,000 in fiscal 1997 and $133,400,000 in fiscal 1996 at average
interest rates of approximately 7% for each year. Maximum borrowings were
$247,000,000 in fiscal 1998, $215,000,000 in fiscal 1997 and $179,800,000 in
fiscal 1996. There were no borrowings under the facility as of May 3, 1998. The
outstanding borrowings were $150,000,000 as of April 27, 1997, at an average
interest rate of 7%.
The senior subordinated notes are unsecured. The senior notes are secured
by four of the Company's major processing plants and certain other property,
plant and equipment. The credit facility is secured by substantially all of the
Company's inventories and accounts receivable. The Company determines the fair
value of long-term debt instruments for public debt using quoted market prices
and values all other debt using discounted cash flow techniques at estimated
market prices for similar issues.
As of May 3, 1997, the fair value of long-term debt, based on the market
value of debt with similar maturities and covenants, was approximately
$407,511,000.
The Company's various debt agreements contain financial covenants that
require the maintenance of certain levels and ratios for working capital, net
worth, current ratio, fixed charges, capital expenditures and, among other
restrictions, limit additional borrowings, the acquisition, disposition and
leasing of assets, and payments of dividends to shareholders.
NOTE 5 -- INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations ......... $ 27,562 $ 22,740 $ 10,465
Discontinued operations ................... - - (2,600)
-------- -------- --------
$ 27,562 $ 22,740 $ 7,865
======== ======== ========
</TABLE>
F-12
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- INCOME TAXES -- Continued
Income tax expense attributable to income from continuing operations
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense:
Federal ..................... $ 11,315 $ 12,765 $ 8,850
State ....................... 2,043 2,805 1,530
-------- -------- --------
13,358 15,570 10,380
-------- -------- --------
Deferred tax expense (benefit):
Federal ..................... 15,684 9,424 (129)
State ....................... (1,480) (2,254) 214
14,204 7,170 85
-------- -------- --------
$ 27,562 $ 22,740 $ 10,465
======== ======== ========
</TABLE>
A reconciliation of taxes computed at the federal statutory rate to the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory rate ................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit ......... 1.0 1.7 3.9
Nondeductible settlements .............................. 4.5 1.6 -
Foreign sales corporation benefit ...................... (2.0) (1.4) (2.4)
Benefits of certain insurance contracts ................ (3.3) (3.6) (3.1)
Other .................................................. (1.2) 0.3 1.2
---- ---- ----
34.0% 33.6% 34.6%
==== ==== ====
</TABLE>
The tax effects of temporary differences consist of the following:
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Employee benefits ........................................... $ 23,264 $ 28,986
Alternative minimum tax credit .............................. 5,781 12,278
Tax credits, carryforwards and net operating losses ......... 12,773 11,807
Inventories ................................................. 1,286 1,377
Accrued expenses ............................................ 12,867 12,519
-------- --------
$ 55,971 $ 66,967
======== ========
Deferred tax liabilities:
Property, plant and equipment ............................... $ 36,488 $ 35,072
Investments in subsidiaries ................................. 719 3,154
Other assets ................................................ 6,875 2,100
-------- --------
$ 44,082 $ 40,326
======== ========
</TABLE>
As of May 3, 1998 and April 27, 1997, the Company had $23,634,000 and
$33,901,000, respectively, of net current deferred tax assets included in
prepaid expenses and other current assets. The Company had no valuation
allowance related to income tax assets as of May 3, 1998 and April 27, 1997,
and there was no change in the valuation allowance during fiscal 1998 and 1997.
The tax credits, carryforwards and net operating losses expire from fiscal
1998 to 2012. The alternative minimum tax credits do not expire.
F-13
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Payroll and related benefits ................ $ 46,834 $ 43,723
Self-insurance reserves ..................... 24,794 18,112
Pension and postretirement benefits ......... 23,931 17,518
Other ....................................... 28,956 27,145
--------- ---------
$ 124,515 $ 106,498
========= =========
</TABLE>
NOTE 7 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK
REINCORPORATION AND TREASURY STOCK
In August 1997, the Company's shareholders approved the reincorporation of
the Company in Virginia from Delaware. The purpose of the reincorporation was
to reduce annual franchise taxes and does not affect the Company's
capitalization or the manner in which it operates. Since Virginia law does not
recognize treasury stock, the shares previously classified as treasury stock
reverted to unissued shares resulting in a reduction in common stock and
additional paid-in capital for the cost basis of the shares.
AUTHORIZED COMMON SHARES
In August 1997, the Company's shareholders approved an increase in the
number of authorized common shares from 25,000,000 to 100,000,000.
STOCK SPLIT
As discussed in Note 1, the Company effected a two-for-one split of its
common stock in September 1997. Share amounts presented in the Consolidated
Balance Sheets and the Consolidated Statements of Shareholders' Equity reflect
the actual share amounts outstanding for each period presented. Stock option
agreements provide for the issuance of additional shares for the stock split.
All stock options outstanding and per share amounts for all periods have been
restated to reflect the effect of this split.
ISSUANCE OF COMMON STOCK
In fiscal 1996, the Company issued 2,188,546 split-adjusted shares of its
common stock to Chiquita Brands International, Inc. as part of the acquisition
of John Morrell.
PREFERRED STOCK
The Company has 1,000,000 shares of $1.00 par value preferred stock
authorized, none of which are issued. The board of directors is authorized to
issue preferred stock in series and to fix, by resolution, the designation,
dividend rate, redemption provisions, liquidation rights, sinking fund
provisions, conversion rights and voting rights of each series of preferred
stock.
In fiscal 1996, the Company authorized and issued 2,000 shares of Series C
6.75% cumulative convertible redeemable preferred stock in a private
transaction for $20,000,000. In fiscal 1997, all of these shares were converted
into 1,333,332 split-adjusted shares of the Company's common stock at $15.00
per share.
In fiscal 1996, all of the Series B 6.75% cumulative convertible
redeemable preferred stock, totaling $10,000,000, was converted into 930,232
split-adjusted shares of the Company's common stock at $10.75 per share.
F-14
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
STOCK OPTIONS
Under the Company's 1984 Stock Option Plan (the "1984 Plan"), officers and
certain key employees were granted incentive and nonstatutory stock options to
purchase shares of the Company's common stock for periods not exceeding 10
years at prices that were not less than the fair market value of the common
stock on the date of grant. Stock appreciation rights which are exercisable
upon a change in control of the Company are attached to the options granted
pursuant to the 1984 Plan. The 1984 Plan has expired with the exception of
outstanding options.
Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"),
management and other key employees may be granted nonstatutory stock options to
purchase shares of the Company's common stock exercisable five years after
grant for periods not exceeding 10 years. The exercise price for options
granted prior to August 31, 1994 was not less than 150% of the fair market
value of the common stock on the date of grant. On August 31, 1994, the Company
amended and restated the 1992 Plan, changing the exercise price of options
granted on or after that date to not less than the fair market value of the
common stock on the date of grant. The Company reserved 2,500,000 shares of
common stock under the 1992 Plan. As of May 3, 1998, there were 394,000 options
available for grant under the 1992 Plan.
The following is a summary of transactions for the 1984 Plan and the 1992
Plan during fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
STOCK OPTION AVERAGE PRICE
SHARES PER SHARE
-------------- --------------
<S> <C> <C>
Outstanding at April 30, 1995 ......... 3,132,200 $ 7.90
Granted ............................. 690,000 12.65
Exercised ........................... (119,200) 3.30
Cancelled ........................... (100,000) 11.53
--------- --------
Outstanding at April 28, 1996 ......... 3,603,000 8.86
Granted ............................. 160,000 15.67
Exercised ........................... (154,000) 3.11
Cancelled ........................... (540,000) 12.29
--------- --------
Outstanding at April 27, 1997 ......... 3,069,000 8.90
Granted ............................. 314,000 25.39
Exercised ........................... (17,000) 4.06
--------- --------
Outstanding at May 3, 1998 ............ 3,366,000 $ 10.47
========= ========
</TABLE>
As of May 3, 1998, April 27, 1997 and April 28, 1996, the number of option
shares exercisable were 1,260,000, 1,278,000 and 1,432,000, respectively, at
average per share exercise prices of $4.06, $4.06 and $3.96, respectively.
The following table summarizes information about stock options outstanding
as of May 3, 1998:
<TABLE>
<CAPTION>
OPTION SHARES
EXERCISE OUTSTANDING AVERAGE REMAINING AVERAGE
PRICE RANGE MAY 3, 1998 CONTRACTUAL LIFE EXERCISE PRICE
- ------------------ -------------- ------------------- ---------------
<S> <C> <C> <C>
$ 4.06 1,260,000 1.0 $ 4.06
10.72 to 11.75 1,291,000 5.6 11.52
13.62 to 15.31 450,000 7.7 13.70
16.47 to 17.84 100,000 8.6 16.88
25.53 to 27.72 200,000 9.1 26.51
31.63 to 32.75 65,000 9.6 32.42
</TABLE>
Stock options with an exercise price of $4.06 per share are the only
options exercisable as of May 3, 1998.
The Company has adopted the supplemental disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Accordingly, compensation costs are not
recognized for the stock option plans. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options granted in
fiscal 1998, 1997 and 1996 consistent with the provisions of SFAS 123, the
Company's income
F-15
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
from continuing operations and income per common share from continuing
operations would have been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Income from continuing operations, as reported ......... $ 53,400 $ 44,937 $ 19,786
Pro forma income from continuing operations ............ 52,571 44,553 19,715
Income per common share from continuing operations,
as reported:
Basic ................................................ $ 1.42 $ 1.21 $ .55
Diluted .............................................. 1.34 1.17 .53
Pro forma income per common share from continuing
operations:
Basic ................................................ $ 1.40 $ 1.20 $ .55
Diluted .............................................. 1.32 1.16 .53
</TABLE>
The weighted-average fair values of option shares granted were $11.88,
$7.62 and $6.01 for fiscal 1998, 1997 and 1996, respectively. The fair value of
each stock option share granted beginning in fiscal 1995 is estimated at date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Expected option life ............... 6.0 years 6.0 years 6.0 years
Expected annual volatility ......... 35.0% 35.0% 35.0%
Risk-free interest rate ............ 6.3% 6.2% 5.8%
Dividend yield ..................... 0.0% 0.0% 0.0%
</TABLE>
PREFERRED SHARE PURCHASE RIGHTS
As part of the reincorporation, the Company adopted a preferred share
purchase rights plan (the "Rights Plan") and declared a dividend of one
preferred share purchase right (a "Right") on each outstanding share of common
stock. Under the terms of the Rights Plan, if the Company is acquired in a
merger or other business combination transaction, each Right will entitle its
holder to purchase, at the Right's then current exercise price, a number of the
acquiring company's common shares having a market value of twice such price. In
addition, if a person or group acquires 20% (or other applicable percentage, as
summarized in the Rights Plan) or more of the outstanding common stock, each
Right will entitle its holder (other than such person or members of such group)
to purchase, at the Right's then current exercise price, a number of shares of
common stock having a market value of twice such price.
Each Right will entitle its holder to buy one one-thousandth of a Series A
junior participating preferred share ("Preferred Share"), par value $1.00 per
share, at an exercise price of $37.50 subject to adjustment. Each Preferred
Share will entitle its holder to 1,000 votes and will have an aggregate
dividend rate of 1,000 times the amount, if any, paid to holders of common
stock. The Rights will expire on May 31, 2001 unless the date is extended or
unless the Rights are earlier redeemed or exchanged at the option of the board
of directors for $.0001 per Right. Generally, each share of common stock issued
after May 31, 1991, will have one Right attached.
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS
The Company sponsors several defined benefit pension and defined
contribution plans covering substantially all employees. Pension plans covering
salaried employees provide benefits based on years of service and average
salary levels. Pension plans covering hourly employees provide benefits of
stated amounts for each year of service. The Company's funding policy for
pension plans is to contribute annually the minimum amount required under
ERISA. The pension plan assets are invested primarily in equities, debt
securities, insurance contracts and money market funds.
F-16
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued
The status of the Company's pension plans and the components of pension
expense are as follows:
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
---------------------------- -----------------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
PLANS PLANS PLANS PLANS
------------ ------------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Accumulated benefit obligation ............................. $ 42,938 $ 185,420 $ 30,974 $ 170,850
========= ========== ========= ==========
Vested benefit obligation .................................. $ 34,508 $ 181,563 $ 26,483 $ 168,222
========= ========== ========= ==========
Plan assets at fair value .................................. $ 63,447 $ 139,945 $ 47,179 $ 123,417
Projected benefit obligation ............................... (48,664) (193,890) (38,805) (177,114)
--------- ---------- --------- ----------
Excess (deficiency) of plan assets over projected benefit
obligation ................................................ 14,783 (53,945) 8,374 (53,697)
Items not recorded on balance sheets:
Unrecognized net transition gain .......................... - - (90) -
Unrecognized net gain from experience differences ......... (11,121) (1,874) (6,799) (10,173)
Unrecognized prior service cost ........................... 797 - 992 88
--------- ---------- --------- ----------
Prepaid (accrued) pension costs ........................... $ 4,459 $ (55,819) $ 2,477 $ (63,782)
========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Net periodic pension cost included the following:
Service costs for benefits earned ........................ $ 4,103 $ 4,054 $ 2,662
Interest accrued on projected benefit obligation ......... 16,730 16,299 7,532
Actual return on plan assets ............................. (35,052) (15,556) (6,691)
Net amortization and deferral ............................ 18,606 878 (200)
--------- --------- --------
Net periodic pension cost .............................. $ 4,387 $ 5,675 $ 3,303
========= ========= ========
</TABLE>
In determining the projected benefit obligation in fiscal 1998 and 1997,
the average assumed discount rate was 7% and 8%, respectively, while the
assumed rate of increase in future compensation was 4% in fiscal 1998 and 5% in
fiscal 1997. The average expected long-term rate of return on plan assets was
9% in fiscal 1998 and 1997.
The Company provides health care and life insurance benefits for certain
retired employees. These plans are unfunded and generally pay covered costs
reduced by retiree premium contributions, co-payments and deductibles. The
Company retains the right to modify or eliminate these benefits.
The status of the Company's postretirement plans are as follows:
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents ..................................... $ 6,806 $ 8,226
Active plan participants .................................... 4,011 1,404
-------- --------
Total accumulated postretirement benefit obligation ......... 10,817 9,630
Unrecognized net gain (loss) ................................ (1,060) 651
-------- --------
Accrued postretirement benefit cost ........................... $ 9,757 $ 10,281
======== ========
</TABLE>
In determining the accumulated postretirement benefit obligation in fiscal
1998 and 1997, the average assumed discount rate was 7% and 8%, respectively.
The assumed annual rate of increase in per capita cost of covered health care
benefits is
F-17
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued
7.5% for fiscal 1998, 6.5% for fiscal 1999 and 5.5% thereafter. An increase of
1% in the health care cost trend would increase the accumulated postretirement
benefit obligation as of May 3, 1998 by $1,228,000 and the annual expense by
$94,000.
The total cost of postretirement benefits was $894,000, $1,072,000 and
$673,000 in fiscal 1998, 1997 and 1996, respectively.
NOTE 9 -- LEASE OBLIGATIONS AND COMMITMENTS
The Company leases transportation equipment under operating leases ranging
from one to 10 years with options to cancel at earlier dates. In addition, the
Company has a long-term maintenance agreement related to this equipment.
Maintenance fees are based upon fixed monthly charges for each vehicle, as well
as the maintenance facility itself and contingent fees based upon
transportation equipment usage. The amounts shown below as minimum rental
commitments do not include contingent maintenance fees.
The Company has agreements, expiring in fiscal 2004 and 2008, to use two
cold storage warehouses owned by a partnership, 50% of which is owned by the
Company. The Company has agreed to pay prevailing competitive rates for use of
the facilities, subject to aggregate guaranteed minimum annual fees of
$3,600,000. In fiscal 1998, 1997 and 1996, the Company paid $6,228,000,
$5,372,000 and $4,641,000, respectively, in fees for use of the facilities. As
of May 3, 1998 and April 27, 1997, the Company had investments of $1,411,000
and $1,137,000, respectively, in the partnership.
In fiscal 1998, the Company entered into a 15-year agreement, expiring in
2013, to use a cold storage warehouse owned by a partnership, 50% of which is
owned by the Company. The Company has agreed to lease the facility, beginning
in fiscal 1999, for an amount which will cover debt service costs plus a
minimum guaranteed annual fee totaling $2,174,000 in fiscal 1999. As of May 3,
1998, the Company had an investment of $1,826,000 in the partnership.
Minimum rental commitments under all noncancelable operating leases and
maintenance agreements are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year
1999 ............... $ 20,986
2000 ............... 18,774
2001 ............... 16,219
2002 ............... 21,535
2003 ............... 9,900
Thereafter ......... 34,651
---------
$ 122,065
=========
</TABLE>
Rental expense was $24,839,000 in fiscal 1998, $24,270,000 in fiscal 1997
and $17,664,000 in fiscal 1996. Rental expense in fiscal 1998, 1997 and 1996
included $3,231,000, $3,593,000 and $3,389,000 of contingent maintenance fees,
respectively.
The Company has a sale and leaseback arrangement for certain hog
production facilities at Brown's. The arrangement provides for an early
termination at predetermined amounts in fiscal 2004.
Property, plant and equipment under capital leases as of May 3, 1998
consists of land of $1,911,000, buildings and improvements of $5,647,000, and
machinery and equipment of $6,550,000, less accumulated depreciation of
$6,001,000.
F-18
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- LEASE OBLIGATIONS AND COMMITMENTS -- Continued
Future minimum lease payments for assets under capital leases and the
present value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year
1999 .................................... $ 3,016
2000 .................................... 3,070
2001 .................................... 3,184
2002 .................................... 3,190
2003 .................................... 3,190
Thereafter .............................. 9,602
--------
25,252
Less amounts representing interest ...... (6,310)
--------
Present value of net minimum obligations 18,942
Less current portion .................... (1,491)
--------
Long-term capital lease obligations ..... $ 17,451
========
</TABLE>
As of May 3, 1998, the Company had definitive commitments of $18,871,000
for capital expenditures primarily to increase its processed meats and
value-added fresh pork capacities at several of its processing plants and to
replace and upgrade portions of its hardware and software in response to the
Year 2000.
NOTE 10 -- RELATED PARTY TRANSACTIONS
A director of the Company is the chairman, president and chief executive
officer and a director of Prestage Farms, Inc. ("PFI"). The Company has a
long-term agreement to purchase hogs from PFI at prices which, in the opinion
of management, are equivalent to market. Pursuant to this agreement with PFI,
the Company purchased $168,829,000, $182,576,000 and $129,577,000 of hogs in
fiscal 1998, 1997 and 1996, respectively.
The chairman and chief executive officer and a director of Murphy Family
Farms, Inc. ("MFF") was a director of the Company until May 1998. The Company
has a long-term agreement to purchase hogs from MFF at prices which, in the
opinion of management, are equivalent to market. Pursuant to this agreement
with MFF, the Company purchased $366,397,000, $433,861,000 and $330,033,000 of
hogs in fiscal 1998, 1997 and 1996, respectively.
A director and the owner of 50% of the voting stock of Maxwell Foods, Inc.
("MFI") was a director of the Company until May 1998. The Company has a
long-term agreement to purchase hogs from MFI at prices which, in the opinion
of management, are equivalent to market. Pursuant to this agreement with MFI,
the Company purchased $118,041,000, $109,470,000 and $76,448,000 of hogs in
fiscal 1998, 1997 and 1996, respectively.
In fiscal 1998, 1997 and 1996, the Company purchased raw materials
totaling $18,524,000, $12,772,000 and $10,069,000, respectively, from a company
which was 48%-owned by the chairman and chief executive officer's children. In
the opinion of management, these purchases were made at prices that were
equivalent to market.
The Company is engaged in hog production arrangements with several related
parties. See Note 3 for additional information regarding these arrangements.
NOTE 11 -- DISCONTINUED OPERATIONS
In fiscal 1996, the Company completed the disposition of the assets and
business of Ed Kelly, Inc., its former retail electronics subsidiary, which is
reported separately as discontinued operations in the consolidated statements
of income. A loss from discontinued operations of $3,900,000 is reflected in
fiscal 1996.
F-19
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- REGULATION AND LITIGATION
Like other participants in the meat processing industry, the Company is
subject to various laws and regulations administered by federal, state and
other government entities, including the U.S. Environmental Protection Agency
("EPA"), the U.S. Department of Agriculture, the U.S. Food and Drug
Administration, the U.S. Occupational Safety and Health Administration and
corresponding state agencies in states where the Company operates. Management
believes that the Company presently is in compliance with all such laws and
regulations in all material respects and that continued compliance will not
have a material adverse effect on the Company's financial position or results
of operations. The Company believes that the ultimate resolution of the
litigation and investigations discussed below will not have a material adverse
effect on its financial position or results of operations.
Under the water pollution control laws of the United States and the
Commonwealth of Virginia ("Virginia"), the Company is required to maintain
certain test records for three years. Failure to do so may result in the
imposition of civil penalties. Criminal sanctions may be imposed in the event
of false reporting or destruction of records. In July 1994, the Company learned
that records of many tests conducted at its Smithfield, Virginia packing plants
from 1991 through early 1994 could not be found and may have been destroyed. In
1997, the employee responsible for such testing and record-keeping was
convicted in the United States District Court for the Eastern District of
Virginia on eight charges of records destruction and making false reports.
Since January 1998, several of the Company's employees responsible for
wastewater treatment operations have been called to testify under subpoena
before a federal grand jury in Norfolk, Virginia. The grand jury also issued
subpoenas requiring production of various environmental materials relating to
the Company's wastewater treatment operations at these plants. Neither the
Company nor any of its other present or former employees has been charged with
any criminal violation arising from these matters, but there can be no
assurance that such charges will not be brought.
On August 8, 1997, in a civil suit filed by the EPA against the Company,
the United States District Court for the Eastern District of Virginia imposed a
$12,600,000 civil penalty on the Company for Clean Water Act violations at its
Smithfield, Virginia packing plants. The Company recorded a nonrecurring charge
of $12,600,000 during the first quarter of fiscal 1998 with respect to this
penalty. The Company has appealed this decision to the United States Court of
Appeals for the Fourth Circuit. There can be no assurance as to the outcome of
such appeal or any subsequent proceedings regarding this matter.
Prior to the filing of the EPA suit, the Commonwealth of Virginia filed a
civil suit against the Company in the Circuit Court of the County of Isle of
Wight, Virginia under Virginia's water pollution control laws. Virginia's
action alleged 22,517 discharge permit violations at the Smithfield, Virginia
packing plants during the period 1986 until 1997. Most of these alleged
violations were also presented in the EPA suit. While each violation is subject
to a maximum penalty of $25,000, Virginia follows a civil penalties policy
designed to recapture from the violator any economic benefit which accrued as a
result of the noncompliance, plus a surcharge penalty for having committed such
violations. In addition, the policy may increase the amount of penalties based
upon the extent of environmental damage caused by the violations.
At the beginning of the July 1997 trial of its case, Virginia contended
that the Company had received an economic benefit of $4,000,000 due to its
noncompliance and should pay a total of $6,000,000 for the alleged violations.
In the middle of the trial, however, Virginia voluntarily dismissed its suit.
One week later, Virginia refiled the same suit in Isle of Wight County Circuit
Court. On June 29, 1998, the Court overruled the Company's motions to dismiss
this second suit on double jeopardy and res judicata grounds. If Virginia's
charges go to trial again, the Company will present evidence to show and argue,
among other things, that no economic benefit accrued to the Company as a result
of, and that no environmental damage was caused by, the violations. There can
be no assurance as to the outcome of any such proceeding.
F-20
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13 -- INCOME PER SHARE
The computation for basic and diluted income per share is as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
------------ -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Fiscal 1998
Net income per basic share ...................................... $ 53,400 37,532 $ 1.42
Effect of dilutive stock options ................................ - 2,200 -
-------- ------ -------
Net income per diluted share ................................... $ 53,400 39,732 $ 1.34
======== ====== =======
Fiscal 1997
Net income per basic share ...................................... $ 44,937 - -
Less preferred stock dividends .................................. (1,238) - -
-------- ------ -------
Net income available to common shareholders per basic share ..... 43,699 36,121 $ 1.21
Effect of dilutive stock options ................................ - 1,144 -
Effect of dilutive convertible preferred stock .................. 1,238 1,293 -
-------- ------ -------
Net income per diluted share ................................... $ 44,937 38,558 $ 1.17
======== ====== =======
Fiscal 1996
Income from continuing operations ............................... $ 19,786 - -
Less preferred stock dividends .................................. (1,152) - -
-------- ------ -------
Income from continuing operations available to common
shareholders per basic share ................................... 18,634 33,865 $ .55
Effect of dilutive stock options ................................ - 1,135 -
-------- ------ -------
Income from continuing operations per diluted share ............ $ 18,634 35,000 $ .53
======== ====== =======
</TABLE>
The summary below lists stock options outstanding at the end of each
fiscal year which were not included in the computation of income per diluted
share because the average exercise price of the options was greater than the
average market price of the common shares. These options, which have varying
expiration dates, were still outstanding at May 3, 1998.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Stock option shares excluded ....... 65,000 100,000 440,000
Average option price per share ..... $ 32.42 $ 16.88 $ 13.70
</TABLE>
F-21
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------------- -------------- ---------------- --------------
(UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal 1998
Sales ...................... $ 914,963 $ 982,699 $ 1,095,999 $ 873,781
Gross profit .............. 75,184 93,970 116,663 101,797
Net income (loss) .......... (6,541) 15,548 23,719 20,674
Net income per common share:
Basic .......................... $ (.17) $ .41 $ .63 $ .55
Diluted ........................ (.17) .39 .60 .52
Fiscal 1997
Sales ...................... $ 892,870 $ 969,226 $ 1,080,979 $ 927,536
Gross profit .............. 58,762 73,577 88,704 99,895
Net income ................. 746 9,017 15,734 19,440
Net income per common share:
Basic .......................... $ .01 $ .24 $ .43 $ .53
Diluted ........................ .01 .23 .40 .50
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
TO THE SHAREHOLDERS OF SMITHFIELD FOODS, INC.
We have audited in accordance with generally accepted auditing standards
the financial statements included in the Form 10-K Annual Report of Smithfield
Foods, Inc. for the fiscal year ended May 3, 1998, and have issued our report
thereon dated June 10, 1998. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
on the Index to Financial Statements and Financial Schedule filed as a part of
the Company's Form 10-K Annual Report is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Richmond, Virginia
June 10, 1998
- F-23 -
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY BALANCE SHEETS
AS OF MAY 3, 1998 AND APRIL 27, 1997
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
MAY 3, 1998 APRIL 27, 1997
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 7,800 $ 38
Accounts receivable ................................................................ 324 3,675
Receivables from related parties ................................................... -- 1,414
Refundable income taxes ............................................................ 2,300 --
Deferred income taxes .............................................................. 23,634 33,901
Other .............................................................................. 15,921 5,137
--------- ---------
TOTAL CURRENT ASSETS ............................................................. 49,979 44,165
--------- ---------
Investments in and net advances to subsidiaries, at cost plus equity in undistributed
earnings ........................................................................... 679,266 444,149
--------- ---------
OTHER ASSETS:
Investments in partnerships ........................................................ 46,966 41,753
Property, plant and equipment, net ................................................. 18,327 9,838
Other .............................................................................. 26,353 16,476
--------- ---------
TOTAL OTHER ASSETS ............................................................... 91,646 68,067
--------- ---------
$ 820,891 $ 556,381
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable ....................................................................... $ -- $ 2,500
Current portion of long-term debt .................................................. 6,248 4,263
Accounts payable ................................................................... 2,795 5,167
Accrued expenses ................................................................... 45,232 28,617
Income taxes payable ............................................................... -- 1,789
--------- ---------
TOTAL CURRENT LIABILITIES ........................................................ 54,275 42,336
--------- ---------
Long-term debt ...................................................................... 387,732 192,384
--------- ---------
Deferred income taxes and other noncurrent liabilities .............................. 17,874 14,175
--------- ---------
Shareholders' equity ................................................................ 361,010 307,486
--------- ---------
$ 820,891 $ 556,381
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-24
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
MAY 3, 1998 APRIL 27, 1997 APRIL 28, 1996
---------------- ---------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales ................................................... $ -- $ -- $ --
Cost of Sales ........................................... 9,589 1,820 (2,540)
--------- --------- --------
Gross Profit ............................................ (9,589) (1,820) 2,540
General and administrative expenses, net of allocation to
subsidiaries ........................................... 4,686 10,911 5,780
Depreciation expense .................................... 843 903 892
Interest expense ........................................ 24,578 16,434 2,556
Nonrecurring charge ..................................... 12,600 -- --
--------- --------- --------
Loss before income tax benefit and equity in earnings of
subsidiaries ........................................... (52,296) (30,068) (6,688)
Income tax benefit ...................................... (19,130) (12,562) (2,400)
--------- --------- --------
Loss before equity in earnings of subsidiaries .......... (33,166) (17,506) (4,288)
Equity in earnings of subsidiaries ...................... 86,566 62,443 20,174
--------- --------- --------
Net income .............................................. $ 53,400 $ 44,937 $ 15,886
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
MAY 3, 1998 APRIL 27, 1997 APRIL 28, 1996
---------------- ---------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 53,400 $ 44,937 $ 15,886
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................... 1,461 1,040 1,162
Gain on sale of property and equipment ...................... -- (2,328) (1)
Changes in operating assets and liabilities:
Deferred income taxes and other noncurrent liabilities ..... 13,966 (37,308) 5,343
Accounts receivables ....................................... 3,351 (1,329) (2,171)
Receivables from related parties ........................... 1,414 45 6,615
Other current assets ....................................... (10,784) (3,367) (1,318)
Accounts payable and accrued expenses ...................... 14,243 15,696 260
Refundable income taxes .................................... (2,300) -- 3,458
Income taxes payable ....................................... (1,789) 1,560 229
Other assets ............................................... (10,495) (1,541) (4,778)
---------- --------- ----------
Net cash provided by operating activities ..................... 62,467 17,405 24,685
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................... (9,332) (3,226) (2,987)
Proceeds from sale of property, plant and equipment ........... -- 3,424 38
Increase in investments in and advances to subsidiaries, net
of common stock issued to acquire John Morrell & Co. ........ (235,117) (80,800) (36,649)
Investment in partnerships .................................... (5,213) (5,660) (2,376)
---------- --------- ----------
Net cash used in investing activities ....................... (249,662) (86,262) (41,974)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance (repayments) of short-term debt ........ -- (500) 500
Proceeds from issuance of long-term debt ...................... 447,150 140,000 --
Principal payments on long-term debt .......................... (252,317) (71,200) (2,420)
Exercise of options ........................................... 124 1,270 767
Issuance of preferred stock ................................... -- -- 20,000
Preferred dividends ........................................... -- (1,238) (1,152)
---------- --------- ----------
Net cash provided by financing activities ................... 194,957 68,332 17,695
---------- --------- ----------
NET INCREASE (DECREASE) in cash and cash equivalents ........... 7,762 (525) 406
CASH AND CASH EQUIVALENTS at beginning of year ................. 38 563 157
---------- --------- ----------
CASH AND CASH EQUIVALENTS at end of year ....................... $ 7,800 $ 38 $ 563
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
May 3, 1998 and April 27, 1997
1. The Notes to Parent Company Financial Statements should be read in
conjunction with the Registrant's Notes to Consolidated Financial
Statements included herein.
2. Restricted assets of Registrant:
Existing loan covenants contain provisions which limit the amount of
funds available for transfer from the subsidiaries to Smithfield Foods,
Inc. without the consent of certain lenders.
3. Accrued expenses as of May 3, 1998 and April 27, 1997 are as follows:
(In thousands) 1998 1997
-------------- --------- ---------
Self-insurance reserves $21,834 $14,151
Other 23,398 14,466
-------- --------
$45,232 $28,617
======= ========
4. Long-Term Debt:
In fiscal 1998, the Registrant entered into loan agreements with a bank
group providing for $350,000,000 in revolving credit facilities,
consisting of a five-year $300,000,000 revolving credit facility and a
364-day $50,000,000 revolving credit facility. In connection with this
refinancing, the Registrant repaid all borrowings under its previous
$300,000,000 credit facilities, which were terminated. The 364-day
$50,000,000 revolving credit facility was later terminated.
In fiscal 1998, the Registrant issued $200,000,000 in aggregate principal
amount of 10-year 7.625% senior subordinated notes. The net proceeds
from the sales of the notes were used to repay indebtedness under the
Registrant's $300,000,000 revolving credit facility with the balance
invested in short-term marketable debt securities.
In fiscal 1997, the Registrant privately placed $140,000,000 of senior
secured notes. The proceeds of the financing were used to repay
$65,200,000 of long-term bank debt and for investments in and advances to
subsidiaries. In conjunction with the placement of these notes, the
Registrant refinanced $59,707,000 of existing long-term debt previously
recorded by its subsidiaries. The result of the refinancing was to
transfer debt to the parent and revise maturity dates and repayment
schedules for the refinanced debt. No additional proceeds resulted from
this refinancing.
As of May 3, 1998, the Registrant is guaranteeing $18,942,000 of capital
lease obligations of its subsidiaries and a $300,000,000 credit facility
that had no outstanding balance.
Scheduled maturities of the Registrant's long-term debt consists of the
following (in thousands):
Fiscal Year
1999 $6,248
2000 2,362
2001 3,134
2002 3,083
2003 10,473
Thereafter 368,680
-------
$393,980
========
5. The amount of dividends received from subsidiaries in fiscal 1998 and
1997 was $43,423,000 and $65,316,000, respectively.
6. In fiscal 1997, all of the Series C 6.75% cumulative convertible
redeemable preferred stock, totaling $20,000,000, was converted into the
Registrant's common stock.
F-27
<PAGE>
7. In fiscal 1998, the Registrant's shareholders approved the
reincorporation of the Registrant in Virginia from Delaware. The purpose
of the reincorporation was to reduce annual franchise taxes and does not
affect the Registrant's capitalization or the manner in which it
operates.
8. Supplemental disclosures of cash flow information (in thousands):
Fiscal Year 1998 1997 1996
- ----------- ---- ---- ----
Interest paid, net of amount capitalized $20,901 $11,106 $ 1,807
====== ====== =====
Income taxes paid $10,179 $15,043 $ 1,685
====== ====== =====
Noncash investing and financing activities:
Refinancing of long-term debt $ - $59,707 $ -
====== ====== =====
Conversion of preferred stock to common stock $ - $20,000 $10,000
====== ====== =====
Common stock issued for acquisition $ - $ - $33,000
====== ====== ======
Conversion of receivables from related parties
to investments in partnership $ - $ 7,691 $ -
====== ====== ======
F-28
