SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(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)
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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.
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<PAGE>
TABLE OF CONTENTS
ITEM
NUMBER PAGE
PART I
1. Business............................................................ 3
General........................................................... 3
Business Strategy................................................. 4
Revenue by Source..................................................5
Fresh Pork Products .............................................. 5
Processed Meat Products........................................... 5
Raw Materials .................................................... 6
Customers and Marketing .......................................... 6
Trademarks ........................................................7
Distribution...................................................... 7
Competition ...................................................... 7
Employees .........................................................8
Regulation ....................................................... 8
2. Properties ..........................................................10
3. Legal Proceedings .................................................. 11
4. Submission of Matters to a Vote
of Security Holders ................................... 11
4A. Executive Officers of the Company ...................................12
PART II
5. Market for Company's Common Equity
and Related Stockholder Matters ..................................14
6. Selected Financial Data .............................................15
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................16
8. Financial Statements and Supplementary Data .........................20
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...........................20
PART III
10. Directors and Executive Officers of the Company .....................21
11. Executive Compensation ..............................................21
12. Security Ownership of Certain Beneficial Owners
and Management ...................................................21
13. Certain Relationships and Related Transactions ......................21
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...........................................22
SIGNATURES ..............................................................S-1
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ..........F-1
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PART I
ITEM 1. BUSINESS
General
Smithfield Foods, Inc. ("Smithfield Foods" or the "Company"), as a
holding company, conducts its pork processing operations through five principal
subsidiaries: Gwaltney of Smithfield, Ltd. ("Gwaltney") and The Smithfield
Packing Company, Incorporated ("Smithfield Packing"), both based in Smithfield,
Virginia; John Morrell & Co. ("John Morrell"), based in Cincinnati, Ohio;
Patrick Cudahy Incorporated ("Patrick Cudahy"), based in Cudahy, Wisconsin; and
Lykes Meat Group, Inc. ("Lykes"), based in Plant City, Florida. The Company also
conducts hog production operations through its 86% owned subsidiary, Brown's of
Carolina, Inc. ("Brown's") and through a 50% interest in Smithfield-Carroll's
("Smithfield-Carroll's"), a joint hog production arrangement between the Company
and Carroll's Foods of Virginia, Inc., an affiliate of Carroll's Foods, Inc.,
one of the largest hog producers in the United States. Both Brown's and
Smithfield-Carroll's produce hogs for the Company's pork processing plants in
Bladen County, North Carolina and Smithfield, Virginia. The Company is also a
participant in the Circle Four joint hog production arrangement ("Circle Four")
with certain of the principal hog suppliers for the Company's Eastern
operations, which conducts hog production operations in Milford, Utah. The hogs
produced by Circle Four are sold to an unrelated party. In this report,
references to "Smithfield Foods" or the "Company" are to Smithfield Foods, Inc.
together with all of its subsidiaries, unless the context otherwise indicates.
The Company believes it is the largest combined pork slaughterer and
further processor of pork in the United States. Smithfield Foods produces a wide
variety of fresh pork and processed meat products which it markets domestically
and internationally to over 25 foreign markets, including Japan, Russia and
Mexico. Since 1975, when current management assumed control of the Company,
Smithfield Foods has expanded its production capacity and markets through a
combination of strong internal growth and selective acquisitions of regional and
multi-regional companies with well-recognized brand identities. The Company's
brands include Smithfield Premium, Smithfield Lean Generation Pork, Gwaltney,
John Morrell, Patrick Cudahy and Lykes.
To complement its hog slaughtering and further processing operations,
the Company has vertically integrated into hog production through Brown's and
Smithfield-Carroll's. These hog production operations collectively accounted for
10.8% of the hogs the Company slaughtered in fiscal 1998. In addition, the
Company obtains a substantial part of its hogs under market-indexed, multi-year
agreements with several of the nation's largest suppliers of high quality hogs,
strategically located in proximity to the Company's hog slaughtering and further
processing operations in North Carolina and Virginia. These suppliers accounted
for 42.9% of the hogs the Company slaughtered in fiscal 1998.
The Company's fresh pork and processed meats are available nationwide.
In a number of markets, the Company's brands are among the leaders in selected
product categories. In recent years, as consumers have become more health
conscious, the Company has broadened its product line to include leaner fresh
pork products as well as fat-free, lower fat and lower salt processed meats.
Management believes that leaner pork products combined with the pork industry's
efforts to heighten public awareness of pork as an attractive protein source
have led to increased consumer demand for pork products. In order to capture the
growing market for lower fat products, the Company has developed, and is
marketing on a national basis, a line of extremely lean, premium fresh pork
products under the Smithfield Lean Generation Pork brand to selected retail
chains and institutional foodservice customers.
Business Strategy
Since 1975, when current management assumed control, Smithfield Foods
has expanded both its production capacity and its markets through a combination
of strong internal growth and the acquisition of regional and multi-regional
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companies with well-recognized brand identities. In fiscal 1982, the Company
acquired Gwaltney, then Smithfield Packing's principal Mid-Atlantic competitor.
This acquisition doubled the Company's sales and slaughter capacity and added
several popular lines of branded products along with a highly efficient hot dog
and lunch meats production facility. The proximity of Gwaltney to Smithfield
Packing allowed for synergies and cost savings in manufacturing, purchasing,
engineering and transportation.
This combination set the stage for a series of acquisitions of smaller
regional processors with widely-recognized brands. In fiscal 1985, the Company
acquired Patrick Cudahy, which added a prominent line of dry sausage products to
the Company's existing line of processed meats. In fiscal 1986, the Company
acquired Esskay, Inc., a firm with a broad line of deli products having
substantial brand loyalty in the Baltimore-Washington, D.C. metropolitan area.
In fiscal 1991, the Company acquired the Mash's brand name and a ham processing
plant in Landover, Maryland. In fiscal 1993, the Company acquired the Valleydale
brand name and a bacon processing plant in Salem, Virginia.
In December 1995, the Company acquired John Morrell, a major Midwestern
pork processor with primary markets in the Midwest, Northeast and Western United
States. This acquisition changed the Company's character from a large
multi-regional pork processor to one with national distribution. It also doubled
the Company's sales and slaughter capacity, added several popular lines of
branded processed meat products along with four efficient processing facilities
and more than doubled the Company's international sales. The Company believes
that John Morrell's strength in smoked sausage, hot dogs, lunch meats, bacon and
smoked hams complements the strong smoked meats, hot dog and bacon business of
the Company's Eastern operations. The acquisition of John Morrell also presented
substantial opportunities for cost savings in the areas of processing,
marketing, purchasing and distribution.
In November 1996, the Company acquired the assets and businesses of
Lykes. Lykes is a pork processor with primary markets in the South and
Southeast. Lykes produces branded processed meats, including bacon, hot dogs,
and breakfast and dinner sausages, under the Lykes and Sunnyland brands.
The Company's business is based around four strategic initiatives: (i)
vertical integration into hog production through Company-owned hog production
operations and long-term partnerships and alliances with large and efficient hog
producers; (ii) use of genetics which produce hogs that are among the leanest
commercially available to enable the Company to market highly differentiated
pork products; (iii) continued growth through strategic acquisitions; and (iv) a
heightened emphasis on expansion into international markets.
As a complement to the Company's hog processing operations, the Company
has vertically integrated into highly efficient hog production through Brown's
and Smithfield-Carroll's. In addition, the Company is supplementing the hogs it
obtains from these hog production operations with market-indexed, multi-year
agreements with several of the nation's largest suppliers of high quality hogs,
strategically located in proximity to the Company's hog slaughtering and further
processing operations in North Carolina and Virginia, including Carroll's Foods,
Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc.
In May 1991, Smithfield-Carroll's acquired from National Pig
Development Company ("NPD"), a British firm, the exclusive United States
franchise rights for genetic lines of specialized breeding stock.
Smithfield-Carroll's has sub-licensed these franchise rights to certain of the
Company's strategic partners. The hogs produced by these genetic lines are among
the leanest hogs commercially available, and enable the Company to market highly
differentiated pork products. Management believes that the leanness and
increased meat yields of these hogs will, over time, improve the Company's
profitability with respect to both fresh pork and processed meat. In fiscal
1998, the Company processed 2.5 million NPD hogs and expects to increase that
number substantially in future years.
Revenues by Source
The Company's sales are in one industry segment, meat processing. The
following table shows for the fiscal periods indicated the percentages of the
Company's revenues derived from fresh pork, processed meats, and other products.
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Fresh Pork................. 56% 59% 59% 51% 48%
Processed Meats............ 40% 37% 37% 45% 49%
Other Products............. 4% 4% 4% 4% 3%
--- --- ---- ---- ----
100% 100% 100% 100% 100%
=== === === === ===
The increase in percentage of revenues derived from fresh pork since
fiscal 1994 resulted principally from an increase in the number of hogs
slaughtered at its Bladen County, North Carolina plant. The meat industry is
generally characterized by narrow margins; however, profit margins on processed
meats are greater than profit margins on fresh pork and on other products.
Fresh Pork Products
The Company is one of the largest fresh pork processors in the United
States. The Company slaughters hogs at five of its plants (three in the
Southeast and two in the Midwest),with a current aggregate slaughter capacity of
78,300 hogs per day. The Company owns a fourth plant in the Southeast not
currently in operation, which has the capacity to slaughter an additional 6,500
hogs per day. A substantial portion of the Company's fresh pork is sold to
retail customers as unprocessed, trimmed cuts such as loins (including roasts
and chops), butts, picnics and ribs. The Company also sells hams, bellies and
trimmings to other further processors. The Company is putting greater emphasis
on the sale of value-added, higher margin fresh pork products, such as boneless
loins, hams, butts and picnics. In addition, the Company provides its own
processing operations with raw material of much higher quality and freshness
than that generally available through open market purchases.
The Company is marketing an extensive product line of NPD fresh pork
cuts (including boneless loins, shoulder cuts, chops, ribs and processed and
cubed pork) under the Smithfield Lean Generation Pork brand to selected retail
chains and institutional foodservice customers. Smithfield Packing has also
developed a case-ready pork program designed to supply supermarket chains with
pre-packaged, weighed, labeled and priced fresh pork, ready for immediate sale
to the consumer. Management believes that these initiatives, over time, will
result in greater brand identification and higher margins for the Company's
fresh pork products.
Processed Meat Products
The Company manufactures a wide variety of processed meats, including
smoked and boiled hams, bacon, sausage, hot dogs (pork, beef and chicken), deli
and lunch meats and specialty products such as pepperoni and dry salami. The
Company markets its processed meat products under labels that include, among
others, Smithfield, Smithfield Premium, Smithfield Lean Generation Pork,
Gwaltney, Patrick Cudahy and John Morrell, as well as Dinner Bell, Esskay,
Jamestown, Kretschmar, Luter's, Lykes, Peyton's, Tobin's First Prize and
Valleydale. The Company also sells a substantial quantity of processed meats as
private label products. The Company believes it is one of the largest producers
of smoked hams and picnics in the United States.
In response to growing consumer preference for more nutritious and
healthy meats, the Company has for several years emphasized production of more
closely-trimmed, leaner and lower-salt processed meats, such as 40
percent-lower-fat bacon. The Company markets a lower-fat line of value-priced
lunch meats, smoked sausage and hot dogs, as well as fat-free hot dogs and
fat-free deli hams.
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Raw Materials
The Company's primary raw material is live hogs. Historically, hog
prices have been subject to substantial fluctuations. In addition, hog prices
tend to rise seasonally as hog supplies decrease during the hot summer months
and tend to decline as supplies increase during the fall. This is due to lower
farrowing performance during the winter months and slower animal growth rates
during the hot summer months. Hog supplies, and consequently prices, are also
affected by factors such as corn and soybean prices, weather and interest rates.
The Company produces its own hogs through Brown's and
Smithfield-Carroll's and purchases hogs from several of the nation's largest hog
producers strategically located in proximity to the Company's hog slaughtering
and further processing operations in North Carolina and Virginia, such as
Carroll's Foods, Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and
Prestage Farms, Inc., as well as from other independent hog producers and
dealers located in the East, Southeast and Midwest. The Company obtained 10.8%
of the hogs it processed in fiscal 1998 from Brown's and Smithfield-Carroll's.
The Company's raw material costs fall when hog production at Brown's and
Smithfield-Carroll's is profitable and conversely rise when such production is
unprofitable. The profitability of hog production is directly related to the
market price of live hogs and the cost of corn. Hog producers such as Brown's
and Smithfield-Carroll's generate higher profits when hog prices are high and
corn prices are low, and lower profits (or losses) when hog prices are low and
corn prices are high. Management believes that hog production at Brown's and
Smithfield-Carroll's furthers the Company's strategic initiative of vertical
integration and reduces the Company's exposure to fluctuations in profitability
historically experienced by the pork processing industry. The Company has also
established multi-year agreements with Carroll's Foods, Inc., Maxwell Foods,
Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc. which provide the
Company with a stable supply of high-quality hogs at market-indexed prices.
These producers supplied 42.9% of the hogs processed by the Company in fiscal
1998.
The Company purchases its hogs on a daily basis at its Southeastern and
Midwestern slaughter plants; at Company-owned buying stations in three
Southeastern and five Midwestern states; from certain Canadian sources; and
through certain exclusive dealer-operated buying stations in the Midwest. The
Company also purchases fresh pork from other meat processors to supplement its
processing requirements, and raw beef, poultry and other meat products to add to
its sausage, hot dogs and lunch meats. Such meat products and other materials
and supplies, including seasonings, smoking and curing agents, sausage casings
and packaging materials are readily available from numerous sources at
competitive prices.
Customers and Marketing
The Company has significant market presence nationwide, and strong
market positions in the Mid-Atlantic, Southeast, South and Midwest. The
Company's fundamental marketing strategy is to sell large quantities of
value-priced processed meat products as well as fresh pork to national and
regional supermarket chains, wholesale distributors and the foodservice industry
(fast food, restaurant and hotel chains, hospitals and other institutional
customers) and export markets. Management believes that this marketing approach
reaches the largest number of value-conscious consumers without requiring large
advertising and promotional campaigns. The Company uses both in-house
salespersons as well as independent commission brokers to sell its products. In
fiscal 1998, the Company sold its products to more than 3,500 customers, none of
whom accounted for as much as 10% of the Company's revenues. The Company has no
significant or seasonally variable backlog because most customers prefer to
order products shortly before shipment, and therefore, do not enter into formal
long-term contracts. Management believes that its registered trademarks have
been important to the success of its branded processed meat products.
The Company in recent years has placed major emphasis on growing and
expanding its international sales. In fiscal 1998, international sales comprised
approximately 6% of the Company's total dollar sales. The Company provides the
Japanese market with a line of unique branded, as well as other chilled and
frozen unbranded, fresh pork products. In connection with export sales to Japan,
the Company maintains a distributorship arrangement with Sumitomo Corporation of
America. To serve other international markets, the Company may also enter into
similar distribution and sales arrangements, as well as make international
acquisitions or establish strategic joint ventures not only for product sales
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but also for hog production and pork processing. The Company also had export
sales to Russia, Mexico and to more than two dozen other foreign countries in
fiscal 1998. The Company expects continued growth in its international sales for
the foreseeable future. International sales are subject to factors beyond the
Company's control, such as tariffs, exchange rate fluctuations and changes in
governmental policies. The Company conducts all of its export sales in U.S.
dollars and therefore bears no currency translation risk.
The Company's processed meats business is somewhat seasonal in that,
traditionally, the heavier periods of sales for hams are the holiday seasons
such as Thanksgiving, Christmas and Easter, and the heavier periods of sales of
smoked sausage, hot dogs and lunch meats are the summer months. The Company
typically builds substantial inventories of hams in anticipation of its seasonal
holiday business.
The Company uses recognized price risk management and hedging
techniques to enhance sales and to reduce the effect of adverse price changes on
the Company's profitability. The Company's price risk management and hedging
activities currently are utilized in the areas of forward sales, hog production
margin management, procurement of raw materials (ham and bacon) for seasonal
demand peaks, inventory hedging, hog contracting and truck fleet fuel purchases.
Trademarks
The Company owns and uses numerous marks, which are registered
trademarks of the Company or are otherwise subject to protection under
applicable intellectual property laws. The Company considers these marks and the
accompanying goodwill and customer recognition valuable and material to its
business.
Distribution
The Company uses a private fleet of leased tractors and trailers, as
well as independent common carriers, to distribute both fresh pork and processed
meats to its customers, as well as to move raw material between plants for
further processing. The Company coordinates deliveries and uses backhauling to
reduce overall transportation costs. The Company distributes its products
directly from certain of its plants and from leased distribution centers located
in Connecticut, Indiana, Missouri, Kansas, Texas and California. In addition,
during fiscal 1998, the Company completed a distribution center adjacent to its
plant in Sioux Falls, South Dakota.
Competition
The protein industry generally, and the pork processing industry in
particular, are highly competitive. The Company's products compete with a large
number of other protein sources, including beef, chicken, turkey and seafood,
but the Company's principal competition comes from other pork processors.
Management believes that the principal competitive factors in the pork
processing industry are price, quality, product distribution and brand loyalty.
Some of the Company's competitors are larger, have correspondingly greater
financial and other resources and enjoy wider recognition for their branded
products. Some of these competitors are also more diverse than the Company. To
the extent that their other operations generate profits, such companies may be
able to subsidize their pork processing operations for a time.
Employees
As of May 3, 1998, the Company has approximately 19,500 employees,
approximately 10,800 of whom are covered by collective bargaining agreements
expiring between December 31, 1998 and May 5, 2002. The Company believes that
its relationship with its employees is good.
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Regulation
Regulation Generally. Like other participants in the meat processing
industry, the Company is subject to various laws and regulations administered by
United States, state and other government entities, including the Environmental
Protection Agency ("EPA") and corresponding state agencies such as the Virginia
State Water Control Board ("VSWCB"), the Virginia Department of Environmental
Quality ("VDEQ"), the North Carolina Department of Environment and Natural
Resources ("DENR"), the Iowa Department of Natural Resources and the South
Dakota Department of Environment Natural Resources, as well as the United States
Department of Agriculture, the United States Food and Drug Administration and
the United States Occupational Safety and Health Administration. Management
believes that Smithfield Foods presently is in compliance with all such laws and
regulations in all material respects, and that continued compliance with these
standards will not have a material adverse effect on the Company's financial
position or results of operations. Furthermore, with respect to the litigation
and investigations discussed below, the Company believes that the ultimate
resolution of these suits will not have a material adverse effect on the
Company's financial position or annual results of operations.
Permit Violations At Smithfield Packing And Gwaltney Plants;
Administrative Consent Orders; Connection To HRSD System. The National Pollutant
Discharge Elimination System permit (the "discharge permit") for the Smithfield
Packing and Gwaltney plants in Smithfield, Virginia, as modified by the VSWCB in
1990, imposed more stringent effluent limitations on phosphorus and two species
of nitrogen (ammonia and Total Kjeldahl Nitrogen) than the wastewater treatment
facilities at those plants were designed to meet. To achieve compliance with
these new limitations, the Company agreed to discontinue wastewater discharges
into the Pagan River and connect its wastewater treatment facilities to the
regional sewage collection and treatment system operated by the Hampton Roads
Sanitation District ("HRSD"), when available. This agreement was embodied in an
administrative consent order issued by the VSWCB in 1991 (the "1991 Order"). The
VSWCB issued a second consent order (the "1994 Order") which concerned
compliance with other discharge permit terms pending connection to the HRSD
system.
The Company connected its Gwaltney and Smithfield Packing wastewater
treatment facilities to the HRSD system in June 1996 and July 1997,
respectively, which were the earliest dates that the HRSD could serve those
individual plants. To prepare for making these connections, the Company made
more than $2.7 million in capital expenditures to upgrade its existing
wastewater treatment facilities. The Company must continue to operate these
facilities to produce a wastewater suitable for treatment in the HRSD system
and, in addition, pay the HRSD approximately $1.8 million per year for
wastewater treatment. The Company will account for these wastewater treatment
costs as current period charges in the years in which such costs are incurred.
These wastewater treatment facilities no longer make any discharges
that are subject to regulation under the discharge permit. However, before being
connected to the HRSD system, these facilities exceeded applicable discharge
permit and consent orders limitations as discussed below.
Record-Keeping Violations. Under its discharge permit, the Company
regularly tested wastewater to determine compliance with applicable effluent
limitations. Federal and state laws require that records of such tests be
maintained for three years. Failure to maintain these records may result in the
imposition of civil penalties, and 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 from 1991 through early 1994 could
not be found. Despite a careful search, most of these records were never found
and are believed to have been destroyed. The employee responsible for the
supervision of the tests and the maintenance of the test records was replaced
and subsequently terminated. In October 1996, that former employee entered a
guilty plea and was convicted in the United States District Court for the
Eastern District of Virginia of 23 violations of the United States Clean Water
Act, including records destruction and making false reports. Eight of these
violations related to his duties as the Company's employee, while 15 violations
were committed during his outside consulting activities for public and private
entities unrelated to Smithfield Foods. Beginning in January 1998, several
Company employees responsible for wastewater treatment were subpoenaed and
testified before a federal grand jury in Norfolk, Virginia. Subsequently, the
grand jury issued subpoenas requiring production of various environmental
materials relating to the Company's Smithfield, Virginia wastewater and further
testimony by Company employees. 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 charges will not be brought.
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EPA Suit. On August 8, 1997, in United States of America v. Smithfield
Foods, Inc. et al. (Civil Case No. 2:96:cv1204), a federal judge for the United
States District Court for the Eastern District of Virginia imposed a $12.6
million civil penalty on the Company and its Smithfield Packing and Gwaltney
subsidiaries. The Company recognized a nonrecurring charge of $12.6 million
during the first quarter of fiscal 1998 with respect to this penalty. This suit
was brought by the EPA for violations of the federal Clean Water Act before the
Company's wastewater treatment facilities were connected to the HRSD system. The
court found 6,982 days of violation. The Company asserted in its defense that
approximately 5,500 of these violations were excused by the 1991 and 1994
Orders, which were issued by VSWCB in its role as primary enforcement authority
under the federal-state Clean Water Act program. The Court held that the EPA was
not bound by its awareness of, and failure to object to, those orders. The
Company has appealed this and other aspects of the court's decision to the
United States Court of Appeals for the Fourth Circuit in Richmond, Virginia.
There can be no assurance as to the outcome of such appeal or any subsequent
proceedings regarding this matter.
Suit by Commonwealth Of Virginia. On August 30, 1996, VDEQ filed a
civil suit under the laws of the Commonwealth of Virginia against Smithfield
Foods in the Circuit Court of the County of Isle of Wight, Virginia. This suit
alleged a total of 22,517 discharge permit violations at the Gwaltney and
Smithfield Packing facilities during the period from 1986 until such facilities
were connected to the HRSD system in 1996 and 1997, respectively. The difference
in the number of total violations charged by the EPA and the Commonwealth of
Virginia is mainly attributable to their different methods of counting
violations. The same categories of violations were involved in both suits,
except that the Commonwealth of Virginia did not charge the Company with any
permit violation excused by the 1991 and 1994 Orders. The Commonwealth's total
was larger in part because the Commonwealth counted every missing record as a
separate violation, and the EPA counted the number of days records were missing.
In addition, the Commonwealth's suit alleged a separate violation for each
failure to test chlorine levels every hour, failure to make certain required
reports, and failure on certain days to properly staff Smithfield's facilities.
While each violation is subject to a maximum penalty of $25,000, the
Commonwealth's civil penalties policy is designed to recapture any economic
benefit which accrued to the violator as a result of the noncompliance, and to
impose a surcharge penalty for having committed such violations. In addition,
the policy would 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, the Commonwealth
contended that the Company should pay a total of $6 million for the violations
alleged, which included an alleged economic benefit of $4 million. In the middle
of the trial, however, the Commonwealth voluntarily dismissed its suit. One week
later, the Commonwealth 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 the
Commonwealth's charges go to trial again, the Company will present evidence to
show and argue that, among other things, no economic benefit accrued to
Smithfield Foods 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.
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ITEM 2. PROPERTIES
The following table summarizes information concerning the principal
plants and other materially important physical properties of the Company:
<TABLE>
<CAPTION>
APPROXIMATE
LAND AREA FLOOR SPACE
LOCATION OPERATION (ACRES) (SQ. FT.)
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<S> <C>
Smithfield Packing Plant No. 1* Slaughtering and cutting hogs; 25.5 457,000
501 North Church Street manufacture of bacon products,
Smithfield, Virginia smoked meats, and dry salt meats;
production of hams and picnics
Smithfield Packing Plant No. 2 Production of bone-in and boneless 20.0 218,000
2501 West Vernon Avenue cooked and smoked ham and other
Kinston, North Carolina smoked meat products
Smithfield Packing Plant No. 3 Production of bone-in smoked ham 7.8 136,000
5801 Columbia Park Drive and other smoked meat products
Landover, Maryland
Smithfield Packing Plant No. 4* Slaughtering and cutting hogs; 860.0 966,000
Carolina Food Processors production of boneless hams and loins
Division (Bladen County)
Route #87
Tarheel, North Carolina
Gwaltney Plant No. 1* Slaughtering and cutting hogs; 56.4 556,000
601 North Church Street production of boneless loins, bacon,
Smithfield, Virginia sausage, bone-in and boneless cooked
and smoked hams and picnics
Gwaltney Plant No. 2 Production of hot dogs, lunch meats 13.1 200,000
3515 Airline Boulevard and sausage products
Portsmouth, Virginia
Gwaltney Plant No. 3 Manufacture of bacon, smoked 11.0 152,000
1013 Iowa Street sausage and boneless cooked hams
Salem, Virginia
John Morrell Plant No. 1* Slaughtering and cutting hogs and 88.0 2,350,000
1400 N. Weber Avenue lambs; production of boneless loins,
Sioux Falls, South Dakota bacon, bot dogs, lunch meats, smoked
and canned hams, and packaged lard
John Morrell Plant No. 2 Slaughtering and cutting hogs; 22.0 243,000
1200 Bluff Road production of boneless hams, loins,
Sioux City, Iowa butts and picnics
John Morrell Plant No. 3 Production of hot dogs, lunch meats, 21.0 177,000
801 East Kemper Road smoked sausage and smoked hams
Springdale, Ohio
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
LAND AREA FLOOR SPACE
LOCATION OPERATION (ACRES) (SQ. FT.)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
John Morrell Plant No. 4 Production of bacon and smoked hams 60.0 150,000
South 281 Highway
Great Bend, Kansas
Lykes Meat Group Plant No. 1 Production of hot dogs, lunch meats 55.0 206,763
4811 Lykes Road and sausage products
Plant City, Florida
Lykes Meat Group Plant No. 2 Production of hot dogs, lunch meats, 78.0 312,466
603 Cassidy Road cured meats, bacon, boneless cooked
Thomasville, Georgia and smoked ham and other smoked
bone-in meat products
Patrick Cudahy Plant Manufacture of bacon, dry sausage, 60.0 1,090,000
3500 E. Barnard Avenue boneless cooked hams and refinery
Cudahy, Wisconsin products
</TABLE>
- ------------------------
* Pledged as collateral under various loan agreements.
The Company, through Brown's, owns and leases hog production facilities
in North Carolina and South Carolina, and through Smithfield-Carroll's, owns hog
production facilities in North Carolina and Virginia.
The Company operates hog buying stations in North Carolina, South
Carolina and Virginia which have facilities for purchasing and loading hogs for
shipment to the Company's plants in Smithfield, Virginia and Bladen County,
North Carolina, and hog buying stations in Iowa, Kansas, Minnesota, Nebraska and
South Dakota, which have facilities for purchasing and loading hogs for shipment
to the Company's plants in Sioux City, Iowa and Sioux Falls, South Dakota.
ITEM 3. LEGAL PROCEEDINGS
Smithfield Foods and its subsidiaries and affiliates are parties in
various lawsuits arising in the ordinary course of business, excluding certain
matters discussed under "Business -- Regulation" above. In the opinion of
management, any ultimate liability with respect to these matters will not have a
material adverse effect on the Company's financial position or results of
operations. For a discussion of certain other regulatory and environmental
matters, see "Item 1. Business -- Regulation" above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
- 11 -
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name and age, position with the
Company and business experience during the past five years of each of the
executive officers of the Company. The Board of Directors elects executive
officers to hold office until the next annual meeting of the Board or Directors
or until their successors are elected, or until their resignation or removal.
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE
NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Joseph W. Luter, III (59) Chairman of the Board and Mr. Luter has served as Chairman
Chief Executive Officer of the of the Board and Chief Executive
Company Officer since 1975. Prior to May
1995, he also served as President
of the Company.
Lewis R. Little (54) President and Chief Operating Mr. Little was elected President
Officer of the Company, Lykes and Chief Operating Officer of the
and Smithfield Packing Company and Smithfield Packing
in November 1996 and President
and Chief Operating Officer of
Lykes in June 1998. From May
1993 until November 1996, he was
President and Chief Operating
Officer of Gwaltney. Prior to May
1993, Mr. Little served as
Executive Vice President of
Gwaltney.
Timothy A. Seely (48) President and Chief Operating Mr. Seely was elected President
Officer of Gwaltney and Chief Operating Officer of
Gwaltney in November 1996.
Prior to that time, he was Vice
President, Sales and Marketing,
Fresh Meats, of Gwaltney.
Roger R. Kapella (56) President and Chief Operating Mr. Kapella has served as
Officer of Patrick Cudahy President and Chief Operating
Officer of Patrick Cudahy since
1986.
Joseph B. Sebring (51) President and Chief Operating Mr. Sebring has served as
Officer of John Morrell President and Chief Operating
Officer of John Morrell since May
1994. Between 1992 and May
1994, he served as President and
Chief Executive Officer of Indiana
Packers Company. Prior to 1992,
Mr. Sebring was Executive Vice
President of Fresh Mark, Inc.
</TABLE>
- 12 -
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE
NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
C. Larry Pope (43) Vice President, Finance of the Mr. Pope was elected Vice
Company President, Finance of the Company
in July 1998. He joined the Company
as Controller in 1980 and served
as Vice President and Controller
from August 1995 to July 1998.
Aaron D. Trub (63) Vice President, Chief Financial Mr. Trub has served as Vice
Officer and Secretary of the President and Secretary of the
Company Company since 1978. Prior to
July 1998, he also held the position
of Treasurer. In July 1998, he was
elected Chief Financial Officer of
the Company.
Richard J. M. Poulson (59) Vice President and Senior Advisor Mr. Poulson joined the Company
to the Chairman as Vice President and Senior
Advisor to the Chairman in July
1998. Between 1994 and 1998, he
was a senior managing director of
the Appian Group, a private
merchant bank with offices in
Washington, D.C. and Paris.
Prior to 1994, Mr. Poulson was a
senior corporate partner with the
law firm of Hogan & Hartson, in
Washington, D.C. and London.
</TABLE>
- 13 -
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Stock of the Company is traded in the national
over-the-counter market and is authorized for quotation on The Nasdaq National
Market under the symbol "SFDS."
The following table sets forth, for the fiscal periods indicated, the
highest and lowest sales prices of the Common Stock on The Nasdaq National
Market.
Range of Sales Prices
-------------------------
High Low
-------------------------
Fiscal year ended April 27, 1997
First quarter ................................... $15.00 $11.31
Second quarter .................................. 16.25 11.62
Third quarter ................................... 19.31 14.25
Fourth quarter .................................. 24.75 16.19
Fiscal year ended May 3, 1998
First quarter.................................... 31.12 22.00
Second quarter................................... 33.87 22.75
Third quarter.................................... 35.62 24.37
Fourth quarter................................... 36.37 28.62
Holders
As of July 10, 1998, there were 1,143 record holders of the Common
Stock.
Dividends
The Company has never paid a cash dividend on its Common Stock and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. In addition, the terms of certain of the Company's debt agreements
prohibit the payment of cash dividends on the Common Stock. The payment of cash
dividends, if any, will be made only from assets legally available for that
purpose, and will depend on the Company's financial condition, results of
operations, current and anticipated capital requirements, restrictions under
then existing debt instruments and other factors deemed relevant by the board of
directors.
- 14 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the fiscal
years indicated were derived from the Company's audited consolidated financial
statements. The information should be read in conjunction with the Company's
consolidated financial statements (including the notes thereto) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in, or incorporated by reference into, this
report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------------
May 3, April 27, April 28, April 30, May 1,
1998 1997 1996 1995 1994
---------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C>
INCOME STATEMENT DATA:
Sales........................................ $ 3,867,442 $ 3,870,611 $ 2,383,893 $ 1,526,518 $ 1,403,485
Cost of sales ............................... 3,479,828 3,549,673 2,203,626 1,380,586 1,287,880
--------------------------------------------------------------------------
Gross profit ................................ 387,614 320,938 180,267 145,932 115,605
Selling, general and administrative
expenses .................................. 219,861 191,225 103,095 61,723 50,738
Depreciation expense......................... 42,300 35,825 25,979 19,717 21,327
Interest expense............................. 31,891 26,211 20,942 14,054 11,605
Nonrecurring charge.......................... 12,600 - - - -
---------------------------------------------------------------------------
Income from continuing operations before
income taxes and change in accounting
for income taxes.......................... 80,962 67,677 30,251 50,438 31,935
Income taxes................................. 27,562 22,740 10,465 18,523 12,616
---------------------------------------------------------------------------
Income from continuing operations
before change in accounting for
income taxes.............................. 53,400 44,937 19,786 31,915 19,319
Income (loss) from discontinued operations... - - (3,900) (4,075) 383
---------------------------------------------------------------------------
Net income................................ $ 53,400 $ 44,937 $ 15,886 $ 27,840 $ 19,702
===========================================================================
DILUTED INCOME (LOSS) PER SHARE:
Continuing operations before cumulative
effect of change in accounting for
income taxes.............................. $ 1.34 $ 1.17 $ 53 $ 92 $ .55
Discontinued operations...................... - - (.11) (.12) .01
Cumulative effect of change in
accounting for income taxes............... - - - - -
-------------------------------------------------------------------------
Net income................................... $ 1.34 $ 1.17 $ .42 $ .80 $ .56
=========================================================================
Average diluted shares outstanding........... 39,732 38,558 35,000 33,923 33,697
BALANCE SHEET DATA:
Working capital.............................. $ 259,188 $ 164,312 $ 88,026 $ 60,911 $ 81,529
Total assets................................. 1,083,645 995,254 857,619 550,225 452,279
Long term debt and capital lease
obligations............................... 407,272 288,486 188,618 155,047 118,942
Shareholders' equity......................... 361,010 307,486 242,516 184,015 154,950
OPERATING DATA:
Fresh pork sales (pounds).................... 2,539,221 2,320,477 1,635,300 955,290 820,203
Processed meats sales (pounds)............... 1,370,232 1,218,835 839,341 774,615 661,783
Total hogs purchased......................... 17,952 16,869 12,211 8,678 7,414
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- 15 -
<PAGE>
Management's discussion and analysis set forth below should be read in
conjunction with the Company's consolidated financial statements (including the
notes thereto) appearing elsewhere in this Form 10-K.
Introduction
The Company is comprised of a Meat Processing Group ("MPG") and a Hog
Production Group ("HPG"). The MPG consists of five pork processing subsidiaries,
Gwaltney, John Morrell, Lykes, Patrick Cudahy, and Smithfield Packing. The HPG
consists of Brown's and the Company's interests in Smithfield-Carroll's and
Circle Four.
Acquisitions
The Company has expanded through selective acquisitions of regional and
multi-regional meat processing companies with well-recognized brand identities.
The Company acquired John Morrell in December 1995 and Lykes in November 1996.
The Company's fiscal 1998 operating results include those of John Morrell and
Lykes for the full fiscal year. The Company's fiscal 1997 operating results
include those of John Morrell for the full year and those of Lykes for 25 weeks.
The Company's fiscal 1996 operating results include those of John Morrell for 18
weeks.
In December 1997, the Company reached an irrevocable agreement with
members of the Schneider family, the controlling shareholders, to purchase all
of their shares in Schneider Corporation ("Schneider") as part of an offer by
the Company to acquire all of the shares of Schneider. Schneider produces and
markets fresh pork and a full line of processed meats in Canada and had revenues
in its fiscal year ended October 1997 of US$512.7 million. A lawsuit contesting
the acquisition was filed by a Canadian competitor and other Schneider
shareholders. The court dismissed these claims, which have since been appealed.
If the Company is successful in the appeals process, management anticipates that
the acquisition will be completed in the second quarter of fiscal 1999.
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 $1.9
million and $2.2 million, 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 $59.6 million and $44.3 million,
respectively. As of May 3, 1998 and April 27, 1997, the Company had deposits
with brokers for outstanding futures contracts of $10.9 million and $3.5
million, 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 $2.1 million.
- 16 -
<PAGE>
Operations
Fiscal 1998 represented 53 weeks of operations compared to fiscal 1997
and 1996, each of which represented 52 weeks of operations. Accordingly, sales
and all expense categories in fiscal 1998 reflect the impact of an additional
week of operations compared to fiscal 1997.
Fiscal 1998 Compared to Fiscal 1997.
Sales in fiscal 1998 were flat compared to fiscal 1997. Sales reflected
a 9.4% increase in sales tonnage offset by a 9.0% decrease in unit sales prices,
reflecting the impact of lower live hog costs. The increase in sales tonnage
reflected a 9.4% increase in fresh pork tonnage, a 12.4% increase in processed
meats tonnage and a 4.5% increase in the tonnage of other products. The increase
in fresh pork tonnage was primarily related to an increase in the number of hogs
slaughtered at the Company's Sioux City, Iowa and Bladen County, North Carolina
plants. The increase in processed meats tonnage was primarily related to Lykes.
Cost of sales decreased $69.8 million, or 2.0%, in fiscal 1998,
reflecting the increased sales tonnage offset by a 17.3% decrease in live hog
costs.
Gross profit increased $66.7 million, or 20.8%, in fiscal 1998 compared
to fiscal 1997. The increase in gross profit reflected sharply improved margins
on higher sales of both fresh pork (56.1% of dollar sales) and processed meats
(40.2% of dollar sales).
Selling, general and administrative expenses increased $28.6 million,
or 15.0%, in fiscal 1998. This increase was primarily due to Lykes and to higher
selling, marketing and product promotion costs associated with intensified
efforts to market branded fresh pork and processed meats.
Depreciation expense increased $6.5 million, or 18.1%, in fiscal 1998.
The increase was primarily due to completed capital projects at several of the
Company's processing plants and to Lykes.
Interest expense increased $5.7 million, or 21.7%, in fiscal 1998,
reflecting the higher cost of long-term debt placed during the past two fiscal
years and higher average borrowing costs related to higher levels of inventory
and accounts receivable in the first half of fiscal 1998.
A nonrecurring charge of $12.6 million in fiscal 1998 reflected the
imposition of civil penalties against the Company by the U.S. District Court for
the Eastern District of Virginia in a civil action brought by the U.S.
Environmental Protection Agency. The Company has appealed the Court's judgment
to the U.S. Court of Appeals for the Fourth Circuit.
Income before income taxes in fiscal 1998 was adversely affected by a
loss of $1.2 million at the HPG compared to a $20.7 million profit in fiscal
1997.
The effective income tax rate for fiscal 1998 increased to 34.0% from
33.6% in fiscal 1997, reflecting the impact of the $12.6 million nondeductible
nonrecurring charge offset by a lower tax rate on increased foreign sales,
benefits related to certain insurance contracts, and employment-related tax
credits. Excluding the nonrecurring charge, the effective income tax for fiscal
1998 decreased to 29.5% from 33.6% in fiscal 1997. The Company had no valuation
allowance related to income tax assets as of May 3, 1998, and there was no
change in the valuation allowance during fiscal 1998.
Excluding the nonrecurring charge, net income was $66.0 million, or
$1.66 per diluted share, in fiscal 1998. Including the nonrecurring charge, net
income increased to $53.4 million in fiscal 1998, or $1.34 per diluted share,
from $44.9 million, or $1.17 per diluted share, in fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996.
- 17 -
<PAGE>
Sales in fiscal 1997 increased $1.49 billion, or 62.4%, from fiscal
1996. This increase was due to the inclusion of the sales of John Morrell and
Lykes, significant increases in unit sales prices for both fresh pork and
processed meats, and increased sales of fresh pork related to an increase in the
number of hogs slaughtered at the Company's Bladen County, North Carolina plant.
The increase in unit sales prices reflected the pass-through of higher raw
material costs due to an 18.8% increase in live hog costs. The increase in sales
reflected a 41.9% increase in fresh pork tonnage and a 45.2% increase in
processed meats tonnage, primarily related to John Morrell and Lykes.
Cost of sales increased $1.35 billion, or 61.1%, in fiscal 1997,
reflecting the increased sales tonnage and increased live hog costs.
Gross profit increased $140.7 million, or 78.0%, in fiscal 1997
compared to fiscal 1996, reflecting the inclusion of the operations of John
Morrell and Lykes and increased overall margins at the Company's other operating
subsidiaries. The increase in gross profit reflected significantly improved
margins on sales of processed meats (37.3% of dollar sales) that were somewhat
offset by lower margins on sales of fresh pork (58.9% of dollar sales). Fresh
pork margins were adversely impacted by relatively high hog costs due to a
shortage of live hogs, excess industry slaughter capacity and strong competition
at the retail level from comparatively lower-priced beef and chicken.
Selling, general and administrative expenses increased $88.1 million,
or 85.5%, in fiscal 1997. This increase was primarily due to John Morrell and
Lykes.
Depreciation expense increased $9.8 million, or 37.9%, in fiscal 1997.
The increase was primarily due to John Morrell and Lykes.
Interest expense increased $5.3 million, or 25.2%, in fiscal 1997,
reflecting borrowings to finance the acquisition of Lykes, increased carrying
costs on higher levels of inventories and accounts receivable related to higher
live hog costs and the higher cost of long-term debt placed during the fiscal
year.
Income before income taxes was favorably affected by a $20.7 million
profit at the HPG in fiscal 1997 compared to a $10.8 million profit in fiscal
1996.
The effective income tax rate in fiscal 1997 decreased to 33.6% from
34.6% in fiscal 1996, reflecting a lower tax rate on increased foreign sales and
a reduction in the effective rate of state income taxes. The Company had no
valuation allowance related to income tax assets as of April 27, 1997, and there
was no change in the valuation allowance during fiscal 1997.
Income from continuing operations increased $25.1 million in fiscal
1997, reflecting the operating results of John Morrell for the full fiscal year,
significantly improved margins on processed meats and substantially increased
profitability of the HPG.
Reflecting the factors discussed above, net income increased to $44.9
million, or $1.17 per diluted share, in fiscal 1997, up from $15.9 million, or
$.42 per diluted share, in the prior fiscal year.
Financial Condition
The pork processing industry is characterized by high sales tonnage and
rapid turnover of inventories and accounts receivable. Because of the rapid
turnover rate, the Company considers its inventories and accounts receivable
highly liquid and readily convertible into cash. Borrowings under the Company's
credit facilities are used to finance increases in the levels of inventories and
accounts receivable resulting from seasonal and other market-related
fluctuations in raw material costs. The demand for seasonal borrowings usually
peaks in early November when ham inventories are at their highest levels, and
borrowings are repaid in January when accounts receivable generated by sales of
the hams are collected.
- 18 -
<PAGE>
In July 1997, the Company entered into loan agreements with a bank
group providing for $350 million in revolving credit facilities, consisting of a
five-year $300 million revolving credit facility and a 364-day $50 million
revolving credit facility. In connection with this refinancing, the Company
repaid all borrowings under its previous $300 million credit facilities, which
were terminated. The 364-day $50 million revolving credit facility was
terminated in February 1998.
Average borrowings under the facilities were $149.7 million in fiscal
1998, $165.1 million in fiscal 1997 and $133.4 million in fiscal 1996 at average
interest rates of approximately 7% for each year. Maximum borrowings were $247.0
million in fiscal 1998, $215.0 million in fiscal 1997 and $179.8 million in
fiscal 1996. There were no borrowings under the facility as of May 3, 1998. The
outstanding borrowings were $150.0 million as of April 27, 1997 at an average
interest rate of 7%.
In February 1998, the Company issued $200 million 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 Company's
$300 million revolving credit facility with the balance invested in short-term
marketable debt securities.
Capital expenditures totaled $92.9 million in fiscal 1998 and included
renovation and expansion of certain of the Company's processing plants, as well
as the acquisition of an idle slaughter plant in South Dakota and hog production
facilities in North Carolina. In addition, during fiscal 1998, the Company
acquired substantially all of the assets and business of Curly's Foods, Inc. and
certain of the assets and business of Mohawk Packing Co. for an aggregate $15.9
million in cash plus $11.8 million of assumed liabilities. The capital
expenditures and the business acquisitions were funded with internally generated
funds.
As of May 3, 1998, the Company had definitive commitments of $18.9
million 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. The Company plans to make capital expenditures in fiscal 1999 to
expand its hog production operations and to increase its processed meats
business through strategic acquisitions and joint ventures, both in the United
States and internationally. This will be funded by cash flows from operations
and borrowings under the $300 million revolving credit facility.
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 payment of dividends to shareholders.
Year 2000
Management has assessed and is in the process of modifying or replacing
the Company's affected hardware and software and is evaluating whether external
service providers, significant vendors and customers are taking the appropriate
action to remedy problems associated with the Year 2000. Management expects to
have substantially all of the systems and application changes completed by the
end of fiscal 1999 (May 2, 1999) and believes that its level of preparedness is
appropriate. Management is currently in the process of quantifying the costs
associated with the Year 2000; however, the ultimate costs are still not
determinable. Costs are being charged to expense as incurred with the exception
of hardware and software costs that are capitalizable in accordance with
generally accepted accounting principles. The costs of the project and the
expected completion dates are based on management's best estimates, which were
derived using assumptions of future events, including the continued availability
of certain resources and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific factors that could influence the results may
include, but are not limited to, the availability and cost of personnel trained
in this area, and the ability to locate and correct all relevant computer codes
and similar uncertainties.
Cautionary Statement Pursuant to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
- 19 -
<PAGE>
This report may contain "forward-looking" information within the
meaning of the federal securities laws. The forward-looking information may
include, among other information, statements concerning the Company's outlook
for fiscal 1998, volume trends, industry conditions and expectations for capital
expenditures. There may also be other statements of exceptions, beliefs, future
plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts. The forward-looking
information and statements in this report are subject to risks and
uncertainties, including availability and prices of raw materials, product
pricing, competitive environment and related market conditions, operating
efficiencies, access to capital and actions of governments, that could cause
actual results to differ materially from those expressed in or implied by the
information or statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed in Item 14(a) hereof
are incorporated herein by reference and are filed as a part of this
report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 20 -
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Information required by this Item regarding directors and all
persons nominated or chosen to become directors is incorporated by reference
from the Company's definitive proxy statement to be filed with respect to its
Annual Meeting of Shareholders to be held on August 27, 1998.
(b) Information required by this Item regarding the executive officers
of the Company is included in Part I, Item 4A of this report.
There is no family relationship between any of the persons named in
response to Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 27, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 27, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 27, 1998.
- 21 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1. and 2. Index to Financial Statements and Financial Statement
Schedule
An "Index to Financial Statements and Financial Statement Schedule" has
been filed as a part of this Form 10-K Annual Report on page F-1 hereof.
3. Exhibits
Exhibit 3.1 -- Articles of Incorporation of the Company, as
amended to date (incorporated by reference to Exhibit 2
to the Company's Current Report on Form 8-K filed with
the Commission on September 5, 1997).
Exhibit 3.2 -- By-Laws of the Company, as amended to date
(incorporated by reference to Exhibit 3 to the Company's
Current Report on Form 8-K filed with the Commission on
September 5, 1997).
Exhibit 4.1 -- Articles of Incorporation of the Company, as amended to
date (see Exhibit 3.1 above).
Exhibit 4.2 -- Form of Certificate representing the Company's Common
Stock, par value $.50 per share (including Rights
legend) (incorporated by reference to Exhibit 6 to the
Company's Current Report on Form 8-K filed with the
Commission on September 5, 1997)
Exhibit 4.3 -- Form of Certificate representing Rights
(incorporated by reference to Exhibit 5 to the Company's
Current Report on Form 8-K filed with the Commission on
September 5, 1997)
Exhibit 4.4 -- Rights Agreement dated as of May 1, 1998, by and
between the Company and Harris Trust and Savings Bank,
Rights Agent.
Exhibit 4.5 -- Five-Year Credit Agreement dated as of July 10, 1997,
among Smithfield Foods, Inc., the Subsidiary Guarantors
party thereto, the Lenders party thereto, and The Chase
Manhattan Bank, as Administrative Agent, relating to a
$300,000,000 secured five-year revolving credit facility
(incorporated by reference to Exhibit 4.5 of the
Company's Annual Report on Form 10-K for its fiscal year
ended April 27, 1997 filed with the Commission on July
25, 1997); and Amendment Number One to the Five-Year
Credit Agreement dated as of November 19, 1997
(incorporated by reference to Exhibit 4.5 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended February 1, 1998 filed with the Commission
on March 17, 1998).
Exhibit 4.5(a) -- 364-Day Credit Agreement dated as of July 10, 1997, among
Smithfield Foods, Inc., the Subsidiary Guarantors party
thereto, the Lenders party thereto, and The Chase
Manhattan Bank, as Administrative Agent, relating to a
$50,000,000 secured 364-day revolving credit facility
(incorporated by reference to Exhibit 4.5(a) of the
Company's Annual Report on Form 10-K for its fiscal year
ended April 27, 1997 filed with the Commission on July
25, 1997); and Amendment Number One to the 364-Day Credit
Agreement dated as of November 19, 1997 (incorporated by
reference to Exhibit 4.5(a) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended February
1, 1998 filed with the Commission on March 17, 1998).
- 22 -
<PAGE>
Exhibit 4.5(b) -- Collateral Agency, Pledge and Security Agreement
dated as of July 10, 1997, among Smithfield Foods,
Inc., the Subsidiary Guarantors party thereto, The Chase
Manhattan Bank, as Collateral Agent, relating to the
Company's five-year revolving credit facility and its
364- day revolving credit facility (incorporated by
reference to Exhibit 4.5(b) of the Company's Annual
Report on Form 10-K for its fiscal year ended April 27,
1997 filed with the Commission on July 25, 1997).
Exhibit 4.6 -- Note Purchase Agreement dated as of July 15, 1996, among
Smithfield Foods, Inc. and each of the Purchasers listed
on Annex 1 thereto, relating to $140,000,000 in senior
secured notes (incorporated by reference to Exhibit 4.7
to the Company's Form 10-Q Quarterly Report for the
fiscal quarter ended July 28, 1996); Amendment Number One
to the Note Purchase Agreement dated as of July 15, 1997
(incorporated by reference to Exhibit 4.6 of the
Company's Annual Report on Form 10-K for its fiscal year
ended April 27, 1997 filed with the Commission on July
25, 1997); Amendment Number Two to the Note Purchase
Agreement dated as of December 1, 1997 (incorporated by
reference to Exhibit 4.6 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended February
1, 1998 filed with the Commission on March 17, 1998); and
Amendment Number Three to the Note Purchase Agreement
dated as of January 30, 1998.
Exhibit 4.6(a) -- Joint and Several Guaranty dated as of July 15, 1996, by
Gwaltney of Smithfield, Ltd., John Morrell & Co., The
Smithfield Packing Company, Incorporated, SFFC, Inc.,
Patrick Cudahy Incorporated, and Brown's of Carolina,
Inc. (incorporated by reference to Exhibit 4.7(a) to the
Company's Form 10-Q Quarterly Report for the fiscal
quarter ended July 28, 1996); and Amendment Number One to
the Note Purchase Agreement dated as of July 15, 1997
(incorporated by reference to Exhibit 4.6(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended April 27, 1997 filed with the Commission on July
25, 1997).
Exhibit 4.6(b) -- Joint and Several Guaranty dated as of July 15, 1997, by
Lykes Meat Group, Inc., Sunnyland, Inc., Valleydale
Foods, Inc., Hancock's Old Fashioned Country Hams,
Inc., Copaz Packing Corporation, and Smithfield
Packing - Landover, Inc. (incorporated by reference to
Exhibit 4.6(b) to the Company's Annual Report on Form
10-K for the fiscal year ended April 27, 1997 filed with
the Commission on July 25, 1997).
Exhibit 4.7 -- Master Lease Agreement dated May 14, 1993 between
General Electric Capital Corporation and Brown's of
Carolina, Inc. (incorporated by reference to Exhibit 4.12
to the Company's Form 10-K Annual Report for the fiscal
year ended May 2, 1993).
Exhibit 4.7(a) -- Corporate Guaranty by Smithfield Foods, Inc. dated May
14, 1993 (incorporated by reference to Exhibit 4.12(a)
to the Company's Form 10-K Annual Report for the fiscal
year ended May 2, 1993).
Exhibit 4.8 -- Indenture between the Company and SunTrust Bank,
Atlanta (incorporated by reference to Exhibit 4.8 to the
Company's Current Report on Form 10-Q for the fiscal
quarter ended February 1, 1998 filed with the Commission
on March 17, 1998).
Exhibit 4.8(a) -- Purchase Agreement between the Company and Chase
Securities, Inc. (incorporated by reference to
Exhibit 4.8(a) to the Company's Current Report on Form
10-Q for the fiscal quarter ended February 1, 1998 filed
with the Commission on March 17, 1998).
Exhibit 4.8(b) -- Registration Rights Agreement between the Company and
Chase Securities, Inc. (incorporated by reference to
Exhibit 4.8(b) to the Company's Current Report on Form
10-Q for the fiscal quarter ended February 1, 1998 filed
with the Commission on March 17, 1998).
- 23 -
<PAGE>
Exhibit 10.1 -- Subscription Agreement dated September 3, 1992 between
Smithfield Foods, Inc. and Carroll's Foods, Inc.,
covering 1,000,000 shares of Smithfield Foods, Inc.
Common Stock (incorporated by reference to Exhibit 10.1
of the Company's Form 10-K Annual Report for the fiscal
year ended May 2, 1993); and Amendment No. 1 to
Subscription Agreement dated January 31, 1995
(incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended April 28, 1996 filed with the Commission on July
18, 1996).
Exhibit 10.2 -- Smithfield Foods, Inc. 1984 Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.1 to the
Company's Form 10-K Annual Report for the fiscal year
ended April 28, 1991).
Exhibit 10.3 -- Smithfield Foods, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the
Company's Form 10-K Annual Report for the fiscal year
ended May 2, 1993).
Exhibit 10.4 -- Smithfield Foods, Inc. Incentive Bonus Plan
applicable to the Company's Chairman of the Board and
Chief Executive Officer (incorporated by reference to
Exhibit 10.8 to the Company's Form 10-K Annual Report for
the fiscal year ended April 30, 1995 filed with the
Commission on July 28, 1995).
Exhibit 10.5 -- Smithfield Foods, Inc. 1997 Incentive Bonus Plan
applicable to the Company's President and Chief Operating
Officer (incorporated by reference to Exhibit 10.6 to the
Company's Form 10-K Annual Report for the fiscal year
ended April 28, 1996 filed with the Commission on July
18, 1996).
Exhibit 10.6 -- Smithfield Foods, Inc. 1998 Incentive Bonus Plan
applicable to the Company's Chief Operating Officer
(incorporated by reference to Exhibit 10.6 to the
Company's Form 10-K Annual Report for the fiscal year
ended April 27, 1997 filed with the Commission on July
25, 1997).
Exhibit 10.7 -- Smithfield Foods, Inc. 1998 Stock Incentive Plan.
Exhibit 21 -- Subsidiaries of the Registrant.
Exhibit 23 -- Consent of Independent Public Accountants.
Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K
1. Current Report on Form 8-K for February 9, 1998, was
filed with the Commission on February 10, 1998, to
report, under Item 5, the closing of a private
offering of $200,000,000 aggregate principal amount
of 7-5/8% Senior Subordinated Notes due 2008.
- 24 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
SMITHFIELD FOODS, INC.
Date: July 27, 1998 By: /s/ JOSEPH W. LUTER, III
--------------------
Joseph W. Luter, III
Chairman of the Board and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on July 27, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
Chairman of the Board and Chief Executive
/s/ JOSEPH W. LUTER, III Officer, and Director
- ------------------------------------------------
Joseph W. Luter, III
President and Chief Operating Officer,
/s/ LEWIS R. LITTLE and Director
- ------------------------------------------------
Lewis R. Little
Vice President, Chief Financial Officer
/s/ AARON D. TRUB and Secretary, and Director
- ----------------------------------------------- (Principal-Financial-Officer)
Aaron D. Trub
Vice President, Finance
/s/ C. LARRY POPE (Principal Accounting Officer)
- -----------------------------------------------
C. Larry Pope
Director
/s/ ROBERT L. BURRUS, JR.
- -----------------------------------------------
Robert L. Burrus, Jr.
Director
/s/ F. J. FAISON, JR.
- -----------------------------------------------
F. J. Faison, Jr.
Director
/s/ JOEL W. GREENBERG
- -----------------------------------------------
Joel W. Greenberg
Director
/s/ GEORGE E. HAMILTON, JR.
- -----------------------------------------------
George E. Hamilton, Jr.
- S-1 -
<PAGE>
Director
- -----------------------------------------------
Richard J. Holland
Director
/s/ ROGER R. KAPELLA
- -----------------------------------------------
Roger R. Kapella
Director
/s/ WILLIAM H. PRESTAGE
- -----------------------------------------------
William H. Prestage
Director
/s/ JOSEPH B. SEBRING
- -----------------------------------------------
Joseph B. Sebring
</TABLE>
- S-2 -
<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 ........................................... 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
AS EXECUTED
SMITHFIELD FOODS, INC.,
A VIRGINIA CORPORATION
AND
HARRIS TRUST AND SAVINGS BANK
RIGHTS AGENT
RIGHTS AGREEMENT
AS AMENDED
DATED AS OF MAY 1, 1998
------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
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SECTION PAGE
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1. Certain Definitions......................................................................................1
2. Appointment of Rights Agent..............................................................................4
3. Issue of Right Certificates..............................................................................4
4. Form of Right Certificates...............................................................................6
5. Countersignature and Registration........................................................................6
6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates.......................6
7. Exercise of Rights; Purchase Price; Expiration Date of Rights............................................7
8. Cancellation and Destruction of Right Certificates.......................................................8
9. Availability of Preferred Shares.........................................................................8
10. Preferred Shares Record Date.............................................................................8
11. Adjustment of Purchase Price, Number of Shares or Number of Rights.......................................9
12. Certificate of Adjusted Purchase Price or Number of Shares..............................................13
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power....................................13
14. Fractional Rights and Fractional Shares.................................................................14
15. Rights of Action........................................................................................15
16. Agreement of Right Holders..............................................................................15
17. Right Certificate Holder Not Deemed a Shareholder.......................................................16
18. Concerning the Rights Agent.............................................................................16
19. Merger or Consolidation or Change of Name of Rights Agent...............................................16
20. Duties of Rights Agent..................................................................................17
21. Change of Rights Agent..................................................................................18
22. Issuance of New Right Certificates......................................................................19
23. Redemption..............................................................................................19
24. Exchange................................................................................................20
25. Notice of Certain Events................................................................................21
26. Notices.................................................................................................22
27. Supplements and Amendments..............................................................................22
28. Successors..............................................................................................22
29. Benefits of this Agreement..............................................................................22
30. Severability............................................................................................22
31. Governing Law...........................................................................................22
32. Counterparts............................................................................................22
33. Descriptive Headings....................................................................................23
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EXHIBITS
Exhibit A - Form of Right Certificate
Exhibit B - Summary of Rights to Purchase Preferred Shares
Rights Agreement
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RIGHTS AGREEMENT
This Rights Agreement, as amended (this "Agreement"), dated as of May
1, 1998, is entered into between Smithfield Foods, Inc., a Virginia corporation
(the "Company"), and Harris Trust and Savings Bank, an Illinois corporation, as
rights agent (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
of the Company outstanding on September 2, 1997, (the "Record Date"), each Right
representing the right to purchase one one-thousandth of a Preferred Share, upon
the terms and subject to the conditions herein set forth, and has further
authorized and directed the issuance of one Right with respect to each Common
Share that shall become outstanding (x) between the Record Date and the earliest
of the Distribution Date, the Redemption Date and the Final Expiration Date (as
such terms are defined in Sections 3 and 7 hereof) or (y) after the Distribution
Date but before the earlier of the Redemption Date or the Final Expiration Date,
if such Common Share became outstanding (A) upon the exercise of a stock option,
(B) pursuant to any employee plan or arrangement, (C) upon the exchange pursuant
to its terms of an Exchangeable Share, without par value (each an "Exchangeable
Share"), of Smithfield Canada Limited, an Ontario corporation ("Smithfield
Canada"), for such Common Share or (D) upon the exercise, conversion or exchange
of any other security, which option, plan, arrangement, Exchangeable Share or
other security was granted, established or issued, as the case may be, by the
Company (or, with respect to any Exchangeable Share, issued by Smithfield
Canada) before the Distribution Date.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS. For purposes of this Agreement,
the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 20% or more of the Common Shares of the Company then
outstanding, but shall not include the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or any Subsidiary of the Company, or
any entity holding Common Shares for or pursuant to the terms of any such plan.
Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as
the result of an acquisition of Common Shares by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 20% or more of the Common Shares of the
Company then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 20% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
"Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of
the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently, and such Person divests as
promptly as practicable a sufficient number of Common Shares so that such Person
would no longer be an "Acquiring Person," as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be an
"Acquiring Person" for any purposes of this Agreement.
(b) "Affiliate" shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in
effect on the date of this Agreement.
(c) "Associate" shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in
effect on the date of this Agreement.
Rights Agreement Page 1
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(d) A Person shall be deemed the "Beneficial Owner" of and
shall be deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns,
directly or indirectly;
(ii) which such Person or any of such Person's
Affiliates or Associates has (A) the right
to acquire (whether such right is
exercisable immediately or only after the
passage of time) pursuant to any agreement,
arrangement or understanding (other than
customary agreements with and between
underwriters and selling group members with
respect to a bona fide public offering of
securities), or upon the exercise of
conversion rights, exchange rights, rights
(other than these Rights), warrants or
options, or otherwise; provided, however,
that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own,
securities tendered pursuant to a tender or
exchange offer made by or on behalf of such
Person or any of such Person's Affiliates or
Associates until such tendered securities
are accepted for purchase or exchange; or
(B) the right to vote pursuant to any
agreement, arrangement or understanding;
provided, however, that a Person shall not
be deemed the Beneficial Owner of, or to
beneficially own, any security if the
agreement, arrangement or understanding to
vote such security (1) arises solely from a
revocable proxy or consent given to such
Person in response to a public proxy or
consent solicitation made pursuant to, and
in accordance with, the applicable rules and
regulations promulgated under the Exchange
Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person with which
such Person or any of such Person's
Affiliates or Associates has any agreement,
arrangement or understanding (other than
customary agreements with and between
underwriters and selling group members with
respect to a bona fide public offering of
securities) for the purpose of acquiring,
holding, voting (except to the extent
contemplated by the proviso to Section
1(d)(ii)(B)) or disposing of any securities
of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
(e) "Business Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in Norfolk, Virginia or Chicago,
Illinois are authorized or obligated by law or executive order to close.
(f) "Close of Business" on any given date shall mean 5:00
P.M., Chicago, Illinois time, on such date; provided, however, that, if such
date is not a Business Day, it shall mean 5:00 P.M.,Chicago, Illinois time, on
the next succeeding Business Day.
Rights Agreement Page 2
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(g) "Common Shares" when used with reference to the Company
shall mean the shares of Common Stock, par value $.50 per share, of the Company.
"Common Shares" when used with reference to any Person other than the Company
shall mean the capital stock (or equity interest) with the greatest voting power
of such other Person or, if such other Person is a Subsidiary of another Person,
the Person or Persons which ultimately control such first-mentioned Person.
(h) "Company" shall have the meaning set forth in the preamble
hereof.
(i) "current per share market price" shall have the meaning
set forth in Section 11(d) hereof.
(j) "Distribution Date" shall have the meaning set forth in
Section 3 hereof.
(k) "equivalent preferred shares" shall have the meaning set
forth in Section 11(b) hereof.
(l) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(m) "Exchange Ratio" shall have the meaning set forth in
Section 24(a) hereof.
(n) "Exchangeable Share" shall have the meaning set forth in
the second paragraph hereof.
(o) "Final Expiration Date" shall have the meaning set forth
in Section 7(a) hereof.
(p) "NASDAQ" shall mean the National Association of Securities
Dealers, Inc. Automated Quotations System.
(q) "Person" shall mean any individual, firm, corporation or
other entity, and shall include any successor (by merger
or otherwise) of such entity.
(r) "Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Stock, of $1.00 par value per
share, of the Company having the rights and preferences
set forth in the Articles of Amendment establishing such
series of preferred stock.
(s) "Purchase Price" shall have the meaning set forth in
Section 7(b) hereof.
(t) "Record Date" shall have the meaning set forth in the
second paragraph hereof.
(u) "Redemption Date" shall have the meaning set forth in
Section 7(a) hereof.
(v) "Redemption Price" shall have the meaning set forth in
Section 23(a) hereof.
(w) "Rights Agent" shall have the meaning set forth in the
preamble hereof.
(x) "Right" shall have the meaning set forth in the second
paragraph hereof.
(y) "Right Certificate" shall have the meaning set forth in
Section 3(a) hereof.
Rights Agreement Page 3
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(z) "Security" shall have the meaning set forth in Section
11(d) hereof.
(aa) "Shares Acquisition Date" shall mean the first date
of public announcement by the Company or an Acquiring
Person that an Acquiring Person has become such.
(bb) "Smithfield Canada" shall have the meaning set forth
in the second paragraph hereof.
(cc) "Subsidiary" of any Person shall mean any corporation
or other entity of which a majority of the voting
power of the voting equity securities or equity
interest is owned, directly or indirectly, by such
Person.
(dd) "Summary of Rights" shall have the meaning set forth
in Section 3(b) hereof.
(ee) "Trading Day" shall have the meaning set forth in
Section 11(d) hereof.
SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall, prior to the Distribution Date, also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
SECTION 3. ISSUE OF RIGHT CERTIFICATES. (a) Until the earlier of (i)
the tenth day after the Shares Acquisition Date or (ii) the tenth business day
(or such later date as may be determined by action of the Board of Directors of
the Company prior to such time as any Person becomes an Acquiring Person) after
the date of the commencement by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company or any entity holding Common Shares for or pursuant to
the terms of any such plan) of, or of the first public announcement of the
intention of any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company or
any entity holding Common Shares for or pursuant to the terms of any such plan)
to commence, a tender or exchange offer the consummation of which would result
in any Person becoming the Beneficial Owner of Common Shares aggregating 20% or
more of the then outstanding Common Shares (the earlier of such dates being
herein referred to as the "Distribution Date"), (x) the Rights associated with
Common Shares for which share certificates have been issued will be evidenced
(subject to the provisions of Section 3(b) hereof) by the certificates for
Common Shares registered in the names of the holders thereof (which certificates
shall also be deemed to be Right Certificates) and not by separate Right
Certificates, (y) the Rights associated with uncertificated Common Shares will
be evidenced (subject to the provisions of Section 3(b) hereof) by the
registration of the Common Shares in the Company's share register in the names
of the holders thereof (which registration shall also be deemed to be
registration of ownership of the associated Right) and not by separate Right
Certificates and (z) the right to receive Right Certificates will be
transferable only in connection with the transfer of Common Shares. As soon as
practicable after the Distribution Date, the Company will prepare and execute,
the Rights Agent will countersign, and the Company will send or cause to be sent
(and the Rights Agent will, if requested, send, at the expense of the Company)
by first-class, insured, postage-prepaid mail, to each record holder of Common
Shares as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, a Right Certificate, in
substantially the form of Exhibit A hereto (a "Right Certificate"), evidencing
one Right for each share of Common Shares so held. As of the Distribution Date,
the Rights will be evidenced solely by such Right Certificates.
Rights Agreement Page 4
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(b) On the Record Date, or as soon as practicable thereafter,
the Company will send a copy of a Summary of Rights to Purchase Preferred
Shares, in substantially the form of Exhibit B hereto (the "Summary of Rights"),
by first-class, postage-prepaid mail, to each record holder of Common Shares as
of the Close of Business on the Record Date, at the address of such holder shown
on the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders thereof
together with a copy of the Summary of Rights attached thereto. With respect to
uncertificated Common Shares outstanding as of the Record Date, until the
Distribution Date, the Rights will be evidenced by the registration of the
Common Shares in the Company's share register in the names of the holders
thereof. Until the Distribution Date (or the earlier of the Redemption Date or
the Final Expiration Date), the transfer of any Common Shares outstanding on the
Record Date, including in the case of Common Shares represented by certificates
the surrender for transfer of any such certificate with or without a copy of the
Summary of Rights attached thereto, shall also constitute the transfer of the
Rights associated with such Common Shares.
(c) Certificates for Common Shares which become outstanding,
or initial transaction or subsequent periodic statements issued with respect to
uncertificated Common Shares (whether upon issuance out of authorized but
unissued Common Shares, issuance out of treasury, or issuance upon transfer or
exchange of outstanding Common Shares) after the Record Date but prior to the
earliest of the Distribution Date, the Redemption Date or the Final Expiration
Date shall have impressed on, printed on, written on or otherwise affixed to
them, in the case of share certificates, the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement, as amended, between
Smithfield Foods, Inc. and Harris Trust and Savings Bank, dated as of
May 1, 1998 (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal executive offices of Smithfield Foods, Inc. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. Smithfield Foods, Inc. will mail to the holder of
this certificate a copy of the Rights Agreement without charge after
receipt of a written request therefor. Under certain circumstances, as
set forth in the Rights Agreement, Rights issued to any Person who
becomes an Acquiring Person (as defined in the Rights Agreement) will
become null and void.
and in the case of initial transaction or subsequent periodic statements with
respect to uncertificated Common Shares, the following legend:
The registration in the share register of Smithfield Foods, Inc. of the
shares of common stock to which this initial transaction statement
relates also evidences and entitles the registered holder of such
shares to certain rights as set forth in a Rights Agreement, as
amended, between Smithfield Foods, Inc. and Harris Trust and Savings
Bank, dated as of May 1, 1998 (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy of which
is on file at the principal executive offices of Smithfield Foods, Inc.
Under certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. Smithfield Foods, Inc. will mail to the
holder of this certificate a copy of the Rights Agreement without
charge after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, Rights issued to
any Person who becomes an Acquiring Person (as defined in the Rights
Agreement) will become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates
Rights Agreement Page 5
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alone, and the surrender for transfer of any such certificate shall also
constitute the transfer of the Rights associated with the Common Shares
represented thereby. With respect to such initial transaction or subsequent
periodic statements containing the foregoing legend, until the Distribution
Date, the Rights associated with the Common Shares with respect to which such
statements are issued shall be evidenced solely by the registration of ownership
of such Common Shares in the share register of the Company, and the registration
of transfer of ownership in such share register shall also constitute the
transfer of the Rights associated with the Common Shares whose ownership is so
transferred. In the event that the Company purchases or acquires any Common
Shares after the Record Date but prior to the Distribution Date, any Rights
associated with such Common Shares shall be deemed canceled and retired so that
the Company shall not be entitled to exercise any Rights associated with the
Common Shares which are no longer outstanding.
SECTION 4. FORM OF RIGHT CERTIFICATES. The Right Certificates (and the
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit A hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or automated
quotation system on which the Rights may from time to time be listed or quoted,
or to conform to usage. Subject to the provisions of Section 22 hereof, the
Right Certificates shall entitle the holders thereof to purchase such number of
one one-thousandths of a Preferred Share as shall be set forth therein at the
price per one one-thousandth of a Preferred Share set forth therein, but the
number of such one one-thousandths of a Preferred Share and the Purchase Price
shall be subject to adjustment as provided herein.
SECTION 5. COUNTERSIGNATURE AND REGISTRATION. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Chief Executive Officer, its President, any of its Vice Presidents, or its
Treasurer, either manually or by facsimile signature, shall have affixed thereto
the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be manually countersigned by
the Rights Agent and shall not be valid for any purpose unless countersigned. In
case any officer of the Company who shall have signed any of the Right
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the Person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any Person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of the Company to sign such Right
Certificate although at the date of the execution of this Rights Agreement any
such Person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration and transfer of the
Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT
CERTIFICATES. Subject to the provisions of Section 14
hereof, at any time after the Close of Business on the Distribution Date, and at
or prior to the Close of Business on the earlier of the Redemption Date or the
Final Expiration Date, any Right Certificate or Right Certificates (other than
Right Certificates representing Rights that have become void pursuant to Section
11(a)(ii) hereof or that have been exchanged pursuant to Section 24 hereof) may
be transferred, split up, combined or exchanged for another Right Certificate or
Right Certificates entitling the
Rights Agreement Page 6
<PAGE>
registered holder to purchase a like number of one one-thousandths of a
Preferred Share as the Right Certificate or Right Certificates surrendered then
entitled such holder to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Right Certificate or Right Certificates shall
make such request in writing delivered to the Rights Agent, and shall surrender
the Right Certificate or Right Certificates to be transferred, split up,
combined or exchanged at the principal office of the Rights Agent. Neither the
Rights Agent nor the Company shall be obligated to take any action whatsoever
with respect to the transfer of any such surrendered Right Certificate until the
registered holder shall have completed and signed the certificate contained in
the form of assignment on the reverse side of such Right Certificate and shall
have provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall countersign and
deliver to the Person entitled thereto a Right Certificate or Right
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS. (a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein), in whole or in
part, at any time after the Distribution Date, upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-thousandth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the Close of Business on May 31, 2001 (the "Final Expiration
Date"), (ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date") or (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-thousandth of a
Preferred Share purchasable pursuant to the exercise of a Right shall initially
be $37.50, and shall be subject to adjustment from time to time as provided in
Section 11 or 13 hereof (the "Purchase Price") and shall be payable in lawful
money of the United States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase duly executed,
accompanied by payment of the Purchase Price for the shares to be purchased and
an amount equal to any applicable transfer tax required to be paid by the holder
of such Right Certificate in accordance with Section 9 hereof by certified
check, cashier's check or money order payable to the order of the Company, the
Rights Agent shall thereupon promptly (i) (A) requisition from any transfer
agent of the Preferred Shares certificates for the number of Preferred Shares to
be purchased and the Company hereby irrevocably authorizes any such transfer
agent to comply with all such requests, or (B) requisition from the depositary
agent depositary receipts representing such number of one one-thousandths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent of the Preferred Shares with such depositary agent) and the Company hereby
directs such depositary agent to comply with such request; (ii) when
appropriate, requisition from the Company the amount of cash to be paid in lieu
of issuance of fractional shares in
Rights Agreement Page 7
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accordance with Section 14 hereof; (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Right Certificate, registered in such name or names as
may be designated by such holder; and (iv) when appropriate, after receipt,
deliver such cash to or upon the order of the registered holder of such Right
Certificate.
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 14 hereof.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Right Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Right Certificates to the Company, or shall, at the written request of
the Company, destroy such cancelled Right Certificates, and, in such case, shall
deliver a certificate of destruction thereof to the Company.
SECTION 9. AVAILABILITY OF PREFERRED SHARES. The Company covenants and
agrees that it will cause to be reserved and kept available out of its
authorized and unissued Preferred Shares or any Preferred Shares held in its
treasury, the number of Preferred Shares that will be sufficient to permit the
exercise in full of all outstanding Rights in accordance with Section 7. The
Company covenants and agrees that it will take all such action as may be
necessary to ensure that all Preferred Shares delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such Preferred Shares
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
SECTION 10. PREFERRED SHARES RECORD DATE. Each Person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the Preferred Shares transfer books of the Company are closed, such Person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation,
Rights Agreement Page 8
<PAGE>
the right to vote, to receive dividends or other distributions or to exercise
any preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF
RIGHTS. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of Preferred Shares or
(D) issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective date of
such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Shares transfer books of the Company were open, he would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right be less
than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in
the event any Person becomes an Acquiring Person, each holder of a Right shall
thereafter have a right to receive, upon exercise thereof at a price equal to
the then current Purchase Price multiplied by the number of one one-thousandths
of a Preferred Share for which a Right is then exercisable, in accordance with
the terms of this Agreement and in lieu of Preferred Shares, such number of
Common Shares of the Company as shall equal the result obtained by (A)
multiplying the then current Purchase Price by the number of one one-thousandths
of a Preferred Share for which a Right is then exercisable and dividing that
product by (B) 50% of the then current per share market price of the Company's
Common Shares (determined pursuant to Section 11(d) hereof) on the date of the
occurrence of such event. In the event that any Person shall become an Acquiring
Person and the Rights shall then be outstanding, the Company shall not take any
action which would eliminate or diminish the benefits intended to be afforded by
the Rights.
From and after the occurrence of such event, any Rights that are or
were acquired or beneficially owned by any Acquiring Person (or any Associate or
Affiliate of such Acquiring Person) shall be void and any holder of such Rights
shall thereafter have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate shall be issued pursuant to Section 3 that
represents Rights beneficially owned by an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the transfer of
any Rights to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence or any Associate or Affiliate thereof or to any nominee of
such Acquiring Person, Associate or Affiliate; and any Right Certificate
delivered to the Rights Agent for transfer to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient
Common Shares authorized but unissued to permit the exercise in full of the
Rights in accordance with the foregoing subparagraph (ii), the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exercise of the Rights. In the event the Company shall, after
good faith effort, be unable to
Rights Agreement Page 9
<PAGE>
take all such action as may be necessary to authorize such additional Common
Shares, the Company shall substitute, for each Common Share that would otherwise
be issuable upon exercise of a Right, a number of Preferred Shares or fraction
thereof such that the current per share market price of one Preferred Share
multiplied by such number or fraction is equal to the current per share market
price of one Common Share as of the date of issuance of such Preferred Shares or
fraction thereof.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred Shares
entitling them (for a period expiring within 45 calendar days after such record
date) to subscribe for or purchase Preferred Shares (or shares having the same
rights, privileges and preferences as the Preferred Shares ("equivalent
preferred shares")) or securities convertible into Preferred Shares or
equivalent preferred shares at a price per Preferred Share or equivalent
preferred share (or having a conversion price per share, if a security
convertible into Preferred Shares or equivalent preferred shares) less than the
then current per share market price of the Preferred Shares on such record date,
the Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of Preferred Shares
outstanding on such record date plus the number of Preferred Shares which the
aggregate offering price of the total number of Preferred Shares and/or
equivalent preferred shares so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of additional
Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making
of a distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
Rights Agreement Page 10
<PAGE>
(d) (i) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the purpose
of this Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive Trading
Days immediately prior to such date; provided, however, that in the event that
the current per share market price of the Security is determined during a period
following the announcement by the issuer of such Security of (A) a dividend or
distribution on such Security payable in shares of such Security or securities
convertible into such shares, or (B) any subdivision, combination or
reclassification of such Security and prior to the expiration of 30 Trading Days
after the ex-dividend date for such dividend or distribution, or the record date
for such subdivision, combination or reclassification, then, and in each such
case, the current per share market price shall be appropriately adjusted to
reflect the current market price per share equivalent of such Security. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case, as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Security is not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Security is
listed or admitted to trading or, if the Security is not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the over-the-counter
market, as reported by NASDAQ or such other system then in use, or, if on any
such date the Security is not quoted by any such organization, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the Security selected by the Board of Directors of the
Company. The term "Trading Day" shall mean a day on which the principal national
securities exchange or automated quotation system on which the Security is
listed or admitted to trading or quoted is open for the transaction of business
or, if the Security is not listed or admitted to trading on any national
securities exchange or quoted on any automated quotation system, a Business Day.
(ii) For the purpose of any computation
hereunder, the "current per share market price" of the Preferred Shares shall be
determined in accordance with the method set forth in Section 11(d)(i). If the
Preferred Shares are not publicly traded, the "current per share market price"
of the Preferred Shares shall be conclusively deemed to be the current per share
market price of the Common Shares as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by one thousand. If
neither the Common Shares nor the Preferred Shares are publicly held or so
listed or traded, "current per share market price" shall mean the fair value per
share as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent.
(e) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one one-millionth
of a Preferred Share or one ten-thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If, as a result of an adjustment made pursuant to Section
11(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock of the Company other than Preferred
Shares, thereafter the number of such other shares so receivable upon exercise
of any Right shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c),
Rights Agreement Page 11
<PAGE>
inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the
Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-thousandths of a Preferred Share (calculated to the nearest one
one-millionth of a Preferred Share) obtained by (A) multiplying (x) the number
of one one-thousandths of a share covered by a Right immediately prior to this
adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (B) dividing the product so obtained by the
Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights in substitution
for any adjustment in the number of one one-thousandths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company, shall
cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-thousandths of a Preferred Share issuable upon
the exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-thousandths of a Preferred Share which were expressed in the initial Right
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-thousandth of the then par value, if
any, of the Preferred Shares issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
Rights Agreement Page 12
<PAGE>
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that it, in its sole discretion, shall
determine to be advisable in order that any consolidation or subdivision of the
Preferred Shares, issuance wholly for cash of any Preferred Shares at less than
the current market price, issuance wholly for cash of Preferred Shares or
securities which by their terms are convertible into or exchangeable for
Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or
issuance of rights, options or warrants referred to hereinabove in Section
11(b), hereafter made by the Company to holders of its Preferred Shares shall
not be taxable to such shareholders.
(n) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-thousandths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-thousandths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Right Certificate in accordance with Section 25 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained, and shall not be obligated or responsible for
calculating any adjustment, nor shall it be deemed to have knowledge of such an
adjustment unless and until it shall have received such certificate.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER. In the event, directly or indirectly, at any time after a Person
has become an Acquiring Person, (a) the Company shall consolidate with, or merge
with and into, any other Person, (b) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (c) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the
Rights Agreement Page 13
<PAGE>
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to any other Person other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that (i) each holder of a Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise thereof at a price equal
to the then current Purchase Price multiplied by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable and
dividing that product by (B) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (ii) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer, all
the obligations and duties of the Company pursuant to this Agreement; (iii) the
term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such
issuer shall take such steps (including, but not limited to, the reservation of
a sufficient number of its Common Shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to the Common Shares thereafter deliverable upon the exercise of
the Rights. The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and such issuer shall have
executed and delivered to the Rights Agent a supplemental agreement so
providing. The Company shall not enter into any transaction of the kind referred
to in this Section 13 if at the time of such transaction there are any rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers.
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company
shall not be required to issue fractions of Rights or to distribute Right
Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Right Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For the purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case, as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or, if
the Rights are not listed or admitted to trading on the New York Stock Exchange,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such date no such market maker is making a
market in the Rights, the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-thousandth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral
Rights Agreement Page 14
<PAGE>
multiples of one one-thousandth of a Preferred Share). Fractions of Preferred
Shares in integral multiples of one one-thousandth of a Preferred Share may, at
the election of the Company, be evidenced by depositary receipts, pursuant to an
appropriate agreement between the Company and a depositary selected by it;
provided that such agreement shall provide that the holders of such depositary
receipts shall have all the rights, privileges and preferences to which they are
entitled as beneficial owners of the Preferred Shares represented by such
depositary receipts. In lieu of fractional Preferred Shares that are not
integral multiples of one one-thousandth of a Preferred Share, the Company shall
pay to the registered holders of Right Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one Preferred Share. For the purposes of this Section
14(b), the current market value of a Preferred Share shall be the closing price
of a Preferred Share (as determined pursuant to the second sentence of Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.
(c) The holder of a Right by the acceptance of the Right
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right (except as provided above).
SECTION 15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
SECTION 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right,
by accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the
Person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Shares certificate, in the case of certificated Common
Shares, or, in the case of uncertificated Common Shares, the associated Common
Shares reflected on the Company's share register) is registered as the absolute
owner thereof and of the Rights evidenced thereby (notwithstanding any notations
of ownership or writing on the Right Certificates or, in the case of
certificated Common Shares, the associated Common Shares certificate made by
anyone other than the Company or the Rights Agent) for all purposes whatsoever,
and neither the Company nor the Rights Agent shall be affected by any notice to
the contrary.
Rights Agreement Page 15
<PAGE>
SECTION 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
SECTION 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability or expense incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises. The indemnity provided
for herein shall survive the expiration of the Rights, the termination of this
Agreement, and the resignation or removal of the Rights Agent. The reasonable
costs and expenses of enforcing this right of indemnification shall also be paid
by the Company.
The Rights Agent may conclusively rely upon and shall be protected and
shall incur no liability for, or in respect of any action taken, suffered or
omitted by it in connection with, its administration of this Agreement in
reliance upon any Right Certificate or certificate for the Preferred Shares or
Common Shares or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons, or otherwise upon the advice of
counsel as set forth in Section 20 hereof.
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust powers of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Agreement without the execution
or filing of any paper or any further fact on the part of any of the parties
hereto; provided that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned;
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right
Rights Agreement Page 16
<PAGE>
Certificates shall not have been countersigned, the Rights Agent may countersign
such Right Certificates either in its prior name or in its changed name; and in
all such cases such Right Certificates shall have the full force provided in the
Right Certificates and in this Agreement.
SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement, and no implied duties or
obligations shall be read into this Agreement against the Rights Agent, upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates, by their acceptance thereof, shall be bound:
(a) Before the Rights Agent acts or refrains from acting, the
Rights Agent may consult with legal counsel (who may be legal counsel for the
Company), and the opinion of such counsel shall be full and complete
authorization and protection to the Rights Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any
adjustment in the terms of the Rights (including the manner, method or amount
thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after actual
notice that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
Rights Agreement Page 17
<PAGE>
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Secretary or the Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered by it in
good faith in accordance with instructions of any such officer or for any delay
in acting while waiting for those instructions. Any application by the Rights
Agent for written instructions from the Company shall be addressed and delivered
in accordance with Section 26 of this Agreement and may, at the option of the
Rights Agent, set forth in writing any action proposed to be taken or omitted by
the Rights Agent under this Rights Agreement and the date on or after which such
action shall be taken or such omission shall be effective. The Rights Agent
shall not be liable for any action taken by, or omission of, the Rights Agent in
accordance with a proposal included in any such application on or after the date
specified in such application (which date shall not be less than ten Business
Days after the date any officer of the Company actually receives such
application, unless any such officer shall have consented in writing to an
earlier date) unless, prior to taking any such action (or the effective date in
the case of an omission), the Rights Agent shall have received written
instruction in response to such application subject to the proposed action or
omission and/or specifying the action to be taken or omitted.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct, provided reasonable care was exercised in
the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) Except as may be otherwise specified in this Agreement,
the Rights Agent shall not be required to take notice or be deemed to have
notice of any fact, event or determination (including, without limitation, any
dates or events defined in this Agreement or the designation of any Person as an
Acquiring Person, Affiliate or Associate) under this Agreement unless and until
the Rights Agent shall be specifically notified in writing by the Company of
such fact, event or determination.
SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and at
the expense of the Company to the holders of the Right Certificates by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Shares or Preferred Shares by registered or certified mail, and to the
holders of the Right Certificates by first-class mail. If the Rights Agent shall
resign or be removed or shall otherwise become incapable of acting, the Company
shall appoint a successor to the Rights Agent. If the Company shall fail to
Rights Agreement Page 18
<PAGE>
make such appointment within a period of 30 days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Right Certificate (who shall, with such notice, submit his Right Certificate for
inspection by the Company), then the registered holder of any Right Certificate
may apply to any court of competent jurisdiction for the appointment of a new
Rights Agent. Any successor Rights Agent, whether appointed by the Company or by
such a court, shall be a corporation organized and doing business under the laws
of the United States or of the Commonwealth of Virginia, the State of North
Carolina or the State of Illinois (or of any other state of the United States so
long as such corporation is authorized to do business as a banking institution
in the Commonwealth of Virginia, the State of North Carolina or the State of
Illinois), in good standing, having an office in the Commonwealth of Virginia,
the State of North Carolina, the State of Illinois or the State of New York,
which is authorized under such laws to exercise corporate trust or stock
transfer powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares or Preferred Shares, and mail a
notice thereof in writing to the registered holders of the Right Certificates.
Failure to give any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement or with respect to the
exchange pursuant to their terms of any Exchangeable Shares (so long as such
options, plan or arrangement were granted or established by the Company, or such
Exchangeable Shares were issued by Smithfield Canada, as the case may be, prior
to the Distribution Date), or upon the exercise, conversion or exchange of any
other securities issued by the Company after the Record Date and prior to the
Distribution Date, and (b) may, in any other case if deemed necessary or
appropriate by the Board of Directors of the Company, issue Rights Certificates
representing the appropriate number of Rights in connection with such issuance
or sale.
SECTION 23. REDEMPTION. (a) The Board of Directors of the Company may,
at its option, at any time prior to such time as any Person becomes an Acquiring
Person, redeem all but not less than all the then outstanding Rights at a
redemption price of $.0001 per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"). The redemption of the Rights by the Board of Directors of the Company
may be made effective at such time, on such basis and with such conditions as
the Board of Directors of the Company, in its sole discretion, may establish.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights pursuant to paragraph (a) of
this Section 23, and without any further action and
Rights Agreement Page 19
<PAGE>
without any notice, the right to exercise the Rights will terminate and the only
right thereafter of the holders of Rights shall be to receive the Redemption
Price. The Company shall promptly give public notice of any such redemption;
provided, however, that the failure to give, or any defect in, any such notice
shall not affect the validity of such redemption. Within 10 days after such
action of the Board of Directors of the Company ordering the redemption of the
Rights, the Company shall mail a notice of redemption to all the holders of the
then outstanding Rights at their last addresses as they appear upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the transfer agent for the Common Shares. Any notice which is mailed in
the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of redemption will state the method by
which the payment of the Redemption Price will be made. Neither the Company nor
any of its Affiliates or Associates may redeem, acquire or purchase for value
any Rights at any time in any manner other than that specifically set forth in
this Section 23 or in Section 24 hereof, and other than in connection with the
purchase of Common Shares prior to the Distribution Date.
SECTION 24. EXCHANGE. (a) The Board of Directors of the Company may, at
its option, at any time after any Person becomes an Acquiring Person, exchange
all or part of the then outstanding and exercisable Rights (which shall not
include Rights that have become void pursuant to the provisions of Section 3(a)
or Section 11(a)(ii) hereof) for Common Shares at an exchange ratio of one
Common Share per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding
the foregoing, the Board of Directors of the Company shall not be empowered to
effect such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any such
Subsidiary, or any entity holding Common Shares for or pursuant to the terms of
any such plan), together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to paragraph (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of Common Shares equal to
the number of such Rights held by such holder multiplied by the Exchange Ratio.
The Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 3(a) or Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common
Shares authorized but unissued to permit any exchange of Rights as contemplated
in accordance with this Section 24, the Company shall take all such action as
may be necessary to authorize additional Common Shares for issuance upon
exchange of the Rights. In the event the Company shall, after good faith effort,
be unable to take all such action as may be necessary to authorize such
additional Common Shares, the Company shall substitute, for each Common Share
that would otherwise be issuable upon exchange of a Right, a number of Preferred
Shares or fraction thereof such that the current per share market price of one
Preferred Share multiplied by such number or fraction is equal to the current
per share market price of one Common Share as of the date of issuance of such
Preferred Shares or fraction thereof.
Rights Agreement Page 20
<PAGE>
(d) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this paragraph (d), the current market value of a whole Common Share
shall be the closing price of a Common Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
SECTION 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall
propose (i) to pay any dividend payable in stock of any class to the holders of
its Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Shares and/or Preferred Shares, whichever shall be the
earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof.
SECTION 26. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Smithfield Foods, Inc.
200 Commerce Street
Smithfield, Virginia 23430
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be
Rights Agreement Page 21
<PAGE>
sent by Federal Express or another overnight courier service, registered or
certified mail and shall be deemed given upon receipt and addressed (until
another address is filed in writing with the Company) as follows:
Harris Trust and Savings Bank
311 W. Monroe Street, 11th Floor
Chicago, Illinois 60606
Attention: Tod Shafer
Corporate Trust Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
SECTION 27. SUPPLEMENTS AND AMENDMENTS. The Company may from time to
time supplement or amend this Agreement without the approval of any holders of
Right Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions with respect to the Rights
which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights.
SECTION 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 29. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, the registered holders of Common Shares) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date, the
Common Shares).
SECTION 30. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
SECTION 31. GOVERNING LAW. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
Commonwealth of Virginia and for all purposes shall be governed by and construed
in accordance with the laws of Commonwealth of Virginia applicable to contracts
to be made and performed entirely within such Commonwealth.
SECTION 32. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Rights Agreement Page 22
<PAGE>
SECTION 33. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Rights Agreement Page 23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
ATTEST: HARRIS TRUST AND SAVINGS BANK,
as Rights Agent
By: /s/Ginger L. Lawrence By: /s/ Tod C. Shafer
- ------------------------------ -------------------------------
Name: Ginger L. Lawrence Name: Tod C. Shafer
Title: Trust Officer Title: Vice President
ATTEST: SMITHFIELD FOODS, INC.
By: /s/ Michael H. Cole By: /s/ Aaron D. Trub
- ------------------------------ --------------------------------
Name: Michael H. Cole Name: Aaron D. Trub
Title: Assistant Secretary and Title: Vice President,
Corporate Counsel Secretary and Treasurer
Rights Agreement Page 24
<PAGE>
Exhibit A
Form of Right Certificate
Certificate No. R-
_______ Rights
NOT EXERCISABLE AFTER MAY 31, 2001 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS.
THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.0001 PER RIGHT AND TO EXCHANGE ON THE
TERMS SET FORTH IN THE RIGHTS AGREEMENT.
Right Certificate
SMITHFIELD FOODS, INC.
This certifies that _________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, as amended, dated as of May 1, 1998 (the "Rights Agreement"), between
Smithfield Foods, Inc., a Virginia corporation (the "Company"), and Harris Trust
and Savings Bank, an Illinois corporation (the "Rights Agent"), to purchase from
the Company at any time after the Distribution Date (as such term is defined in
the Rights Agreement) and prior to 5:00 P.M., Chicago, Illinois time, on May 31,
2001 at the principal office of the Rights Agent, or at the office of its
successor as Rights Agent, one one-thousandth of a fully paid non-assessable
share of Series A Junior Participating Preferred Stock, $1.00 par value per
share, of the Company, (the "Preferred Shares") at a purchase price of $37.50
(subject to adjustment as provided in the Rights Agreement) per one
one-thousandth of a Preferred Share (the "Purchase Price"), upon presentation
and surrender of this Right Certificate with the Form of Election to Purchase
duly executed. The number of Rights evidenced by this Right Certificate (and the
number of one one-thousandths of a Preferred Share which may be purchased upon
exercise hereof) set forth above, and the Purchase Price set forth above, are
the number and Purchase Price as of September 2, 1997, based on the Preferred
Shares as constituted at such date. As provided in the Rights Agreement, the
Purchase Price and the number of one one-thousandths of a Preferred Share which
may be purchased upon the exercise of the Rights evidenced by this Right
Certificate are subject to modification and adjustment upon the happening of
certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Right Certificate (i) may be redeemed by the Company at a redemption
price of $.0001 per Right or (ii) may be exchanged in whole or in part for
Preferred Shares or shares of the Company's Common Stock, par value $0.50 per
share.
Rights Agreement Exhibit A, Page 1
<PAGE>
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but, in lieu thereof, a
cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of ______, ____.
HARRIS TRUST AND SAVINGS BANK
By: ______________________________
Name:
Title:
ATTEST: SMITHFIELD FOODS, INC.
By: ______________________________ By: _________________________________
Name: Name:
Title: Title:
Rights Agreement Exhibit A, Page 2
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Right Certificate.)
FOR VALUE RECEIVED,__________ hereby sells, assigns and transfers unto
________________________(Please print name and address of transferee) this Right
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint_______________ Attorney, to transfer
the within Right Certificate on the books of the within-named Company, with full
power of substitution.
Dated:____________,___________
Signature
___________________________________
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
Signature
______________________________________
--------------------------------------------------------
Rights Agreement Exhibit A, Page 3
<PAGE>
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights represented by
the Right Certificate.)
To: Smithfield Foods, Inc.
The undersigned hereby irrevocably elects to exercise______Rights
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of such Rights and requests that certificates for such
Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated:_________________,_____
Signature
__________________________________
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
--------------------------------------------------------
Rights Agreement Exhibit A, Page 4
<PAGE>
Form of Reverse Side of Right Certificate -- continued
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
Signature
______________________________
--------------------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to
Purchase, as the case may be, must conform to the name as written upon the face
of this Right Certificate in every particular, without alteration or enlargement
or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
Rights Agreement Exhibit A, Page 5
<PAGE>
Exhibit B
SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES
On August 28, 1997, the Board of Directors of Smithfield Foods, Inc., a
Virginia corporation (the "Company"), declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock, par value
$0.50 per share, of the Company (the "Common Shares"). The dividend was payable
on September 2, 1997 (the "Record Date") to the shareholders of record on that
date. Each Right entitles the registered holder to purchase from the Company one
one-thousandth of a Series A Junior Participating Preferred Share of the
Company, $1.00 par value per share (the "Preferred Shares") at a price of $37.50
(subject to adjustment as provided in the Rights Agreement) per one
one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The Purchase Price of $37.50 took into account the one-for-one
Common Shares dividend which the Board of Directors had declared on August 28,
1997, payable on or about September 26, 1997, to holders of record of the Common
Shares on September 12, 1997. The description and terms of the Rights are set
forth in a Rights Agreement, as amended (the "Rights Agreement"), between the
Company and Harris Trust and Savings Bank, an Illinois corporation, as Rights
Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 20% or more of the
outstanding Common Shares or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors of the Company prior to such time
as any person or group of affiliated persons becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding Common Shares
(the earlier of such dates being the "Distribution Date"), the Rights will be
evidenced, with respect to any of the Common Shares outstanding as of the Record
Date, by such Common Share certificate with a copy of this Summary of Rights
attached thereto, in the case of Common Shares for which certificates have been
issued, and, in the case of uncertificated Common Shares, by the registration of
ownership of Common Shares in the Company's share register.
The Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the Common Shares. Until the Distribution Date (or earlier
redemption or expiration of the Rights), upon transfer or new issuance of Common
Shares, new Common Share certificates issued after the Record Date, in the case
of certificated Common shares, and, in the case of uncertificated Common Shares,
the initial transaction statement issued with respect to such Common Shares,
will contain a notation incorporating the Rights Agreement by reference. Until
the Distribution Date (or earlier redemption or expiration of the Rights), the
transfer of any Common Shares outstanding as of the Record Date, including in
the case of certificated Common Shares surrender for transfer of any
certificates therefor even without such notation or a copy of this Summary of
Rights being attached thereto, will also constitute the transfer of the Rights
associated with such Common Shares. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Company's Common
Shares as of the close of business on the Distribution Date and such separate
Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on May 31, 2001 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
Rights Agreement Exhibit B, Page 1
<PAGE>
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares; (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then-current market price of the Preferred Shares; or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-thousandths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date (other than the already-declared stock dividend
referred to in the first paragraph above).
Preferred Shares purchasable upon exercise of the Rights will be
nonredeemable. Each Preferred Share will have a minimum preferential quarterly
dividend rate of $1.00 per share, but will be entitled to an aggregate dividend
of 1,000 times the dividend declared on the Common Shares. In the event of
liquidation, the holders of the Preferred Shares will receive a preferential
liquidation payment equal to the greater of $37,500 or 1,000 times the payment
made per Common Share. Each Preferred Share will have 1,000 votes, voting
together with the Common Shares. Finally, in the event of any merger,
consolidation or other transaction in which Common Shares are exchanged, each
Preferred Share will be entitled to receive 1,000 times the amount received per
Common Share. These rights are protected by customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of a one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. In the event that any person or group of affiliated
or associated persons becomes an Acquiring Person, proper provision shall be
made so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the right
to receive upon exercise that number of Common Shares having a market value of
two times the exercise price of the Right.
At any time after any person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of 50% or more of the
outstanding Common Shares, the Board of Directors of the Company may exchange
the Rights (other than Rights owned by such person or group which will have
become void), in whole or in part, at an exchange ratio of one Common Share, or
one one-thousandth of a Preferred Share (or of a share of a class or series of
the Company's preferred stock having equivalent rights, preferences and
privileges), per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will
Rights Agreement Exhibit B, Page 2
<PAGE>
be issued (other than fractions which are integral multiples of one
one-thousandth of a Preferred Share, which may, at the election of the Company,
be evidenced by depositary receipts) and, in lieu thereof, an adjustment in cash
will be made based on the market price of the Preferred Shares on the last
trading day prior to the date of exercise.
At any time prior to the acquisition by a person or group of affiliated
or associated persons of beneficial ownership of 20% or more of the outstanding
Common Shares, the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $.0001 per Right (the "Redemption Price").
The redemption of the Rights may be made effective at such time on such basis
with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person no such amendment may adversely affect the interests
of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a [Current Report on Form 8-K dated
__________, 1998. A copy of the Rights Agreement is available free of charge
from the Company. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is hereby incorporated herein by reference.
* * * * * *
Rights Agreement Exhibit B, Page 3
<PAGE>
--------------
SMITHFIELD FOODS, INC.
--------------
AMENDMENT NUMBER THREE
TO NOTE PURCHASE AGREEMENT DATED AS OF JULY 15, 1996
Amendment Dated as of January 30, 1998
<PAGE>
SMITHFIELD FOODS, INC. AMENDMENT NUMBER THREE
AMENDMENT NUMBER THREE
AMENDMENT NUMBER THREE (this "Agreement"), dated as of January 30, 1998,
to the separate Note Purchase Agreements, each dated as of July 15, 1996,
between SMITHFIELD FOODS, INC., a Delaware corporation (the "Company"), formerly
known as Smithfield Foods Virginia, Inc. and each of the Persons listed on Annex
1 thereto (collectively, the "Purchasers").
RECITALS:
A. The Company entered into those certain separate Note Purchase
Agreements, each dated as of July 15, 1996, (as amended by Amendment Number One
dated as of July 15, 1997 and Amendment Number Two dated as of December 1, 1997
and as in effect immediately prior to the effectiveness of this Agreement, the
"Existing Note Purchase Agreement," and, as amended by this Agreement, the
"Amended Note Purchase Agreement"), with the Purchasers, pursuant to which the
Company authorized, issued and sold, and certain of the Purchasers purchased (as
set forth on Annex 1 thereto):
(a) $2,825,000 in aggregate principal amount of its six and
twenty-four one-hundredths percent (6.24%) Series A Senior Secured Notes
Due November 1, 1998 (as amended, restated or otherwise modified from time
to time, the "Series A Notes"),
(b) $9,852,942 in aggregate principal amount of its eight and
forty-one one-hundredths percent (8.41%) Series B Senior Secured Notes Due
August 1, 2006 (as amended, restated or otherwise modified from time to
time, the "Series B Notes"),
(c) $40,000,000 in aggregate principal amount of its eight and
thirty-four one-hundredths percent (8.34%) Series C Senior Secured Notes
Due August 1, 2003 (as amended, restated or otherwise modified from time
to time, the "Series C Notes"),
(d) $9,000,000 in aggregate principal amount of its nine and
eighty one-hundredths percent (9.80%) Series D Senior Secured Notes Due
August 1, 2003 (as amended, restated or otherwise modified from time to
time, the "Series D Notes"),
(e) $9,250,000 in aggregate principal amount of its ten and
seventy five one-hundredths percent (10.75%) Series E Senior Secured Notes
Due August 1, 2005 (as amended, restated or otherwise modified from time
to time, the "Series E Notes"),
(f) $100,000,000 in aggregate principal amount of its eight
and fifty-two one-hundredths percent (8.52%) Series F Senior Secured Notes
Due August 1, 2006 (as amended, restated or otherwise modified from time
to time, the "Series F Notes"),
(g) $14,000,000 in aggregate principal amount of its nine and
eighty-five one-hundredths percent (9.85%) Series G Senior Secured Notes
Due November 1, 2006 (as amended, restated or otherwise modified from time
to time, the "Series G Notes"), and
(h) $14,779,412 in aggregate principal amount of its eight and
forty-one-hundredths percent (8.41%) Series H Senior Secured Notes Due
August 1, 2004 (as amended, restated or otherwise modified from time to
time, the "Series H Notes").
<PAGE>
The Series A Notes, the Series B Notes, the Series C Notes, the Series D Notes,
the Series E Notes, the Series F Notes, the Series G Notes and the Series H
Notes are herein referred to, individually, as a "Note," and collectively, as
the "Notes."
B. As of the Effective Date (defined below), the Purchasers are the
holders of all of the outstanding Notes; the holders of the Notes on the
Effective Date are herein referred to as the "Holders."
C. Gwaltney of Smithfield, Ltd., John Morrell & Co., The Smithfield
Packing Company, Incorporated, SFFC, Inc., Patrick Cudahy Incorporated, Brown's
of Carolina, Inc., Lykes Meat Group, Inc., Hancock's Old Fashioned Country Hams,
Inc. and Sunnyland, Inc. (collectively, the "Guarantors"), each a Wholly-Owned
Subsidiary, are guarantors of the obligations of the Company in respect of,
among other things, the Notes, pursuant to that certain Joint and Several
Guaranty dated as of July 15, 1996.
D. The Company has requested that the Holders agree (a) to amend certain
provisions of the Existing Note Purchase Agreement and (b) direct the Security
Trustee to take certain actions with respect to the Collateral.
E. Subject to the terms and conditions set forth in this Agreement, (a)
the Company and the Holders are willing to amend the Existing Note Purchase
Agreement in the manner specified on certain Exhibits hereto and as more
particularly set forth herein and (b) the Holders are willing to direct the
Security Trustee to release and subordinate its interest with respect to certain
portions of the Collateral.
AGREEMENT:
NOW THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and the Holders agree as follows:
SECTION 1. WARRANTIES AND REPRESENTATIONS.
To induce the Holders to enter into this Agreement, the Company and each
of the Guarantors represent and warrant to each of the Holders that as of the
Effective Date (as hereinafter defined):
1.1 Corporate Organization and Authority.
The Company and each Subsidiary:
(a) is a corporation duly incorporated, validly existing and
in good standing under the laws of its jurisdiction of incorporation;
(b) has all legal and corporate power and authority to own and
operate its Properties and to carry on its business as now conducted and
as presently proposed to be conducted;
(c) has all necessary licenses, certificates and permits to
own and operate its Properties and to carry on its business as now
conducted and as presently proposed to be conducted, except where the
failure to have such licenses, certificates and permits, in the aggregate,
could not reasonably be expected to have a Material Adverse Effect; and
2
<PAGE>
(d) has duly qualified or has been duly licensed, and is
authorized to do business and is in good standing, as a foreign
corporation, in each state in the United States of America and in each
other jurisdiction where the failure to be so qualified or licensed and
authorized and in good standing, in the aggregate for all such failures,
could reasonably be expected to have a Material Adverse Effect.
1.2 Authorization, etc.
(a) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and each of the Guarantors.
Each of this Agreement, the Amended Note Purchase Agreement and each other
Financing Document (as defined in the Amended Note Purchase Agreement, the
"Financing Documents") constitutes a legal, valid and binding obligation
of the Company or the Guarantors, as applicable, enforceable, in each
case, against the Company or such Guarantor, as applicable, in accordance
with its terms, except as such enforceability may be limited by
(i) applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of
creditors' rights generally and
(ii) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at
law).
(b) The Holders are the record owners of all of the
outstanding Notes.
(c) The Guarantors are the only Persons which have an
outstanding Guaranty of the Notes.
1.3 Litigation.
There are no proceedings pending, or, to the knowledge of the Company or
the Guarantors, threatened, against or affecting the Company, any Guarantor or
any other Subsidiary, or any of their respective Properties in any court or
before any governmental authority or arbitration board or tribunal that, either
individually or in the aggregate, conflict with or interfere with the ability of
the Company or any of the Guarantors to execute and deliver this Agreement and
to perform their respective obligations hereunder, under the Amended Note
Purchase Agreement and under each of the other Financing Documents.
1.4 No Conflicts, etc.
The execution and delivery by the Company and the Guarantors of this
Agreement and the performance by the Company and the Guarantors of their
respective obligations under each of this Agreement, the Amended Note Purchase
Agreement and the other Financing Documents to which they are a party do not
conflict with, result in any breach in any of the provisions of, constitute a
default under, violate or result in the creation of any Lien upon any Property
of the Company or any Subsidiary under the provisions of:
(a) any charter document, agreement with shareholders or
bylaws of the Company or any Subsidiary;
3
<PAGE>
(b) any agreement, instrument or conveyance by which the
Company or any Subsidiary or any of their respective Properties may be
bound or affected; or
(c) any statute, rule or regulation or any order, judgment or
award of any court, tribunal or arbitrator by which the Company or any
Subsidiary or any of their respective Properties may be bound or affected.
1.5 Governmental Consent.
The execution and delivery by the Company and the Guarantors of this
Agreement and the performance by the Company and the Guarantors of their
respective obligations hereunder, under the Amended Note Purchase Agreement and
the other Financing Documents to which they are a party do not require any
consents, approvals or authorizations of, or filings, registrations or
qualifications with, any governmental authority on the part of the Company or
any Subsidiary under the circumstances and conditions contemplated by this
Agreement, the Amended Note Purchase Agreement or the other Financing Documents.
1.6 Compliance with Law.
Neither the Company nor any Subsidiary:
(a) is in violation of any law, ordinance, governmental
rule or regulation to which it is subject; or
(b) has failed to obtain any license, permit, franchise or
other governmental authorization necessary to the ownership of its
Property or to the conduct of its business;
which violation or failure to obtain might, either individually or in the
aggregate, have a material adverse effect on the business, prospects, profits,
Properties or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or the ability of the Company or the Guarantors
to perform any of their respective obligations set forth in this Agreement, the
Amended Note Purchase Agreement or the other Financing Documents.
1.7 Existence of Defaults.
Immediately prior to, and after giving effect to, the Note Purchase
Agreement Amendment (as such term is defined in Section 2 hereof), no condition
exists that would constitute a Default or an Event of Default under the Note
Purchase Agreement or the Amended Note Purchase Agreement, as the case may be.
1.8 Disclosure.
Neither this Agreement nor any written statement furnished by the Company
or any Guarantor to any Holder in connection herewith contains any untrue
statement of a material fact or omits a material fact necessary to make the
statements contained therein or herein not misleading. There is no fact that the
Company has not disclosed to the Holders in writing that has had or, so far as
the Company can now reasonably foresee, could reasonably be expected to have a
material adverse effect on the business, prospects, profits, Properties or
condition (financial or otherwise) of the Company and the Subsidiaries, taken as
a whole, or the ability of the Company or any Guarantor to perform any of their
respective obligations set forth in this Agreement, the Amended Note Purchase
Agreement or the other Financing Documents.
4
<PAGE>
1.9 True and Correct Copies.
The Company has delivered to the Holders or their special counsel true and
correct copies of (a) the Note Purchase Agreement dated as of March 1, 1998
between Distribution Development, L.L.C. and certain purchasers of Notes
thereunder and the Lease Guaranty by the Company executed in connection
therewith and (b) the Bladen County Option Documents.
SECTION 2. AMENDMENT, DIRECTION; AFFIRMATIONS.
2.1 Amendment to Existing Documents.
The Company and the Guarantors, and, subject to the satisfaction of the
conditions set forth in Section 3 hereof, the Holders, each hereby consents and
agrees that the Existing Note Purchase Agreement is hereby amended in the manner
and as specified in Exhibit A to this Agreement (such amendment provided for in
Exhibit A is herein collectively referred to as the "Note Purchase Agreement
Amendment").
2.2 Direction to Security Trustee.
Subject to the satisfaction of the conditions set forth in Section 3
hereof, the Holders hereby agree to execute and deliver to the Security Trustee
the direction letter in the form attached hereto as Exhibit B.
2.3 Affirmation of Obligations under Amended Note Purchase
Agreement and Notes.
The Company hereby acknowledges and affirms all of its obligations under
the terms of the Amended Note Purchase Agreement, the Notes and each of the
other Financing Documents to which it is a party.
2.4 Affirmation of Obligations under Joint and Several Guaranty
and Financing Documents.
Each of the Guarantors hereby acknowledges and affirms all of its
obligations under the terms of the Joint and Several Guaranty and each other
Financing Document to which it is a party.
2.5 Confirmation of Security Interest.
The Smithfield Packaging Company, Incorporated ("Packing") hereby confirms
to the Holders that the security interest granted to the Security Trustee
pursuant to the terms of the Security Agreement, includes, without limitation, a
first perfected security interest in Packing's option rights as set forth in the
Bladen County Option Documents.
SECTION 3. CONDITIONS TO EFFECTIVENESS OF NOTE PURCHASE AGREEMENT AMENDMENT.
5
<PAGE>
The Note Purchase Agreement Amendment and the direction to the Security
Trustee to release and subordinate its interest with respect to certain portions
of the Collateral as set forth on Exhibit B hereto shall not become effective
unless all of the following conditions precedent shall have been satisfied in
full (the date of such satisfaction being herein referred to as the "Effective
Date"):
3.1 Execution and Delivery of this Agreement.
The Company and each of the Guarantors shall have executed and delivered
to each of the Holders an original counterpart of this Agreement.
3.2 No Defaults; Warranties and Representations True.
No Default or Event of Default shall exist, and the warranties and
representations set forth in Section 1 hereof shall be true and correct on the
Effective Date.
3.3 Authorization of Transactions.
The Company and each of the Guarantors shall have authorized, by all
necessary corporate action, the execution and delivery of this Agreement and the
performance of all obligations of, and the satisfaction of all conditions
pursuant to this Section 3 by, and the consummation of all transactions
contemplated by the Amended Note Purchase Agreement and the other Financing
Documents by, the Company and each of the Guarantors.
3.4 Legal Opinions.
The Holders shall have received legal opinions as to such matters as the
Holders and their special counsel shall request in connection with the
transactions contemplated by this Agreement.
3.5 Expenses.
The Company shall have paid all costs and expenses of the Holders relating
to this Agreement in accordance with Section 4.5 hereof.
4. SECTION MISCELLANEOUS.
4.1 Governing Law.
THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE
RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, INTERNAL VIRGINIA LAW, EXCLUDING
CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE
APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE.
6
<PAGE>
4.2 Duplicate Originals.
Two or more duplicate originals of this Agreement may be signed by the
parties, each of which shall be an original but all of which together shall
constitute one and the same instrument. This Agreement may be executed in one or
more counterparts and shall be effective when at least one counterpart shall
have been executed by each party hereto, and each set of counterparts that,
collectively, show execution by each party hereto shall constitute one duplicate
original.
4.3 Waivers and Amendments.
Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated orally, or by any action or inaction, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
4.4 Section Headings.
The titles of the Sections hereof appear as a matter of convenience only,
do not constitute a part of this Agreement and shall not affect the construction
hereof.
4.5 Costs and Expenses.
The Company shall pay all costs and expenses of the Holders relating to
this Agreement, including, but not limited to, the statement for reasonable fees
and disbursements of the Holders' special counsel presented to the Company on
the Effective Date. The Company will also pay, upon receipt thereof, each
additional statement for reasonable fees and disbursements of the Holders'
special counsel rendered after the Effective Date in connection with this
Agreement or the Financing Documents.
4.6 Survival.
All warranties, representations, certifications and covenants made by the
Company or any of the Guarantors in this Agreement shall be considered to have
been relied upon by the Holders and shall survive the execution and delivery of
this Agreement, regardless of any investigation made by or on behalf of the
Holders.
4.7 Time of Essence.
Time is and shall be of the essence in the satisfaction of all the
conditions set forth in Section 3 of this Agreement.
4.8 Defined Terms.
Capitalized terms used herein and not defined herein shall have the
meanings assigned to them in the Amended Note Purchase Agreement.
[Remainder of page intentionally left blank; next page is signature page.]
7
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf by a duly authorized officer or agent thereof.
SMITHFIELD FOODS, INC.
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Vice President
GWALTNEY OF SMITHFIELD, LTD.
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Secretary
JOHN MORRELL & CO.
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Secretary
THE SMITHFIELD PACKING COMPANY,
INCORPORATED
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Secretary
<PAGE>
SFFC, INC.
/s/ DAVID W. DUPERT
---------------
Name: David W. Dupert
Title: President
PATRICK CUDAHY INCORPORATED
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Secretary
BROWN'S OF CAROLINA, INC.
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Secretary
LYKES MEAT GROUP, INC.
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Secretary
<PAGE>
HANCOCK'S OLD FASHIONED COUNTRY
HAMS, INC.
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Secretary
SUNNYLAND, INC.
/s/ AARON D. TRUB
-------------
Name: Aaron D. Trub
Title: Secretary
Accepted and Agreed:
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
By: /s/ DAVID E. JOHNSON
----------------
Name: David E. Johnson
Title: Investment Officer
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
By: /s/ DAVID E. JOHNSON
----------------
Name: David E. Johnson
Title: Investment Officer
<PAGE>
MELLON BANK, N.A., solely in its capacity as Trustee for the Bell Atlantic
Master Trust, (as directed by John Hancock Mutual
Life Insurance Company), and not in its individual capacity
By: /s/ BERNADETTE RIST
---------------
Name: Bernadette Rist
Title: Authorized Signatory
MELLON BANK, N.A., solely in its capacity as Trustee for The Long-Term
Investment Trust, (as directed by John Hancock Mutual Life Insurance Company),
and not in its individual capacity
By: /s/ BERNADETTE RIST
---------------
Name: Bernadette Rist
Title: Authorized Signatory
THE MARITIME LIFE ASSURANCE COMPANY
By: /s/ GARY MARTIN
-----------
Name: Gary Martin
Title: Director, Bonds and Corporate Finance
By: /s/ PETER A. STUART
---------------
Name: Peter A. Stuart
Title: Senior Vice President
Chief Investment Officer
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
By: /s/ J. THOMAS CHRISTOPHERSON
------------------------
Name: J. Thomas Christopherson
Title: Authorized Representative
<PAGE>
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
AND
INDEPENDENT LIFE AND ACCIDENT INSURANCE COMPANY
By: /s/ JULIA S. TUCKER
---------------
Name: Julia S. Tucker
Title: Investment Officer
ACADEMY LIFE INSURANCE COMPANY
By: /s/ MICHAEL S. SMITH
----------------
Name: Michael S. Smith
Title: Second Vice President - Investments
PEOPLES SECURITY LIFE INSURANCE COMPANY
By: /s/ MICHAEL S. SMITH
----------------
Name: Michael S. Smith
Title: Second Vice President - Investments
<PAGE>
UNITED OF OMAHA LIFE INSURANCE COMPANY
By: /s/ EDWIN S. GARRISON, JR.
----------------------
Name: Edwin S. Garrison, Jr.
Title: First Vice President
COMPANION LIFE INSURANCE COMPANY
By: /s/ EDWIN S. GARRISON, JR.
----------------------
Name: Edwin S. Garrison, Jr.
Title: Assistant Treasurer
By: /s/ JEFFRY F. SAILER
----------------
Name: Jeffry F. Sailer
Title: Assistant Treasurer
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: /s/ KATHLEEN LYNCH
--------------
Name: Kathleen Lynch
Title: Managing Director
:
CM LIFE INSURANCE COMPANY
By: /s/ KATHLEEN LYNCH
--------------
Name: Kathleen Lynch
Title: Investment Officer
<PAGE>
EXHIBIT A
AMENDMENT TO EXISTING NOTE PURCHASE AGREEMENT
(Section)1. Section 9.1 of the Existing Note Purchase Agreement is amended
to amend and restate the definition of "Senior Subordinated Debt" and to add the
definitions of "Acquisition", "Bladen County Cogeneration Property" and "Bladen
County Option Documents" in the appropriate alphabetical order in
such section:
Acquisition -- Section 6.10.
Bladen County Cogeneration Property -- means that certain piece or parcel
of land located in Hollow Township, Bladen County, North Carolina, together with
a certain twenty-five (25) foot right of way easement, which property is more
particularly described in that certain Deed made and entered into on or around
July 16, 1997, by and between The Smithfield Packing Company, Incorporated, as
grantor and party of the first part, and United Supply of America, as grantee
and party of the second part, together with any and all buildings, structures,
improvements, fixtures, equipment, machinery and other property now or hereafter
affixed to, located on, within or beneath, or used in connection with said
property.
Bladen County Option Documents -- means that certain Steam Purchase and
Sales Agreement dated July 16, 1997, between United Supply of America, as
supplier, and The Smithfield Packing Company, Incorporated, as purchaser,
together with that certain Memorandum of Option to Purchase made and executed by
United Supply of America in connection therewith or any other instruments and
agreements pursuant to which The Smithfield Packing Company, Incorporated, or
its successors and assigns, may acquire all or any portion of the Bladen County
Cogeneration Property.
Senior Subordinated Debt - means at any time the aggregate amount of Debt
of the Company outstanding at such time which has the terms and conditions
described in the Company's Preliminary Offering Memorandum (draft dated January
15, 1998) prepared by Chase Securities, Inc. for its issue of Senior
Subordinated Notes due 2008 and is in a principal amount not exceeding
$200,000,000.
(Section)2. Section 6.10 of the Existing Note Purchase Agreement is
hereby amended and restated to read in full as follows:
6.10 Consolidated Tangible Net Worth.
The Company shall not at any time permit Consolidated Tangible Net Worth,
determined at such time, to be less than the sum of
(a) two hundred million dollars ($200,000,000), plus
(b) the sum of the Company Fiscal Year Net Worth Increase
Amounts calculated for all fiscal years of the Company ended on or after
the Closing Date, plus
(c) fifty percent (50%) of the aggregate amount of increases in
Consolidated Tangible Net Worth after December 1, 1997 resulting from the
issuance by the Company of capital stock as consideration in Acquisitions
made by the Company and its Subsidiaries.
EXHIBIT A-1
<PAGE>
"Acquisition" means, any transaction, or any series of related transactions, by
which the Company and/or any of its Subsidiaries (a) acquires any going business
or all or substantially all of the assets of any Person, whether through
purchase of assets, merger or otherwise, (b) directly or indirectly acquires
control of at least a majority, in number of votes, of the securities of a
corporation that have ordinary voting power for the election of directors or (c)
directly or indirectly acquires control of at least a majority of the partner,
member or other ownership interests of any Person that is not a corporation.
"Company Fiscal Year Net Worth Increase Amount" means, for any fiscal year of
the Company, the greater of
(i) fifty percent (50%) of Consolidated Net Income for such
fiscal year and
(ii) zero dollars ($0).
(Section)3. A New Section 6.24 to the Existing Note Purchase Agreement is
hereby added and will read in full as follows:
6.24 Covenants Regarding the Bladen County Cogeneration Property.
The Company covenants and agrees that, in the event the Company or any
Affiliate shall acquire all or any portion of the Bladen County Cogeneration
Property pursuant to the Bladen County Option Documents or otherwise, the
Company shall, simultaneously with such acquisition, cause the Bladen County
Cogeneration Property (or the portion thereof) so acquired to be pledged as
additional collateral security for the indebtedness evidenced by the Notes
pursuant to documentation and in a manner that is in all respects satisfactory
to the Required Holders. The Company shall pay any and all fees, costs and
expenses including, without limitation, legal fees and expenses and title
insurance charges and premiums, incurred by the holders of the Notes, the
Security Trustee and the other parties to such transaction.
The Company further covenants and agrees that it shall not, directly or
indirectly, terminate, modify or amend any of the Bladen County Option
Documents, without the prior written consent of the Required Holders.
EXHIBIT A-2
<PAGE>
EXHIBIT B
DIRECTION TO SECURITY TRUSTEE
To: First Union National Bank, a national banking association
(successor by merger to First Union Bank of Connecticut, a
Connecticut banking corporation), as trustee under a Trust
Agreement dated as of July 15, 1996 with Smithfield Foods, Inc.
(the "Company") and certain other parties
Date: January 30, 1998
Re: Amendment Number Three, dated as of January 30, 1998, to the
separate Note Purchase Agreements each dated as of July 15, 1996
(the "Amendment Agreement"), among the Company, certain of its
subsidiaries and other Persons party thereto (such other Persons
herein collectively referred to as the "Holders")
Ladies and Gentlemen:
The undersigned are all of the Holders referred to above. In accordance
with Section 2.2 of the Amendment Agreement, the undersigned hereby directs you
to execute and deliver to Smithfield Foods, Inc. each of the documents attached
hereto as Annex 1, Annex 2, Annex 3 and Annex 4.
[Holders]
By__________
EXHIBIT B-1
SMITHFIELD FOODS, INC.
1998 STOCK INCENTIVE PLAN
1. PURPOSE.
The purpose of this Smithfield Foods, Inc. 1998 Stock Incentive Plan (the
"Plan"), is to further the long term stability and financial success of
Smithfield Foods, Inc. (the "Company"), by attracting and retaining key
employees through the use of stock incentives. It is believed that ownership of
Company Stock will stimulate the efforts of those employees upon whose judgment
and interests the Company is and will be largely dependent for the successful
conduct of its business. It is also believed that Incentive Awards granted to
such employees under this Plan will strengthen their desire to remain employed
with the Company and will further the identification of those employees'
interests with those of the Smithfield Foods, Inc. shareholders. The Plan is
intended to operate in compliance with the provisions of Securities and
Exchange Commission Rule 16b-3.
2. DEFINITIONS.
As used in the Plan, the following terms have the meanings indicated:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Applicable Withholding Taxes" means the aggregate amount of
federal, state and local income and payroll taxes that an Company is
required to withhold in connection with any Performance Award or any
exercise of a Nonstatutory Stock Option.
(c) "Board" means the Board of Directors of Smithfield Foods, Inc.
(d) "Change of Control" means the occurrence of any of the following
events:
(i) The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) of 20% or more of either the then outstanding
shares of Common Stock of the Company or the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors, but excluding for this purpose,
any such acquisition by the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) of the Company or its
subsidiaries, or any corporation with respect to which, following such
acquisition, more than 50% of, respectively, the then outstanding shares
of Common Stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by the individuals and entities who were the
beneficial owners, respectively, of the Common Stock and voting
securities of the Company immediately prior to such acquisition in
substantially the same proportion as their ownership, immediately prior
to such acquisition, of the then outstanding shares of Common Stock of
the Company or the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors, as the case may be; or
(ii) Individuals who, as of the date hereof, constitute the Board (as
of the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any
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individual becoming a director subsequent to the date hereof whose
election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Company (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Securities Exchange Act
of 1934); or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, in each case, with respect to
which the individuals and entities who were the respective beneficial
owners of the Common Stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do
not, following such reorganization, merger or consolidation,
beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of Common Stock and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of
the corporation resulting from such reorganization, merger or
consolidation, or a complete liquidation or dissolution of the Company
or of its sale or other disposition of all or substantially all of the
assets of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Company" means Smithfield Foods, Inc., a Virginia corporation.
(g) "Company Stock" means common stock of the Company. In the event of a
change in the capital structure of the Company (as provided in Section 14),
the shares resulting from such a change shall be deemed to be Company Stock
within the meaning of the Plan.
(h) "Committee" means the Compensation Committee of the Board or a
subcommittee of the Compensation Committee, consisting of not less than two
directors of the Company, unless the Board shall appoint another committee
(or subcommittee) to administer the Plan. If and to the extent required by
Rule 16b-3, all members of the Committee shall be non-employee directors as
defined in Rule 16b-3. If any member of the Committee fails to qualify as a
non-employee director (to the extent required by Rule 16b-3), such person
shall not take part in future Committee deliberations with respect to the
Plan.
(i) "Date of Grant" means the effective date on which an Incentive Award
is granted by the Committee.
(j) "Disability" or "Disabled" means, as to an Incentive Stock Option, a
Disability within the meaning of Code section 22(e)(3). As to all other
Incentive Awards, the Committee shall determine whether a Disability exists
and such determination shall be conclusive.
(k) "Fair Market Value" means, as of the day of the Date of Grant (or,
if there were no trades on the Date of Grant, the last preceding day on
which Company Stock was traded) (i) if the Company Stock is traded on an
exchange, the average of the highest and lowest registered sales prices of
the Company Stock at which it is traded on such date on the exchange on
which it generally has the greatest trading volume or (ii) if the Company
Stock is traded in the over-the-counter market, the last sale price on such
date as reported by The Nasdaq National Market.
(l) "Incentive Award" means, collectively, a Performance Award, or an
Option under the Plan.
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(m) "Incentive Stock Option" means an Option intended to meet the
requirements of, and qualify for favorable federal income tax treatment
under, Code section 422.
(n) "Mature Shares" means shares of Company Stock for which the holder
thereof has good title, free and clear of all liens and encumbrances and
which such holder either (i) has held for at least six months or (ii) has
purchased on the open market.
(o) "Nonstatutory Stock Option" means an Option that does not meet the
requirements of Code section 422, or, even if meeting the requirements of
Code section 422, is not intended to be an Incentive Stock Option and is so
designated.
(p) "Option" means a right to purchase Company Stock granted under the
Plan, at a price determined in accordance with the Plan.
(q) "Parent" means a parent corporation of the Company within the
meaning Code section 425(e).
(r) "Participant" means any employee of the Company who receives an
Incentive Award under the Plan.
(s) "Performance Award" means an Incentive Award made pursuant to
Section 6.
(t) "Performance Criteria" means any of the following areas of
performance of the Company or a Subsidiary of the Company: asset growth;
pre-tax earnings; pre-tax profits; debt to equity ratio; earnings per
share; revenues; operating income; operating cash flow; net income, before
or after taxes; net income before income taxes, incentive payments and
accounting for minority interest; return on total capital, equity, revenue
or assets; or market value of Company Stock. All Performance Criteria shall
be calculated in accordance with generally accepted accounting principles
consistently applied by the Company.
(u) "Rule 16b-3" means Rule 16b-3 of the Securities and Exchange
Commission promulgated under the Act. A reference in the Plan to Rule 16b-3
shall include a reference to any corresponding rule (or number
redesignation) of any amendments to Rule 16b-3 enacted after the effective
date of the Plan's adoption.
(v) "Subsidiary" means a subsidiary of the Company within the meaning of
Code section 425(d).
(w) "Taxable Year" means the fiscal period used by the Company for
reporting taxes on income under the Code.
3. GENERAL.
The following types of Incentive Awards may be granted under the Plan:
Options, or Performance Awards. Options granted under the Plan may be Incentive
Stock Options or Nonstatutory Stock Options.
4. STOCK.
Subject to Section 14 of the Plan, there shall be reserved for issuance
under the Plan an aggregate of one million five hundred thousand (1,500,000)
shares of Company Stock, which shall be authorized, but unissued shares. Shares
that have not been issued under the Smithfield Foods, Inc. 1992 Stock Incentive
Plan (the "1992 Plan"), or shares allocable to Options or portions thereof
granted under the Company's 1992 Plan or this Plan that expire or otherwise
terminate unexercised may again be subjected to an Incentive Award under the
Plan.
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The Committee is expressly authorized to make an Incentive Award to a
Participant conditioned upon the surrender for cancellation of an option
granted under an existing Incentive Award, provided, however, that the
Committee is expressly prohibited from making such an Incentive Award if such
Award reduces the Option exercise price of Company Stock covered by the
existing Award or Option being surrendered. No more than three hundred thousand
(300,000) shares may be allocated to the Incentive Awards, including the
maximum amounts payable under a Performance Award, that are granted to any
Participant during any single Taxable Year.
5. ELIGIBILITY.
(a) All present and future employees of the Company (or Parent or
Subsidiary of the Company) whom the Committee determines to have contributed or
who can be expected to contribute significantly to the Company or Parent or
Subsidiary shall be eligible to receive Incentive Awards under the Plan. The
Committee shall have the power and complete discretion, as provided in Section
15, to select eligible employees to receive Incentive Awards and to determine
for each employee the nature of the award and the terms and conditions of each
Incentive Award.
(b) The grant of an Incentive Award shall not obligate the Company or any
Parent or Subsidiary to pay an employee any particular amount of remuneration,
to continue the employment of the employee after the grant or to make further
grants to the employee at any time thereafter.
6. PERFORMANCE AWARDS.
(a) Each Performance Award shall be evidenced by an agreement (an Award
Agreement) setting forth the Performance Goals for the award, including the
Performance Criteria, the target and maximum amounts payable and such other
terms and conditions as are applicable to the Performance Award. The amount
payable under a Performance Award to any Participant for a Taxable Year may not
exceed the greater of $2,000,000 or 3% of the Company's net income before
income taxes, incentive payments and accounting for minority interests for the
year for which the Performance Award is made. Each Performance Award shall be
awarded and administered to comply with the requirements of Code section
162(m). In the event of any conflict between a Award Agreement and the Plan,
the terms of the Plan shall govern.
(b) The Committee shall establish the Performance Goals for Performance
Awards to Participants. The Committee shall determine the extent to which any
Performance Criteria shall be used and weighted in determining Performance
Awards. The Committee may vary the Performance Criteria, Performance Goals and
weightings from Participant to Participant, Performance Award to Performance
Award and Plan Year to Plan Year. The Committee may increase, but not decrease,
any Performance Goal during a Plan Year.
(c) The Committee shall establish for each Performance Award the amount of
cash payable at specified levels of performance, based on the Performance Goal
for each Performance Criteria. Any Performance Award shall be granted not later
than 90 days after the start of the period for which the Performance Award
relates and shall be granted prior to the completion of 25% of such period. The
Committee will make all determinations regarding the achievement of any
Performance Goals. The Committee may not increase during a Plan Year the amount
that would otherwise be payable upon achievement of the Performance Goal or
Goals but may reduce or eliminate the payments as provided in a Performance
Award.
(d) The actual payments to a Participant under a Performance Award will be
calculated by applying the achievement of a Performance Criteria to the
Performance Goal as established in the Award Agreement. The
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Committee will make or review all calculations of actual payments and the
Committee shall certify in writing the extent, if any, to which the Performance
Goals have been met.
(e) Performance Awards will be paid in cash, at such time or times as are
provided in the Award Agreement. Performance Awards will be subject to
Applicable Withholding Taxes. The Committee may provide in the Award Agreement
that the Participant may make a prior election to defer the payment under a
Performance Award subject to such terms and conditions as the Committee may
determine.
(f) Nothing contained in the Plan will be deemed in any way to limit or
restrict the Company or the Committee from making any award or payment to any
person under any other plan, arrangement or understanding, whether now existing
or hereafter in effect.
(g) A Participant's interest in a Performance Award may not be sold,
assigned, transferred, pledged, hypothecated, or otherwise encumbered.
7. STOCK OPTIONS.
(a) The Committee may make grants of Options to Participants. Whenever the
Committee deems it appropriate to grant Options, notice shall be given to the
Participant stating the number of shares for which Options are granted, the
Option price per share, whether the Options are Incentive Stock Options or
Nonstatutory Stock Options, and the conditions to which the grant and exercise
of the Options are subject. This notice, when duly accepted in writing by the
Participant, shall become a stock option agreement.
(b) The exercise price of shares of Company Stock covered by an Option
shall be not less than 100% of the Fair Market Value of such shares on the Date
of Grant.
(c) Options may be exercised in whole or in part at such times as may be
specified by the Committee in the Participant's stock option agreement;
provided that, the exercise provisions for Incentive Stock Options shall in all
events not be more liberal than the following provisions:
(i) No Incentive Stock Option may be exercised after the first to occur
of (x) 10 years from the Date of Grant, (y) three months following the date
of the Participant's retirement or termination of employment with the
Company for reasons other than Disability or death, or (z) one year
following the date of the Participant's termination of employment on
account of Disability or death.
(ii) An Incentive Stock Option by its terms, shall be exercisable in any
calendar year only to the extent that the aggregate Fair Market Value
(determined at the Date of Grant) of the Company Stock with respect to
which Incentive Stock Options are exercisable for the first time during the
calendar year does not exceed $100,000 (the "Limitation Amount"). Incentive
Stock Options granted under the Plan and all other plans of any Company
shall be aggregated for purposes of determining whether the Limitation
Amount has been exceeded. The Committee granting the Option may impose such
conditions as it deems appropriate on an Incentive Stock Option to ensure
that the foregoing requirement is met. If Incentive Stock Options that
first become exercisable in a calendar year exceed the Limitation Amount,
the excess Options will be treated as Nonstatutory Stock Options to the
extent permitted by law.
(d) Unless otherwise provided in an Incentive Award, Options shall become
fully exercisable (i) upon a Change of Control or (ii) on the day immediately
preceding the Distribution Date under the Rights Agreement
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dated as of September 1, 1997, as amended by Amendment No. 1 dated as of May 1,
1998, between the Company and Harris Trust and Savings Bank, as the same may be
further amended from time to time, and any successor or replacement rights
agreement. Unless otherwise provided in an Incentive Award, no option shall be
exercisable sooner than five years from the Date of Grant.
8. METHOD OF EXERCISE OF OPTIONS.
(a) Options may be exercised by the Participant giving written notice of
the exercise to the Company, stating the number of shares the Participant has
elected to purchase under the Option. The notice shall be effective if
accompanied by the exercise price in full in cash. In addition, in the terms of
an Option or by other action, the Committee may permit the Participant to (i)
deliver Mature Shares (valued at their Fair Market Value on the date of
exercise) in satisfaction of all or any part of the exercise price, or (ii)
deliver a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company, from the sale or
loan proceeds with respect to the sale of Company Stock or a loan secured by
Company Stock, the amount necessary to pay the exercise price. In lieu of
physical delivery of Mature Shares of Company Stock that are intended to be
delivered, the Participant may either (a) if the Company Stock is held by a
registered securities broker for Participant, provide a notarized statement
attesting to the number of shares owned, or (b) if the Company Stock is
actually held by Participant, provide a statement with certificate numbers of
the shares owned.
(b) The Company may place on any certificate representing Company Stock
issued upon the exercise of an Option any legend deemed desirable by the
Company's counsel to comply with federal or state securities laws, and the
Company may require a customary written indication of the Participant's
investment intent. Until the Participant has made any required payment,
including any Applicable Withholding Taxes, and has had issued a certificate
for the shares of Company Stock acquired, he or she shall possess no
shareholder rights with respect to the shares.
(c) Each Participant shall agree as a condition of the exercise of an
Option to pay to the Company, or make arrangements satisfactory to the Company
regarding the payment to the Company of, Applicable Withholding Taxes. Until
such amount has been paid or arrangements satisfactory to the Company have been
made, no stock certificate shall be issued upon the exercise of an Option. As
an alternative to making a cash payment to the Company to satisfy Applicable
Withholding Taxes, in addition, in the terms of an Option or by other action,
the Committee may permit the Participant to elect to (i) deliver Mature Shares
or (ii) have the Company retain that number of shares of Company Stock that
would satisfy all or a specified portion of the Applicable Withholding Taxes.
9. ELECTION TO DEFER RECEIPT OF STOCK.
(a) To the extent determined by the Committee, a Participant may elect to
defer receipt of Shares that the Participant would otherwise receive upon
exercise of a Nonstatutory Stock Option by completing a deferral election (a
"Deferral Election"). A Deferral Election must be in writing and must be
delivered to the Secretary of the Company at least six months before the Option
will be exercised. A Deferral Election shall be irrevocable in respect to the
number of shares under the Options to which it pertains. A Deferral Election
must specify the applicable number or percentage of the Shares on which the
Participant wishes to defer receipt. This Section 9 shall also apply to allow
Deferral Elections on the exercise of a Nonstatutory Stock Option issued under
the 1992 Plan.
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(b) The following provisions apply with respect to all Options for which a
Deferral Election is made. The optionee must pay the exercise price of the
Options by delivery to the Company of Shares (the "Exercise Shares") in the
amount of the full Option exercise price for the Shares being acquired.
Delivery of the Exercise Shares may be made as provided in Section 8. Upon
delivery of the Exercise Shares, the Company shall issue Shares equal to the
sum of (1) the number of Shares on which the Option was exercised reduced by
the number of Exercise Shares (the "Deferred Shares"), and (2) if the
Participant surrendered the Exercise Shares, Shares equal to the number of the
Exercise Shares. The Deferred Shares shall be credited to the optionee's
account (the "Deferred Shares Account") established under a trust (the
"Deferred Shares Trust"). Any additional Shares shall be delivered to the
Participant.
(c) The Deferred Shares Trust shall secure the Company's obligation to
transfer the Deferred Shares to the Participant. The Deferred Shares Trust and
its assets shall remain subject to the claims of the Company's creditors and
any interest the Participant may be deemed to have in the Deferred Shares Trust
may not be sold, hypothecated or transferred (including, without limitation,
transfer by gift), except by will or the laws of descent and distribution. The
certificates for shares issued to the Deferred Shares Trust shall be issued in
the name of the trustee. For accounting purposes, the trustee shall maintain
records of the Deferred Shares Account for each Participant. All dividends and
other distributions paid or made with respect to the Common Stock in the
Deferred Shares Trust shall be held in the Deferred Shares Trust account. All
cash dividends or other distributions shall be invested in additional shares of
Common Stock. The Participant shall have the right to direct the trustee as to
the voting of shares of Common Stock in the Deferred Shares Account.
(d) A Deferral Election shall provide for payment of the Deferred Shares
Account at a future date or dates elected by the Participant. A Deferral
Election shall also provide the form of payment of the Deferred Shares Account.
The Committee may establish the permissible forms of payment and dates for
payment to be offered under a Deferral Election. In addition, the Participant
may elect to receive the Deferred Shares Account in a single lump sum payment
upon the occurrence of a Change of Control in lieu of any other form that would
otherwise be payable pursuant to a prior election. The single lump sum payment
shall be paid as soon as practicable after the Change of Control occurs. Except
for an election made within 30 days of the effective date of this Plan which
shall be immediately effective, any election or revocation of an election by
the Participant as to the date of payment or payment upon a Change of Control
shall be effective six months after it is made.
(e) The Committee may establish such procedures as are necessary or
appropriate to implement the provisions of this Section 9 and may delegate the
administration to one or more employees of the Company.
10. TRANSFERABILITY OF OPTIONS AND OTHER AWARDS.
Nonstatutory Stock Options may be transferable by a Participant and
exercisable by a person other than the Participant, but only to the extent
specifically provided in the Incentive Award or in other action of the
Committee. Incentive Stock Options, by their terms, and other Incentive Awards
shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable, during the Participant's lifetime, only
by the Participant.
11. EFFECTIVE DATE OF THE PLAN.
The effective date of the Plan is July 1, 1998. The Plan shall be
submitted to the shareholders of the Company for approval. Until the Plan has
been approved by the Company's shareholders, no Performance Award shall be
awarded that is not contingent on these events and no Option granted shall be
exercisable.
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12. TERMINATION, MODIFICATION, CHANGE.
If not sooner terminated by the Board, this Plan shall terminate at the
close of business on June 30, 2008. No Incentive Awards shall be made under the
Plan after its termination. The Board may amend or terminate the Plan in such
respects as it shall deem advisable; provided that, if and to the extent
required by the Code, no change shall be made that increases the total number
of shares of Company Stock reserved for issuance pursuant to Incentive Awards
granted under the Plan (except pursuant to Section 14), materially modifies the
requirements as to eligibility for participation in the Plan, or materially
increases the benefits accruing to Participants under the Plan, unless such
change is authorized by the shareholders of the Company. Notwithstanding the
foregoing, the Board may unilaterally amend the Plan and Incentive Awards with
respect to Participants as it deems appropriate to ensure compliance with Rule
16b-3 and to cause Incentive Stock Options to meet the requirements of the Code
and regulations thereunder. Except as provided in the preceding two sentences,
a termination or amendment of the Plan shall not, without the consent of the
Participant, adversely affect a Participant's rights under an Incentive Award
previously granted to him or her.
13. OTHER LIMITATIONS.
To the extent provided in an Incentive Award, all or part of the rights
with respect to the Incentive Award may be subject to the conditions that the
Participant not engage or have engaged (i) in fraud, dishonesty, conduct in
violation of Company policy, or any similar act at any time while an Employee;
or (ii) in activity directly or indirectly in competition with any business of
the Company or a Subsidiary, or in other conduct inimical to the best interests
of the Company or a Subsidiary, during or following the Participant's
employment with the Company or a Subsidiary. If it is determined by the
Committee or the Committee's designee, either before or after termination of
employment of a Participant, that there has been a failure of any such
condition in an Incentive Award, all Incentive Awards and all rights with
respect to all Incentive Awards granted to such Participant may be immediately
terminated and any Company Stock issued pursuant to the Awards shall be
forfeited.
14. CHANGE IN CAPITAL STRUCTURE.
(a) In the event of a stock dividend, stock split or combination of
shares, the number of shares of stock or securities of the Company to be
subject to the Plan and to Incentive Awards then outstanding or to be granted
thereunder, the maximum number of shares or securities which may be delivered
under the Plan, and the exercise price of outstanding Options shall be
automatically adjusted to account for the event. In the event of a
recapitalization or merger in which the Company is the surviving corporation or
other change in the Company's capital stock (including, but not limited to, the
creation or issuance to shareholders generally of rights, options or warrants
for the purchase of common stock or preferred stock of the Company), the number
and kind of shares of stock or securities of the Company to be subject to the
Plan and to Incentive Awards then outstanding or to be granted thereunder, the
maximum number of shares or securities which may be delivered under the Plan,
the exercise price and other relevant provisions shall be appropriately
adjusted by the Committee, whose determination shall be binding on all persons.
If the adjustment would produce fractional shares with respect to any
unexercised Option, the Committee may adjust appropriately the number of shares
covered by the Option so as to eliminate the fractional shares.
(b) If the Company is a party to a consolidation or a merger in which the
Company is not the surviving corporation, a transaction that results in the
acquisition of substantially all of the Company's outstanding stock
A-8
<PAGE>
by a single person or entity, or a sale or transfer of substantially all of the
Company's assets, the Committee may take such actions with respect to
outstanding Incentive Awards as the Committee deems appropriate.
(c) Notwithstanding anything in the Plan to the contrary, the Committee
may take the foregoing actions without the consent of any Participant, and the
Committee's determination shall be conclusive and binding on all persons for
all purposes.
(d) If a Change of Control occurs, the Committee may take such actions
with respect to outstanding Options or Awards as the Committee deems
appropriate. These actions may include, but shall not be limited to,
accelerating the expiration date of any or all outstanding Options and Awards
and the dates on which any part of the Options and Awards may be exercised. The
effectiveness of such acceleration, and any exercise of Options and Awards
pursuant thereto with respect to shares in excess of the number of shares which
could have been exercised in the absence of such acceleration, may be
conditioned upon the consummation of the applicable Change of Control.
15. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee. The Committee shall have
general authority to impose any limitation or condition upon an Incentive Award
the Committee deems appropriate to achieve the objectives of the Incentive
Award and the Plan and, without limitation and in addition to powers set forth
elsewhere in the Plan, shall have the following specific authority:
(a) The Committee shall have the power and complete discretion to
determine (i) which eligible employees shall receive Incentive Awards and the
nature of each Incentive Award, (ii) the terms and conditions of any
Performance Award, (iii) the number of shares of Company Stock to be covered by
each Incentive Award, (iv) whether Options shall be Incentive Stock Options or
Nonstatutory Stock Options, (v) the time or times when an Incentive Award shall
be granted, (vi) whether an Incentive Award shall become vested over a period
of time and when it shall be fully vested, (vii) when Options may be exercised,
(viii) whether a Disability exists, (ix) the manner in which payment will be
made upon the exercise of Options, (x) conditions relating to the length of
time before disposition of Company Stock received upon the exercise of Options
is permitted, (xi) whether to authorize a Participant (A) to use Mature Shares
to satisfy Applicable Withholding Taxes or (B) to have the Company withhold
from the shares to be issued under an Incentive Award the number of shares
necessary to satisfy Applicable Withholding Taxes, (xii) notice provisions
relating to the sale of Company Stock acquired under the Plan, and (xiii) any
additional requirements relating to Incentive Awards that the Committee deems
appropriate. The Committee shall have the power to amend the terms of
previously granted Incentive Awards that were granted by the Committee so long
as the terms as amended are consistent with the terms of the Plan and provided
that the consent of the Participant is obtained with respect to any amendment
that would be detrimental to him or her, except that such consent will not be
required if such amendment is for the purpose of complying with Rule 16b-3 or
any requirement of the Code applicable to the Incentive Award.
(b) The Committee may adopt rules and regulations for carrying out the
Plan with respect to Participants. The interpretation and construction of any
provision of the Plan by the Committee shall be final and conclusive as to any
Participant. The Committee may consult with counsel, who may be counsel to the
Company, and shall not incur any liability for any action taken in good faith
in reliance upon the advice of counsel.
A-9
<PAGE>
(c) A majority of the members of the Committee shall constitute a quorum,
and all actions of the Committee shall be taken by a majority of the members
present. Any action may be taken by a written instrument signed by all of the
members, and any action so taken shall be fully effective as if it had been
taken at a meeting.
16. NOTICE.
All notices and other communications required or permitted to be given
under this Plan shall be in writing and shall be deemed to have been duly given
if delivered personally or mailed first class, postage prepaid, as follows: (a)
if to the Company - at the principal business address of the Company to the
attention of the Secretary; or (b) if to any Participant - at the last address
of the Participant known to the sender at the time the notice or other
communication is sent.
17. INTERPRETATION.
The terms of this Plan are subject to all present and future regulations
and rulings of the Secretary of the Treasury or his or her delegate relating to
the qualification of Incentive Stock Options under the Code. If any provision
of the Plan conflicts with any such regulation or ruling, then that provision
of the Plan shall be void and of no effect. The terms of this Plan shall be
governed by the laws of the Commonwealth of Virginia.
A-10
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Set forth below is a list of each of the subsidiaries of Smithfield Foods, Inc.
(other than subsidiaries whose names have been omitted in accordance with
Regulation S-K Item 601(21)(ii)) and their respective jurisdictions of
organization.
JURISDICTION
NAME OF SUBSIDIARY OF ORGANIZATION
------------------ ---------------
Brown's of Carolina, Inc. North Carolina
Gwaltney of Smithfield, Ltd. Delaware
John Morrell & Co. Delaware
Lykes Meat Group, Inc. Delaware
Patrick Cudahy Incorporated Delaware
The Smithfield Packing
Company, Incorporated Virginia
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent auditors, we hereby consent to the incorporation by reference in
and inclusion of our reports dated June 10, 1998, included in this Form 10-K
Annual Report, into the Company's previously filed Registration Statements:
Registration
Form: Number: Relating to:
----- ------- ------------
S-8 33-53024 Smithfield Foods, Inc. 401(k)
Plan for Salaried Employees
S-8 33-14219 1984 Stock Option Plan
S-8 333-34553 1992 Stock Incentive Plan
ARTHUR ANDERSEN LLP
Richmond, Virginia
July 29, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-03-1998
<PERIOD-END> MAY-03-1998
<CASH> 60,522
<SECURITIES> 0
<RECEIVABLES> 157,632
<ALLOWANCES> 1,541
<INVENTORY> 249,511
<CURRENT-ASSETS> 511,123
<PP&E> 705,872
<DEPRECIATION> 233,652
<TOTAL-ASSETS> 1,083,645
<CURRENT-LIABILITIES> 251,935
<BONDS> 407,272
0
0
<COMMON> 18,769
<OTHER-SE> 342,241
<TOTAL-LIABILITY-AND-EQUITY> 1,083,645
<SALES> 3,867,442
<TOTAL-REVENUES> 3,867,442
<CGS> 3,479,828
<TOTAL-COSTS> 3,479,828
<OTHER-EXPENSES> 12,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,891
<INCOME-PRETAX> 80,962
<INCOME-TAX> 27,562
<INCOME-CONTINUING> 53,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 53,400
<EPS-PRIMARY> 1.42
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</TABLE>
