As Filed With the Securities and Exchange Commission on April 6, 1998
Registration No.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Smithfield Foods, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Virginia 2011 52-0845861
<S> <C> <C>
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial code Number) Identification No.)
</TABLE>
200 Commerce Street
Smithfield, Virginia 23430
(757) 365-3000
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
Aaron D. Trub, Vice President, Secretary and Treasurer
200 Commerce Street
Smithfield, Virginia 23430
(Name, address, including Zip Code, and telephone number,
including are code, of agent for service)
Copy To:
Robert L. Burrus, Jr.
McGuire, Woods, Battle & Boothe LLP
One James Center
901 East Cary Street
Approximate Date of Commencement of Proposed Sale of the Securities to the
Public:
As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Title of Each Class Proposed Maximum Maximum Amount of
of Securities to Amount to be Offering Price Aggregate Registration
be Registered Registered Per Unit (1) Offering Price Fee
<S> <C> <C> <C> <C>
7 5/8% Senior Subordinated
Notes due 2008 .......... $200,000,000 100% $200,000,000 $59,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE, WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 6, 1998
Smithfield Foods, Inc.
OFFER TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF 7 5/8% SENIOR
SUBORDINATED NOTES DUE 2008 FOR EACH $1,000 PRINCIPAL AMOUNT OF
OUTSTANDING 7 5/8% SENIOR SUBORDINATED NOTES DUE 2008.
Smithfield Foods, Inc., a Virginia corporation (the "Company"), hereby
offers to exchange (the "Exchange Offer") up to $200,000,000 in aggregate
principal amount of its 7 5/8% Senior Subordinated Notes due 2008 (the
"Exchange Notes") for up to $200,000,000 in aggregate principal amount of its
outstanding 7 5/8% Senior Subordinated Notes due 2008 that were issued and sold
in reliance upon an exemption from registration under the Securities Act of
1933, as amended (the "Senior Subordinated Notes" and, together with the
Exchange Notes, the "Notes").
The terms of the Exchange Notes will be the same in all respects
(including principal amount, interest rate, maturity and ranking) as the terms
of the Senior Subordinated Notes for which they may be exchanged pursuant to
the Exchange Offer, except that the Exchange Notes have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), and therefore
will not be subject to certain restrictions on transfer applicable to the
Senior Subordinated Notes. The Exchange Notes will be issued under the
Indenture, as defined, governing the Senior Subordinated Notes and the Exchange
Notes will not be entitled to registration rights except under certain limited
circumstances. The Senior Subordinated Notes are, and the Exchange Notes will
be, unsecured and will be subordinated to all existing and future Senior
Indebtedness (as defined) of the Company and will be effectively subordinated
to all obligations of the subsidiaries of the Company. The Notes will rank pari
passu with any future Senior Subordinated Indebtedness (as defined) of the
Company and will rank senior to all other subordinated indebtedness of the
Company. The Indenture permits the Company to incur additional indebtedness,
including Senior Indebtedness, subject to certain limitations. As of February
1, 1998, $200.4 million of Senior Indebtedness was outstanding (excluding $26.0
million of outstanding letters of credit), and the Company had $270.4 million
of borrowing availability under the Revolving Credit Facilities (as defined).
For a description of the terms of the Exchange Notes, see "Description of the
Notes." There will be no cash proceeds to the Company from the Exchange Offer.
The Senior Subordinated Notes were originally issued and sold on February 9,
1998 in a transaction not registered under the Securities Act, in reliance upon
the exemption provided in Section 4(2) of the Securities Act and Rule 144A of
the Securities Act (the "Initial Offering"). Accordingly, the Senior
Subordinated Notes may not be reoffered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or unless
an applicable exemption from the registration requirements of the Securities
Act is available. Based upon interpretations provided to third parties by the
Staff (the "Staff") of the Securities and Exchange Commission (the
"Commission"), the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Senior Subordinated Notes may be offered
for resale, resold and otherwise transferred by holders thereof (other than any
holder which is (i) an "affiliate" of the Company within the meaning of the
Securities Act (an "Affiliate"), (ii) a broker-dealer who acquired Senior
Subordinated Notes directly from the Company or (iii) a broker-dealer who
acquired Senior Subordinated Notes as a result of market-making or other
trading activities) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided (continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998
<PAGE>
(continued from previous page)
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to participate in
a distribution of such Exchange Notes. Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal that is filed as an exhibit to
the Registration Statement of which this Prospectus is a part (the "Letter of
Transmittal") states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Senior Subordinated
Notes where such Senior Subordinated Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The
Company has agreed that, for a period of 90 days after the Expiration Date (as
defined), it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. Any holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Plan of Distribution."
The Senior Subordinated Notes and the Exchange Notes constitute new issues
of securities with no established public trading market. The Company does not
intend to apply for listing of the Exchange Notes on any national securities
exchange or for their quotation through the National Association of Securities
Dealers Automated Quotation System. Therefore, there can be no assurance as to
the development or liquidity of any trading market for the Exchange Notes. Any
Senior Subordinated Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that Senior Subordinated Notes are tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered, and
tendered but unaccepted, Senior Subordinated Notes could be adversely affected.
Following consummation of the Exchange Offer, the holders of Senior
Subordinated Notes will continue to be subject to the existing restrictions on
transfer thereof and the Company will have no further obligation to such
holders to provide for the registration under the Securities Act of the Senior
Subordinated Notes except under certain limited circumstances. See "Senior
Subordinated Notes Registration Rights."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Subordinated Notes being tendered or accepted for exchange.
The Exchange Offer will expire at p.m., time, on 1998, unless
extended (the "Expiration Date"). The date of acceptance for exchange of the
Senior Subordinated Notes (the "Exchange Date") will be the Expiration Date,
upon surrender of the Senior Subordinated Notes. Senior Subordinated Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date; otherwise such tenders are irrevocable.
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and
the rules and regulations promulgated thereunder, covering the Exchange Notes
being offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
herewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549, at prescribed rates. In addition, the Commission maintains a site on the
World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company is required by the terms of the indenture dated as of February
9, 1998 between the Company and SunTrust Bank, Atlanta, as trustee (the
"Trustee"), under which the Senior Subordinated Notes were issued, and under
which the Exchange Notes are to be issued (the "Indenture"), to furnish the
Trustee and the holders of the Notes with annual reports containing
consolidated financial statements audited by its independent certified public
accountants, with quarterly reports containing unaudited condensed consolidated
financial statements for each of the first three quarters of each fiscal year
and with Current Reports on Form 8-K.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended April
27, 1997, its Quarterly Reports on Form 10-Q for the 13 weeks ended July 27,
1997, 26 weeks ended October 26, 1997 and 40 weeks ended February 1, 1998, and
its Current Reports on Form 8-K filed January 17, 1997, August 11, 1997,
September 5, 1997, December 24, 1997 and February 10, 1998 have been filed by
the Company with the Commission and are incorporated herein by reference.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior
to the termination of any offering of securities made by this Prospectus shall
be deemed to be incorporated by reference into this Prospectus and to be a part
of this Prospectus from the respective dates of filing of such documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement or document so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this Prospectus.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the documents described above that are incorporated by reference
herein other than exhibits to such documents which are not specifically
incorporated by reference in such documents. Written or telephone requests
should be directed to: Corporate Secretary, Smithfield Foods, Inc., 200
Commerce Street, Smithfield, Virginia 23430, telephone number (757) 365-3000.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE
MADE BY .
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
3
<PAGE>
EXCHANGE NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATIONS THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
FOR NEW HAMPSHIRE RESIDENTS ONLY
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT, NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A
TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
4
<PAGE>
FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
"Recent Developments," "Business" and "Pro Forma Financial Information"
constitute forward looking statements. Such forward looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company or any of
its subsidiaries, or industry results, to differ materially from any future
results, performance or achievements expressed or implied by such forward
looking statements. Such risks, uncertainties and other important factors
include, among others: availability and prices of raw materials, product
pricing, the competitive environment and related market conditions, operating
efficiencies, access to capital, integration of acquisitions and changes in, or
the failure or inability to comply with, governmental regulation, including
without limitation environmental and health regulations. These forward looking
statements speak only as of the date of this Prospectus. The Company disclaims
any obligation or undertaking to disseminate any updates or revisions to any
forward looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
5
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information appearing elsewhere in, or
incorporated by reference into, this Prospectus. All references to fiscal year
in this Prospectus refer to the fiscal year ending on the Sunday closest to
April 30 of each year (e.g. "Fiscal 1997" is the Fiscal Year ending on April
27, 1997). All references to the "Company" or "Smithfield Foods" mean
Smithfield Foods, Inc., a Virginia corporation, and its consolidated
subsidiaries, unless the context indicates otherwise. All share and per share
data in this Prospectus have been adjusted to reflect a two-for-one split of
the Company's Common Stock, par value $.50 per share (the "Common Stock"),
effective September 26, 1997.
The Company
Smithfield Foods believes it is the largest combined hog slaughterer and
further processor of pork in the United States. The Company produces a wide
variety of fresh pork and processed meat products which it markets
domestically, and increasingly, 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 an 86-percent owned subsidiary and
through a joint hog production arrangement with one of the nation's largest hog
producers. These hog production operations collectively accounted for 10.1% of
the hogs the Company slaughtered in fiscal 1997. In addition, the Company
obtains 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 41.5% of the hogs
the Company slaughtered in fiscal 1997.
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 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.
For the twelve months ended February 1, 1998 (unaudited) and the fiscal
year ended April 27, 1997, the Company had sales of $3.9 billion in each
period, and EBITDA (as defined herein) of $166.7 million and $132.9 million,
respectively. Over the last 10 fiscal years, sales and EBITDA have grown at
compound annual growth rates of 17% and 14%, respectively.
Smithfield commenced operations in 1962 and is a corporation governed by
the laws of the Commonwealth of Virginia. Smithfield's principal office is
located at 200 Commerce Street, Smithfield, Virginia 23430, telephone number
(757) 365-3000.
The Company's business is based on four strategic initiatives:
o Vertical Integration. To complement its hog slaughtering and further
processing operations, the Company has vertically integrated into hog
production. Management believes that vertical integration gives the
Company a number of competitive advantages, including substantial
economies of scale from high volume hog production, increased control over
product quality and consistency, and operational, logistical, and
transportation efficiencies due to the proximity of the Company's hog
production operations to its slaughtering and further processing
facilities in North Carolina and Virginia. Hog production also reduces the
Company's exposure to the fluctuations in profitability historically
experienced by the pork processing industry.
o Advanced Genetics. In May 1991, Smithfield-Carroll's, a joint hog
production arrangement between the Company and Carroll's Foods of
Virginia, Inc., acquired the exclusive United States franchise rights for
genetically developed 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 from 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 meats.
6
<PAGE>
o Strategic Acquisitions. Since 1981, Smithfield Foods has made several
significant acquisitions, including Gwaltney, Patrick Cudahy, John Morrell
and Lykes. These acquisitions have increased production capacity, expanded
the geographic reach of the Company into new markets and created a
portfolio of highly recognized regional brands. The Company continues to
seek strategic acquisitions that will increase its processed meats
business and achieve cost savings and synergies in processing,
manufacturing, marketing, purchasing, distribution, engineering and
transportation. For a discussion of a current potential acquisition in
Canada, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Development."
o International Growth. Substantial opportunities exist to expand the
Company's international sales. As a result of increasing economic
development, per capita consumption of pork and other meats is rising
rapidly in many international markets. The lowering of certain tariff
barriers through NAFTA and GATT has also increased foreign demand for U.S.
pork products. To capitalize on this demand, the Company has entered into
an alliance with a major Japanese distributor to serve the Japanese
market. 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 but also for hog production and pork processing.
The Exchange Offer
The Exchange Offer............... The Company is offering to exchange up to
$200,000,000 aggregate principal amount of
7 5/8% Senior Subordinated Notes due 2008
(the "Exchange Notes") for up to
$200,000,000 aggregate principal amount of
its outstanding 7 5/8% Senior Subordinated
Notes due 2008 that were issued and sold on
February 9, 1998 in reliance upon an
exemption from registration under the
Securities Act (the "Senior Subordinated
Notes"). The terms of the Exchange Notes
will be substantially identical in all
respects (including principal amount,
interest rate, maturity and ranking) to the
terms of the Senior Subordinated Notes for
which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange
Notes have been registered under the
Securities Act and therefore will not be
subject to certain restrictions on transfer
except as provided herein (see "The Exchange
Offer -- Terms of the Exchange" and " --
Terms and Conditions of the Letter of
Transmittal") and will not be entitled to
registration rights except under certain
limited circumstances.
Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Senior
Subordinated Notes may be offered for
resale, resold and otherwise transferred by
holders thereof (other than any holder
which is (i) an Affiliate, (ii) a broker
dealer who acquired Senior Subordinated
Notes directly from the Company or (iii) a
broker dealer who acquired Senior
Subordinated Notes as a result of market
making or other trading activities) without
compliance with the registration and
prospectus delivery provisions of the
Securities Act except as provided herein
and provided that such Exchange Notes are
acquired in the ordinary course of such
holders' business and such holders have no
arrangement with any person to participate
in a distribution of such Exchange Notes.
Minimum Condition................ The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of
Senior Subordinated Notes being tendered for
exchange.
Expiration Date.................. The Exchange Offer will expire at
, New York time, on [ ],
1998 unless extended (the "Expiration
Date").
Exchange Date.................... The first date of acceptance for exchange
for the Senior Subordinated Notes will be
the Expiration Date.
7
<PAGE>
Conditions to the
Exchange Offer................... The obligation of the Company to consummate
the Exchange Offer is subject to certain
conditions. See "The Exchange Offer --
Conditions to the Exchange Offer." The
Company reserves the right to terminate or
amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence
of any such condition.
Withdrawal Rights................ Tenders may be withdrawn at any time prior
to the Expiration Date. Any Senior
Subordinated Notes not accepted for any
reason will be returned without expense to
the tendering holders thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer.
Procedures for Tendering Senior Subordinated
Notes........................... See "The Exchange Offer -- How to Tender."
Federal Income Tax Consequences... The exchange of Senior Subordinated Notes
for Exchange Notes by holders should not
constitute an exchange for federal income
tax purposes, and U.S. holders should not
realize any gain or loss upon receipt of
Exchange Notes. See "The Exchange Offer --
Federal Income Tax Consequences."
Effect on Holders of Senior
Subordinated Notes............... As a result of the making of this Exchange
Offer and upon acceptance for exchange of
all validly tendered Senior Subordinated
Notes pursuant to the terms of this Exchange
Offer, the Company will have fulfilled
covenants contained in the terms of the
Senior Subordinated Notes and the Exchange
and Registration Rights Agreement (the
"Exchange and Registration Rights
Agreement") dated February 9, 1998 between
the Company and Chase Securities Inc. as
initial purchaser (the "Initial Purchaser")
and, accordingly, the holders of the Senior
Subordinated Notes will have no further
registration or other rights under the
Exchange and Registration Rights Agreement,
except under certain limited circumstances.
See "Senior Subordinated Notes Registration
Rights." Holders of the Senior Subordinated
Notes who do not tender their Senior
Subordinated Notes in the Exchange Offer
will continue to hold such Senior
Subordinated Notes and will be entitled to
all the rights and limitations applicable
thereto under the Indenture. All untendered,
and tendered but unaccepted, Senior
Subordinated Notes will continue to be
subject to the restrictions on transfer
provided for in the Senior Subordinated
Notes and the Indenture. To the extent that
Senior Subordinated Notes are tendered and
accepted in the Exchange Offer, the trading
market, if any, for the Senior Subordinated
Notes could be adversely affected. See "Risk
Factors -- Consequences of Exchange and
8
<PAGE>
TERMS OF THE NOTES
The Exchange Offer applies to $200,000,000 aggregate principal amount of
the Exchange Notes. The form and terms of the Exchange Notes are the same as
the form and terms of the Senior Subordinated Notes except that the Exchange
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof. The Exchange Notes will evidence
the same debt as the Senior Subordinated Notes and will be entitled to the
benefits of the Indenture. See "Description of the Exchange Notes."
Notes Offered.................... $200,000,000 aggregate principal amount of
7 5/8% Senior Subordinated Notes due 2008.
Maturity......................... February 15, 2008.
Interest Payment Dates........... February 15 and August 15 of each year,
commencing August 15, 1998.
Sinking Fund..................... None.
Change of Control................ Upon the occurrence of a Change of
Control, the Company is required to make an
offer to repurchase all or a portion of such
holder's Exchange Notes at a price equal to
101% of the principal amount thereof,
together with accrued and unpaid interest,
if any, to the date of purchase. See
"Description of Exchange Notes -- Change of
Control."
Ranking.......................... The Exchange Notes will be unsecured and
will be subordinated in right of payment to
all existing and future Senior Indebtedness
of the Company. The Exchange Notes will rank
pari passu with any future Senior
Subordinated Indebtedness of the Company and
will rank senior to all Subordinated
Indebtedness of the Company. As of February
1, 1998, the aggregate principal amount of
the Company's outstanding Senior
Indebtedness was $200.4 million (excluding
outstanding letters of credit and unused
commitments of $350.0 million) and the
Company had no Senior Subordinated
Indebtedness outstanding other than the
Exchange Notes. On the same basis, the
Exchange Notes effectively ranked junior to
approximately $531.2 million of accrued
liabilities and obligations of the Company's
consolidated subsidiaries, including
borrowings under, and guarantees in respect
of, the Revolving Credit Facilities and
Senior Secured Notes. See "Description of
Exchange Notes -- Ranking."
Restrictive Covenants............ The indenture under which the Exchange
Notes will be issued (the "Indenture")
contains covenants relating to, among other
things, (i) the incurrence of additional
indebtedness by the Company and its
Restricted Subsidiaries (as defined), (ii)
the payment of dividends on, and redemption
of, capital stock of the Company and its
Restricted Subsidiaries and the redemption
of certain subordinated obligations of the
Company and its Restricted Subsidiaries,
(iii) investments, (iv) sales of assets and
Restricted Subsidiary stock, (v)
transactions with affiliates and (vi)
consolidations, mergers and transfers of all
or substantially all of the Company's
assets. The Indenture also prohibits certain
restrictions on distributions from
Restricted Subsidiaries. However, all of
these limitations and prohibitions are
subject to a number of important
qualifications and exceptions. See
"Description of Exchange Notes -- Certain
Covenants."
Use of Proceeds.................. There will be no proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
9
<PAGE>
RISK FACTORS
Holders of Senior Subordinated Notes should carefully consider the matters
set forth under the caption "Risk Factors" prior to making a decision with
respect to the Exchange Offer. See "Risk Factors."
10
<PAGE>
SUMMARY CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The following table sets forth certain summary consolidated condensed
historical financial data of the Company which should be read in conjunction
with and is qualified in its entirety by reference to "Pro Forma Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements, the
Unaudited Consolidated Financial Statements and the notes thereto included
elsewhere and incorporated by reference herein. The summary consolidated
condensed financial data for the fiscal years ended May 2, 1993, May 1, 1994,
April 30, 1995, April 28, 1996 and April 27, 1997 have been derived from
financial statements of the Company which have been audited by Arthur Andersen
LLP. The summary consolidated condensed financial data for the 40-week period
ended February 1, 1998 and for the 39-week period ended January 26, 1997 and
the 53-week period ended February 1, 1998 have been derived from unaudited
consolidated financial statements. In the opinion of management, the unaudited
information reflects all adjustments (consisting only of normal and recurring
adjustments) necessary for a fair presentation of the results for such periods.
Results for the 40 weeks and 53 weeks ended February 1, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------------
May 2, May 1, April 30, April 28, April 27,
1993 1994 1995 1996 1997
--------------- --------------- --------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ....................................... $ 1,113,712 $ 1,403,485 $ 1,526,518 $ 2,383,893 $ 3,870,611
Gross profit ................................ 76,084 115,605 145,932 180,267 320,938
Selling, general and administrative
expenses ................................... 42,924 50,738 61,723 103,095 191,225
Depreciation expense ........................ 18,418 21,327 19,717 25,979 35,825
Interest expense ............................ 6,183 11,605 14,054 20,942 26,211
Plant closing costs (1) ..................... 3,598 -- -- -- --
Nonrecurring charge (1) ..................... -- -- -- -- --
Net income (loss) (2) ....................... 3,989 19,702 27,840 15,886 44,937
OTHER DATA:
EBITDA (3) .................................. $ 34,797 $ 66,550 $ 86,619 $ 79,492 $ 132,945
EBITDA margin (4) ........................... 3.1% 4.7% 5.7% 3.3% 3.4%
Capital expenditures ........................ $ 87,992 $ 25,241 $ 90,550 $ 74,888 $ 69,147
Ratio of EBITDA to interest expense (5) ..... 5.6x 5.7x 6.2x 3.8x 5.1x
Ratio of net debt to EBITDA (6) ............. 5.1 2.5 2.5 3.6 2.6
Ratio of earnings to fixed charges (7) ...... 1.3 3.0 3.6 2.0 2.8
BALANCE SHEET DATA (End of Period):
Cash ........................................ $ 3,079 $ 12,350 $ 14,790 $ 28,529 $ 25,791
Working capital ............................. 64,671 81,529 60,911 88,026 164,312
Debt and capital lease obligations .......... 178,985 180,732 234,703 312,573 373,786
Stockholders' equity ........................ 135,770 154,950 184,015 242,516 307,486
OPERATING DATA (IN THOUSANDS):
Fresh pork sales (pounds) ................... 588,284 820,203 955,290 1,635,300 2,320,477
Processed meats sales (pounds) .............. 631,521 661,783 774,615 839,341 1,218,835
Total hogs slaughtered ...................... 5,767 7,414 8,678 12,211 16,869
<CAPTION>
39 Weeks 40 Weeks 53 Weeks
Ended Ended Ended
January 26, February 1, February 1,
1997 1998 1998
--------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ....................................... $ 2,943,075 $ 2,993,661 $ 3,921,197
Gross profit ................................ 221,043 285,817 385,712
Selling, general and administrative
expenses ................................... 135,296 166,526 222,455
Depreciation expense ........................ 26,141 31,086 40,770
Interest expense ............................ 20,378 23,827 29,660
Plant closing costs (1) ..................... -- -- --
Nonrecurring charge (1) ..................... -- 12,600 12,600
Net income (loss) (2) ....................... 25,497 32,726 52,166
OTHER DATA:
EBITDA (3) .................................. $ 88,057 $ 121,797 $ 166,685
EBITDA margin (4) ........................... 3.0% 4.1% 4.3%
Capital expenditures ........................ $ 47,258 $ 73,287 $ 95,176
Ratio of EBITDA to interest expense (5) ..... 4.3x 5.1x 5.6x
Ratio of net debt to EBITDA (6) ............. 4.0 2.9 2.4
Ratio of earnings to fixed charges (7) ...... 2.4 2.6 2.8
BALANCE SHEET DATA (End of Period):
Cash ........................................ $ 21,562 $ 36,416 $ 36,416
Working capital ............................. 125,868 232,255 232,255
Debt and capital lease obligations .......... 373,885 395,247 395,247
Stockholders' equity ........................ 268,271 340,336 340,336
OPERATING DATA (IN THOUSANDS):
Fresh pork sales (pounds) ................... 1,794,885 1,897,666 2,423,258
Processed meats sales (pounds) .............. 900,172 1,015,783 1,334,446
Total hogs slaughtered ...................... 12,811 13,312 17,370
</TABLE>
See Notes to Summary Consolidated Condensed Financial Information
11
<PAGE>
NOTES TO SUMMARY CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(1) Reflects plant closing costs of $3.6 million for the year ended May 2,
1993 and a nonrecurring charge of $12.6 million for the 40 weeks and 53 weeks
ended February 1, 1998 related to civil penalties in an environmental case. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Regulation" and the Notes to Consolidated Financial
Statements.
(2) Net income includes income (loss) from discontinued operations of
$(0.4) million, $0.4 million, $(4.1) million, and $(3.9) million for the fiscal
years ended May 2, 1993, May 1, 1994, April 30, 1995 and April 28, 1996,
respectively, and a gain of $1.1 million for the cumulative effect of changes
in accounting for income taxes for the fiscal year ended May 2, 1993.
(3) "EBITDA" represents earnings from continuing operations before
interest expense, income taxes, depreciation and amortization, cumulative
effects of changes in accounting principles and other charges. Such charges
include $3.6 million for plant closing costs for the fiscal year ended May 2,
1993 and a nonrecurring charge of $12.6 million for the 40 weeks and 53 weeks
ended February 1, 1998 related to civil penalties in an environmental case. The
Company has included EBITDA in Other Data because it is used by certain
investors as a measure of an issuer's ability to service debt. EBITDA should
not be considered as an alternative to operating earnings (loss), net income
(loss), or net cash provided by operating activities (or any other measure of
performance determined in accordance with generally accepted accounting
principles) as a measure of the Company's ability to meet its cash needs.
(4) Represents EBITDA as a percentage of sales.
(5) On a pro forma basis, as if the Exchange Offer and the use of proceeds
therefrom had occurred on April 29, 1996, interest expense for the fiscal year
ended April 27, 1997 and the 40 weeks ended February 1, 1998 would have
increased by $2.2 million and $1.6 million, respectively, and the pro forma
ratios of EBITDA to interest expense for such periods would have been 4.7x and
4.8x, respectively. On a pro forma basis, as if the Exchange Offer and the use
of proceeds therefrom had occurred on January 27, 1997, interest expense for
the 53 weeks ended February 1, 1998 would have increased by $2.0 million and
the pro forma ratio of EBITDA to interest expense for such period would have
been 5.3x.
(6) Net Debt represents total debt plus capital lease obligations less
cash.
(7) For purposes of computing the ratios of earnings to fixed charges,
earnings represent earnings (loss) from continuing operations before taxes and
change in accounting for income taxes plus fixed charges (excluding capitalized
interest). Fixed charges include interest on indebtedness (including
capitalized interest), amortization of deferred debt issuance costs and an
estimate of the interest portion of fixed rent expense.
12
<PAGE>
RISK FACTORS
In evaluating an investment in the Exchange Notes, prospective investors
should carefully consider the following risk factors as well as the other
information set forth in this Prospectus.
Consequences of Exchange and Failure to Exchange
Holders of Senior Subordinated Notes who do not exchange their Senior
Subordinated Notes for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Senior
Subordinated Notes as set forth in the legend thereon as a consequence of the
issuance of the Senior Subordinated Notes pursuant to exemptions from, or in
transaction not subject to, the registration requirements of the Securities Act
and applicable state laws. In general, the Senior Subordinated Notes may not be
offered or sold unless registered under the Securities Act and applicable state
securities laws or pursuant to an exemption therefrom. Except under certain
limited circumstances, the Company does not intend to register the Senior
Subordinated Notes under the Securities Act. In addition, any holder of Senior
Subordinated Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. To the extent Senior Subordinated Notes
are tendered and accepted in the Exchange Offer, the trading market, if any,
for the Senior Subordinated Notes not tendered could be adversely affected. See
"The Exchange Offer" and "Senior Subordinated Notes Registration Rights."
Leverage
The Company currently has a significant amount of outstanding
indebtedness. As of February 1, 1998, the Company's Senior Indebtedness was
$200.4 million (exclusive of outstanding letters of credit and unused
commitments of $350.0 million under the Revolving Credit Facilities). The
Indenture permits the Company to incur additional indebtedness, including
Senior Indebtedness (as defined herein), subject to certain limitations. See
"Capitalization" and "Description of Exchange Notes."
The degree to which the Company is leveraged could have important
consequences to the Company, including: (i) increased vulnerability to adverse
general economic, industry and competitive conditions, (ii) impaired ability to
obtain additional financing for future working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes and (iii) dedication
of a significant portion of the Company's cash flow from operations to the
payment of principal and interest on indebtedness, thereby reducing the funds
available for operations and future business opportunities. In addition, the
terms of the Revolving Credit Facilities, the Senior Secured Notes and other
debt agreements contain certain covenants which could limit the Company's
operating and financial flexibility. See " -- Restrictive Debt Covenants"
below. The Company's ability to make scheduled payments of principal or
interest on, or to refinance, its indebtedness depends on its future business
performance, which is subject to economic, financial, competitive and other
factors beyond its control.
Subordination of the Exchange Notes; Holding Company Structure; Asset
Encumbrances
The payment of principal of, premium, if any, and interest on, and any
other amounts owing in respect of, the Exchange Notes, will be subordinated to
the prior payment in full in cash or cash equivalents of all existing and
future Senior Indebtedness, which includes indebtedness under the Revolving
Credit Facilities and the Senior Secured Notes. Therefore, in the event of the
bankruptcy, liquidation, dissolution, reorganization or other winding up of the
Company, the assets of the Company will be available to pay obligations on the
Exchange Notes only after all Senior Indebtedness has been paid in full in cash
or cash equivalents, and there can be no assurance that there will be
sufficient assets remaining to pay amounts due on any or all of the Exchange
Notes. In addition, the Company may not pay principal of, premium, if any, or
interest on, and any other amounts owing in respect of, the Exchange Notes, or
purchase, redeem or otherwise retire the Exchange Notes, if a default exists
with respect to certain Senior Indebtedness. See "Description of Exchange Notes
- -- Ranking."
As of February 1, 1998, $200.4 million of Senior Indebtedness was
outstanding (excluding $26.0 million of outstanding letters of credit), and the
Company had $270.9 million of borrowing availability under the Revolving Credit
Facilities.
If a default occurs under any secured indebtedness of the Company or any
of its subsidiaries, including the Revolving Credit Facilities or the Senior
Secured Notes, the holders of that secured indebtedness will have the right to
exercise the remedies available to a secured creditor under applicable law.
Accordingly, such creditors will have a prior claim on the assets of the
Company (or any of its subsidiaries) securing such secured indebtedness.
Substantially all of the assets of the Company's subsidiaries, including the
Company's principal operating facilities, its inventories and its receivables,
are subject to liens for the benefit of secured creditors. The Exchange Notes
will not be secured by any assets of the Company.
13
<PAGE>
The Company conducts its operations through its subsidiaries and depends
on the earnings and cash flows of, and dividends from, such subsidiaries to pay
its obligations, including payments of principal, premium, if any, and interest
on the Exchange Notes. Any right of the Company and its creditors (including
the holders of the Exchange Notes) to participate in the assets of any of the
Company's subsidiaries upon any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of that subsidiary's creditors
(except the Company, to the extent it may itself be a creditor of such
subsidiary), including that subsidiary's trade creditors. Accordingly, the
Exchange Notes will be effectively subordinated to the claims of creditors of
the Company's subsidiaries. As of February 1, 1998, the aggregate accrued
liabilities and obligations of the Company's consolidated subsidiaries was
$531.2 million, including borrowings under, and guarantees in respect of, the
Revolving Credit Facilities and the Senior Secured Notes.
Restrictive Debt Covenants
The Revolving Credit Facilities contain financial covenants that require
the maintenance of certain levels and/or ratios for working capital, net worth,
current ratio, total liabilities to tangible net worth, tangible net worth,
EBITDA to fixed charges and capital expenditures. In addition, the Revolving
Credit Facilities impose certain restrictions on the Company and its
subsidiaries regarding indebtedness, liens, mergers and consolidations,
investments, loans, advances, guarantees and acquisitions, hedging agreements,
restricted payments, transactions with affiliates and sale and leaseback
transactions. The Exchange Notes contain financial covenants that require the
maintenance of certain levels and/or ratios regarding working capital, current
ratio, indebtedness as a percentage of total capitalization, net income to
fixed charges, tangible net worth and liabilities to tangible net worth. In
addition, the Exchange Notes impose certain limitations on the Company and its
subsidiaries regarding indebtedness, restrictions on dividends, restricted
payments and investments, liens, mergers and consolidations, acquisitions,
transfers of property, transactions with affiliates and lines of business.
The Company is in compliance with the covenants and restrictions contained
in the terms of the Revolving Credit Facilities, the Senior Secured Notes and
the Indenture, among other financing agreements. However, the Company's ability
to continue to comply with such agreements may over time be affected by events
beyond its control, including then prevailing economic, financial and industry
conditions. The breach of any of such covenants or restrictions could result in
a default under the Revolving Credit Facilities, the Senior Secured Notes
and/or the Indenture, which would permit the senior lenders or the holders of
the Exchange Notes, as the case may be, to declare all amounts borrowed
thereunder to be due and payable, together with accrued and unpaid interest,
and the commitments of the relevant senior lenders to make further extensions
of credit under the Revolving Credit Facilities could be terminated. If the
Company were unable to repay its indebtedness to its senior lenders, such
lenders could proceed against the collateral securing such indebtedness. In
such event, the subordination provisions of the Indenture would likely restrict
payments to be made to the holders of the Exchange Notes.
Limitation on Change of Control
Upon a Change of Control, the Company will be required to offer to
purchase all of the outstanding Exchange Notes at a price equal to 101% of the
principal amount thereof on the date of repurchase plus accrued and unpaid
interest, if any, to the date of repurchase. The Change of Control purchase
feature of the Exchange Notes may in certain circumstances discourage or make
more difficult a sale or takeover of the Company. In particular, a Change of
Control may cause an acceleration of, or require an offer to repurchase under,
the Revolving Credit Facilities, the Senior Secured Notes and certain other
indebtedness of the Company and its subsidiaries, in which case such
indebtedness would be required to be repaid in full before repurchase of the
Exchange Notes. See "Description of Exchange Notes -- Change of Control." The
inability to repay such indebtedness, if accelerated, and to purchase all of
the tendered Exchange Notes would constitute an event of default under the
Indenture. If, as result thereof, a default occurs with respect to any Senior
Indebtedness, the subordination provisions in the Indenture would likely
restrict payments to be made to the holders of Exchange Notes. There can be no
assurance that the Company will have funds available to repurchase the Exchange
Notes upon the occurrence of a Change of Control.
Cyclicality
The Company's results of operations and financial condition are largely
dependent upon the cost and supply of hogs and the selling prices for many of
its products, both of which are determined by constantly changing market forces
of supply and demand over which the Company has limited or no control. The
North American pork processing markets are highly competitive, with major and
regional companies competing in each market. The market prices for pork
products, including the Company's, are highly cyclical, being characterized by
periods of supply and demand imbalance and to sensitivity to
14
<PAGE>
changes in industry capacity. Furthermore, certain structural factors
accentuate this cyclicality, including the substantial capital investment and
high fixed costs required to manufacture pork products efficiently; the
significant exit costs associated with capacity reductions; and competition
from producers of other meats and protein sources, especially beef, chicken and
fish. In addition, the supply and market price of live hogs to be processed is
dependent upon a variety of factors over which the Company has limited or no
control, including fluctuations in the size of the herds maintained by North
American hog suppliers, environmental and conservation regulations, economic
conditions, the relative cost of feed for hogs, weather and other factors.
Severe price swings in such raw materials, and the resultant impact on the
prices the Company charges for its products, have at times had, and may in the
future have, material adverse effects on the Company's results of operations.
There can be no assurance that all or part of any increased costs experienced
by the Company from time to time can be passed along to consumers of the
Company's products directly or in a timely manner.
General Risks of the Food Industry
The food products manufacturing industry is subject to the risks posed by:
adverse changes in general economic conditions; food spoilage or food
contamination; evolving consumer preferences and nutritional and health-related
concerns; federal, state and local food processing controls; consumer product
liability claims; product tampering; and the possible unavailability and/or
expense of liability insurance. In addition, the food industry is experiencing
a period of consolidation, and the success of any future acquisitions by the
Company will substantially depend on the Company's ability to integrate newly
acquired operations successfully with its existing operations. See "Business."
Governmental Regulation
The Company's operations are subject to extensive regulation by the United
States Food and Drug Administration, the United States Department of
Agriculture and other state and local authorities regarding the processing,
packaging, storage, distribution, advertising and labeling of the Company's
products, including food safety standards. The Company's manufacturing
facilities and products are subject to constant inspection by federal, state
and local authorities. The Company believes that it is currently in compliance
with all material governmental laws and regulations and maintains all material
permits and licenses relating to its operations. Nevertheless, there can be no
assurance that the Company is in compliance with such laws and regulations or
that it will be able to comply with any future laws and regulations. Failure by
the Company to comply with applicable laws and regulations could subject the
Company to civil remedies, including fines, injunctions, recalls or seizures,
as well as potential criminal sanctions, which could have a material adverse
effect on the Company. See "Business -- Regulation."
Stringent Environmental Regulation
The past and present business operations of the Company and the past and
present ownership and operation of real property by the Company are subject to
extensive and increasingly stringent federal, state, and local environmental
laws and regulations pertaining to the discharge of materials into the
environment and the handling and disposition of wastes (including solid and
hazardous wastes) or otherwise relating to protection of the environment.
Compliance with these laws and regulations and future changes to them is
material to the Company's business. The Company has incurred and will continue
to incur significant capital and operating expenditures to comply with such
laws and regulations. No assurance can be given that additional environmental
issues relating to presently known matters or identified sites or to other
matters or sites will not require additional, currently unanticipated
investigation, assessment or expenditures. In addition, certain of the
Company's facilities have been in operation for many years and, over such time,
the Company and other prior operators of such facilities have generated and
disposed of wastes which are or may be considered hazardous. Future discovery
of previously unknown contamination of property underlying or in the vicinity
of the Company's present or former properties or manufacturing facilities
and/or waste disposal sites could require the Company to incur material
unforeseen expenses. Occurrences of any such events may have a material adverse
affect on the Company's financial condition. For a description of significant
environmental litigation and investigations, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Regulation."
Risks of International Sales and Operations
International sales accounted for approximately 6% of the Company's sales
in fiscal 1997. International sales are subject to risks related to general
economic conditions, imposition of tariffs, quotas, trade barriers and other
restrictions, enforcement of remedies in foreign jurisdictions and compliance
with applicable foreign laws, and other economic and political uncertainties.
Furthermore, to the extent that in the future the Company conducts foreign
operations, such foreign operations would be subject to the risks described
above as well as risks related to fluctuations in currency values, foreign
currency exchange controls, compliance with foreign laws and other economic or
political uncertainties.
15
<PAGE>
Lack of Public Market
The Exchange Notes will generally be freely transferable (subject to the
restrictions discussed elsewhere herein) but will be new securities for which
there will not initially be a market. Accordingly, there can be no assurance as
to the development or liquidity of any market for the Exchange Notes. The
Company does not intend to apply for a listing of the Exchange Notes on any
securities exchange or on any automated dealer quotation system. The Exchange
Notes also will constitute a new issue of securities with no established
trading market. The Exchange Offer will not be conditioned upon any minimum or
maximum aggregate principal amount of Notes being tendered for exchange. No
assurance can be given as to the liquidity of the trading market for the
Exchange Notes, or, in the case of non-exchanging holders of Senior
Subordinated Notes, the trading market for the Senior Subordinated Notes
following the Exchange Offer.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to the
Exchange Offer. The Company used the net proceeds from the issuance of the
Senior Subordinated Notes, approximately $194,821,615 million after deducting
discounts and fees and expenses incurred in connection therewith, to repay
indebtedness under the Revolving Credit Facilities, with the balance invested
in short-term marketable debt securities.
THE EXCHANGE OFFER
Purpose of the Exchange Offer
The sole purpose of the Exchange Offer is to fulfill the obligations of
the Company with respect to the Exchange and Registration Rights Agreement. The
Senior Subordinated Notes were originally issued and sold on February 9, 1998
(the "Issue Date"). Such sales were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
Rule 144A under the Securities Act. In connection with the sale of the Senior
Subordinated Notes, the Company agreed to file with the Commission a
registration statement relating to an exchange offer (the "Exchange Offer
Registration Statement") pursuant to which senior subordinated notes of the
Company covered by such registration statement and containing the same terms as
the Senior Subordinated Notes, except as set forth in this Prospectus, would be
offered in exchange for Senior Subordinated Notes tendered at the option of the
holders thereof. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Senior Subordinated Notes, where such Senior
Subordinated Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
If (i) because of any change in law or applicable interpretations thereof
by the Commission's staff the Company is not permitted to effect the Exchange
Offer as contemplated, or (ii) any Senior Subordinated Notes validly tendered
pursuant to the Exchange Offer are not exchanged for Exchange Notes within 150
days after the Issue Date, or (iii) the Initial Purchaser so requests with
respect to Senior Subordinated Notes not eligible to be exchanged for Exchange
Notes in the Exchange Offer and held by it following the consummation of the
Exchange Offer, or (iv) any applicable laws or interpretations do not permit
any Holder (as defined below) to participate in the Exchange Offer, or (v) any
Holder that participates in the Exchange Offer does not receive freely
transferable Exchange Notes in exchange for tendered Senior Subordinated Notes
(the obligation to comply with a prospectus delivery requirement being
understood not to constitute a restriction on transferability), then the
following provisions shall apply. The Company shall use its reasonable best
efforts to file as promptly as practicable (but in no event more than 60 days
after so required) with the Commission, and thereafter shall use its reasonable
best efforts to cause to be declared effective, a shelf registration statement
on an appropriate form under the Securities Act relating to the offer and sale
of the Senior Subordinated Notes by the holders thereof ("Holders") from time
to time in accordance with the methods of distribution set forth in such
registration statement (hereafter, a "Shelf Registration Statement" and,
together with any Exchange Offer Registration Statement, a "Registration
Statement"); provided, however, that no Holder of Senior Subordinated Notes
(other than the Initial Purchaser) shall be entitled to have Senior
Subordinated Notes held by it covered by such Shelf Registration Statement
unless such Holder agrees in writing to be bound by all the provisions of this
Agreement applicable to such Holder. The Company shall use its reasonable best
efforts to keep the Shelf Registration Statement continuously effective in
order to permit the prospectus forming part thereof to be used by Holders of
Senior Subordinated Notes for a period ending on the earlier of two years from
the Issue Date or such shorter period that will terminate when all Notes
covered thereby have been sold thereto or in certain other circumstances.
16
<PAGE>
In the event that (1) the applicable Registration Statement is not filed
with the Commission on or prior to 60 days after the Issue Date, (i) the
Exchange Offer Registration Statement is not declared effective within 120 days
after the Issue Date, (iii) the Exchange Offer is not consummated on or prior
to 150 days after the Issue Date, (iv) the Shelf Registration Statement is
filed and declared effective within 120 days after the Issue Date but shall
thereafter cease to be effective (at any time that the Company is obligated to
maintain the effectiveness thereof) without being succeeded within 60 days by
an additional or amended Registration Statement filed and declared effective
(each such event referred to in clauses (i) through (iv), a "Registration
Default"), the Company must pay liquidated damages. See "Senior Subordinated
Notes Registration Rights."
Terms of the Exchange
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Registration Statement of which this Prospectus is a part (the "Letter of
Transmittal"), $1,000 principal amount of Exchange Notes for each $1,000
principal amount of Senior Subordinated Notes. The terms of the Exchange Notes
are identical in all respects to the terms of the Senior Subordinated Notes for
which they may be exchanged pursuant to this Exchange Offer, except that (i)
the Exchange Notes will generally be freely transferable by holders thereof and
(ii) the holders of the Exchange Notes will not be entitled to registration
rights under the Exchange and Registration Rights Agreement except under
certain limited circumstances. See "Senior Subordinated Notes Registration
Rights." The Exchange Notes will evidence the same debt as the Senior
Subordinated Notes and will be entitled to the benefits of the Indenture. See
"Description of the Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Subordinated Notes being tendered or accepted for exchange.
Based on interpretations set forth in no-action letters issued by the
Staff to third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for the Senior Subordinated Notes
may be offered for resale, resold and otherwise transferred by holders thereof
(other than any holder which is (i) an Affiliate, (ii) a broker-dealer who
acquired Senior Subordinated Notes directly from the Company or (iii) a
broker-dealer who acquired Senior Subordinated Notes as a result of market
making or other trading activities) without compliance with the registration
and prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business,
and such holders have no arrangement with any person to participate in a
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Senior Subordinated Notes, where such
Senior Subordinated Notes were acquired by such broker-dealer as a result of
market making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution." Any holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Tendering holders of Senior Subordinated Notes will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Senior
Subordinated Notes pursuant to the Exchange Offer.
Interest on each Exchange Note issued pursuant to the Exchange Offer will
accrue from the last interest payment date to which interest was paid on the
Senior Subordinated Notes surrendered in exchange therefor or, if no interest
has been paid on the Senior Subordinated Notes, from the date of original issue
of the Senior Subordinated Notes.
Expiration Date; Extensions; Termination; Amendments
The Exchange Offer will expire on the Expiration Date. The term
"Expiration Date" means , time, on unless the Company in its sole
discretion extends the period during which the Exchange Offer is open, in which
event the term "Expiration Date" means the latest time and date on which the
Exchange Offer, as so extended by the Company, expires. The Company reserves
the right to extend the Exchange Offer at any time and from time to time prior
to the Expiration Date by giving written notice to (the "Exchange Agent")
and by timely public announcement communicated by no later than Eastern time
on the next business day following the Expiration Date, unless otherwise
required by applicable law or regulation, by making a release to the Dow Jones
News Service. During any extension of the Exchange Offer, all Senior
Subordinated Notes previously tendered pursuant to the Exchange Offer will
remain subject to the Exchange Offer.
The Exchange Date will be the Expiration Date. The Company expressly
reserves the right to (i) terminate the Exchange Offer and not accept for
exchange any Senior Subordinated Notes for any reason, including if any of the
events set forth
17
<PAGE>
below under " -- Conditions to the Exchange Offer" shall have occurred and
shall not have been waived by the Company prior to the Expiration Date and (ii)
amend the terms of the Exchange Offer in any manner, whether before or after
any tender of the Senior Subordinated Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent in writing and
will either issue a press release or give written notice to the holders of the
Senior Subordinated Notes as promptly as practicable. Unless the Company
terminates the Exchange Offer prior to , time, on the Expiration Date, the
Company will exchange the Exchange Notes for the Senior Subordinated Notes on
the Exchange Date.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record holders of Senior
Subordinated Notes and will be furnished to brokers, banks and similar persons
whose names, or the names of whose nominees, appear on the lists of holders for
subsequent transmittal to beneficial owners of Senior Subordinated Notes.
How to Tender
The tender to the Company of Senior Subordinated Notes by a holder thereof
pursuant to one of the procedures set forth below will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
General Procedures. A holder of a Senior Subordinated Note may tender the
same by (i) properly completing and signing the Letter of Transmittal or a
facsimile thereof (all references in this Prospectus to the Letter of
Transmittal shall be deemed to include a facsimile thereof) and delivering the
same, together with the certificate or certificates representing the Senior
Subordinated Notes being tendered and any required signature guarantees (or a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation")
pursuant to the procedure described below), to the Exchange Agent at its
address set forth on the back cover of this Prospectus on or prior to the
Expiration Date or (ii) complying with the guaranteed delivery procedures
described below. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Senior Subordinated Notes, where such Senior
Subordinated Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
If tendered Senior Subordinated Notes are registered in the name of the
signer of the Letter of Transmittal and the Exchange Notes to be issued in
exchange therefor are to be issued (and any untendered Senior Subordinated
Notes are to be reissued) in the name of the registered holder, the signature
of such signer need not be guaranteed. In any other case, the tendered Senior
Subordinated Notes must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Company and duly executed by the
registered holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Exchange Notes and/or Senior Subordinated Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Senior Subordinated Notes, the signature on the
Letter of Transmittal must be guaranteed by an Eligible Institution.
Any beneficial owner whose Senior Subordinated Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender Senior Subordinated Notes should contact such holder
promptly and instruct such holder to tender Senior Subordinated Notes on such
beneficial owner's behalf. If such beneficial owner wishes to tender such
Senior Subordinated Notes himself or herself, such beneficial owner must, prior
to completing and executing the Letter of Transmittal and delivering such
Senior Subordinated Notes, either make appropriate arrangements to register
ownership of the Senior Subordinated Notes in such beneficial owner's name or
follow the procedures described in the immediately preceding paragraph. The
transfer of record ownership may take considerable time.
Book-Entry Transfer. The Exchange Agent will make a request to establish
an account with respect to the Senior Subordinated Notes at The Depository
Trust Company (the "Book-Entry Transfer Facility") for purpose of the Exchange
Offer within two business days after receipt of this Prospectus, and any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Senior Subordinated Notes by
causing the Book-Entry Transfer Facility to transfer such Senior Subordinated
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Senior Subordinated Notes may be effected through
book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address specified on the back cover page of this Prospectus on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
18
<PAGE>
THE METHOD OF DELIVERY OF SENIOR SUBORDINATED NOTES AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER
INSURANCE BE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE.
Guaranteed Delivery Procedures. If a holder desires to accept the Exchange
Offer, and time will not permit a Letter of Transmittal or Senior Subordinated
Notes to reach the Exchange Agent before the Expiration Date, a tender may be
effected if the Exchange Agent has received at its office listed on the back
cover hereof on or prior to the Expiration Date a letter, telegram or facsimile
transmission from an Eligible Institution setting forth the name and address of
the tendering holder, the principal amount of the Senior Subordinated Notes
being tendered, the names in which the Senior Subordinated Notes are registered
and, if possible, the certificate numbers of the Senior Subordinated Notes to
be tendered, and stating that the tender is being made thereby and guaranteeing
that within three New York Stock Exchange trading days after the date of
execution of such letter, telegram or facsimile transmission by the Eligible
Institution, the Senior Subordinated Notes, in proper form for transfer, will
be delivered by such Eligible Institution together with a properly completed
and duly executed Letter of Transmittal (and any other required documents).
Unless Senior Subordinated Notes being tendered by the above-described method
(or a timely Book-Entry Confirmation) are deposited with the Exchange Agent
within the time period set forth above (accompanied or preceded by a properly
completed Letter of Transmittal and any other required documents), the Company
may, at its option, reject the tender. Copies of a Notice of Guaranteed
Delivery which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Senior Subordinated Notes (or a timely Book-Entry
Confirmation) is received by the Exchange Agent. Issuances of Exchange Notes in
exchange for Senior Subordinated Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Senior Subordinated Notes (or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Senior Subordinated Notes
will be determined by the Company, whose determination will be final and
binding. The Company reserves the absolute right to reject any or all tenders
not in proper form or the acceptances for exchange of which may, in the opinion
of counsel to the Company, be unlawful. The Company also reserves the absolute
right to waive any of the conditions of the Exchange Offer or any defect or
irregularities in tenders of any particular holder whether or not similar
defects or irregularities are waived in the case of other holders. Neither the
Company, the Exchange Agent nor any other person will be under any duty to give
notification of any defects or irregularities in tenders or shall incur any
liability for failure to give any such notification. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
Letter of Transmittal and the instructions thereto) will be final and binding.
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer.
The party tendering Senior Subordinated Notes for exchange (the
"Transferor") exchanges, assigns and transfers the Senior Subordinated Notes to
the Company and irrevocably constitutes and appoints the Exchange Agent as the
Transferor's agent and attorney-in-fact to cause the Senior Subordinated Notes
to be assigned, transferred and exchanged. The Transferor represents and
warrants that it has full power and authority to tender, exchange, assign and
transfer the Senior Subordinated Notes and to acquire Exchange Notes issuable
upon the exchange of such tendered Senior Subordinated Notes, and that, when
the same are accepted for exchange, the Company will acquire good and
unencumbered title to the tendered Senior Subordinated Notes, free and clear of
all liens, restrictions, charges and encumbrances and not subject to any
adverse claim. The Transferor also warrants that it will, upon request, execute
and deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Senior
Subordinated Notes. The Transferor further agrees that acceptance of any
tendered Senior Subordinated Notes by the Company and the issuance of Exchange
Notes in exchange therefor shall constitute performance in full by the Company
of its obligations under the Exchange and Registration Rights Agreement and
that the Company shall have no further obligations or liabilities thereunder
(except in certain limited circumstances). All authority conferred by the
Transferor will survive the death or incapacity of the Transferor, and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
19
<PAGE>
By tendering Senior Subordinated Notes and executing the Letter of
Transmittal, the Transferor certifies that (a) it is not an Affiliate, that it
is not a broker-dealer that owns Senior Subordinated Notes acquired directly
from the Company or an Affiliate of the Company, that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes or (b) that it is an
Affiliate of the Company or of the Initial Purchaser and that it will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable to it.
Withdrawal Rights
Senior Subordinated Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the back cover of this Prospectus prior to the Expiration
Date. Any such notice of withdrawal must specify the person named in the Letter
of Transmittal as having tendered Senior Subordinated Notes to be withdrawn,
the certificate numbers of Senior Subordinated Notes to be withdrawn, the
principal amount of Senior Subordinated Notes to be withdrawn, a statement that
such holder is withdrawing his or her election to have such Senior Subordinated
Notes exchanged, and the name of the registered holder of such Senior
Subordinated Notes, and must be signed by the holder in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Company
that the person withdrawing the tender has succeeded to the beneficial
ownership of the Senior Subordinated Notes being withdrawn. The Exchange Agent
will return the properly withdrawn Senior Subordinated Notes promptly following
receipt of notice of withdrawal. All questions as to the validity of notices of
withdrawal, including time of receipt, will be determined by the Company, and
such determination will be final and binding on all parties.
Acceptance of Senior Subordinated Notes for Exchange; Delivery of Exchange
Notes
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Senior Subordinated Notes validly tendered and not
withdrawn and the issuance of the Exchange Notes will be made on the Exchange
Date. For the purposes of the Exchange Offer, the Company shall be deemed to
have accepted for exchange validly tendered Senior Subordinated Notes when, as
and if the Company has given written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Senior
Subordinated Notes for the purposes of receiving Exchange Notes from the
Company and causing the Senior Subordinated Notes to be assigned, transferred
and exchanged. Upon the terms and subject to the conditions of the Exchange
Offer, delivery of Exchange Notes to be issued in exchange for accepted Senior
Subordinated Notes will be made by the Exchange Agent promptly after acceptance
of the tendered Senior Subordinated Notes. Senior Subordinated Notes not
accepted for exchange by the Company will be returned without expense to the
tendering holders (or in the case of Senior Subordinated Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the procedures described above, such non-
exchanged Senior Subordinated Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) promptly following the Expiration Date
or, if the Company terminates the Exchange Offer prior to the Expiration Date,
promptly after the Exchange Offer is so terminated.
Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to issue
Exchange Notes in respect of any properly tendered Senior Subordinated Notes
not previously accepted and may, prior to the Expiration Date, terminate the
Exchange Offer (by oral or written notice to the Exchange Agent and by timely
public announcement, unless otherwise required by applicable law or regulation)
or, at its option, modify or otherwise amend the Exchange Offer, if (a) there
shall be threatened, instituted or pending any action or proceeding before, or
any injunction, order or decree shall have been issued by, any court or
governmental agency or other governmental regulatory or administrative agency
or commission, (i) seeking to restrain or prohibit the making or consummation
of the Exchange Offer or any other transaction contemplated by the Exchange
Offer, (ii) assessing or seeking any damages as a result thereof, or (iii)
resulting in a material delay in the ability of the Company to accept for
exchange or exchange some or all of the Senior Subordinated Notes pursuant to
the Exchange Offer; (b) any statute, rule, regulation, order or injunction
shall be sought, proposed, introduced, enacted, promulgated or deemed
applicable to the Exchange Offer or any of the transactions contemplated by the
Exchange Offer by any government or governmental authority, domestic or
foreign, or any action shall have been taken, proposed or threatened, by any
government, governmental authority, agency or court,
20
<PAGE>
domestic or foreign, that in the reasonable judgment of the Company might
directly or indirectly result in any of the consequences referred to in clauses
(a)(i) or (ii) above or, in the reasonable judgment of the Company, might
result in the holders of Exchange Notes having obligations with respect to
resales and transfers of Exchange Notes which are greater than those described
in the interpretations of the Commission referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the Exchange
Offer; or (c) a material adverse change shall have occurred in the business,
condition (financial or otherwise), operations, or prospects of the Company.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in whole
or in part at any time or from time to time in its sole discretion. The failure
by the Company at any time to exercise any of the foregoing rights will not be
deemed a waiver of any such right, and each right will be deemed an ongoing
right which may be asserted at any time or from time to time. In addition, the
Company has reserved the right, notwithstanding the satisfaction of each of the
foregoing conditions, to terminate or amend the Exchange Offer.
Any determination by the Company concerning the fulfillment or
non-fulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Senior
Subordinated Notes tendered, and no Exchange Notes will be issued in exchange
for any such Senior Subordinated Notes, if at such time any stop order shall be
threatened or in effect with respect to the Registration Statement of which
this Prospectus constitutes a part or qualification of the Indenture under the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
Exchange Agent
SunTrust Bank, Atlanta has been appointed as the Exchange Agent for the
Exchange Offer. Letters of Transmittal must be addressed to the Exchange Agent
at its address set forth on the back cover page of this Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
Solicitation of Tenders; Expenses
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting and legal fees, will be paid by
the Company and are estimated at approximately $1,500.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the respective dates as of
which information is given herein. The Exchange Offer is not being made to (nor
will tenders be accepted from or on behalf of) holders of Senior Subordinated
Notes in any jurisdiction in which the making of the Exchange Offer or the
acceptance thereof would not be in compliance with the laws of such
jurisdiction. However, the Company may, at its discretion, take such action as
it may deem necessary to make the Exchange Offer in any such jurisdiction and
extend the Exchange Offer to holders of Senior Subordinated Notes in such
jurisdiction. In any jurisdiction the securities laws or blue sky laws of which
require the Exchange Offer to be made by a licensed broker or dealer, the
Exchange Offer is being made on behalf of the Company by one or more registered
brokers or dealers which are licensed under the laws of such jurisdiction.
Appraisal Rights
HOLDERS OF SENIOR SUBORDINATED NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR
APPRAISAL RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
21
<PAGE>
Federal Income Tax Consequences
The exchange of the Senior Subordinated Notes for the Exchange Notes in
the Exchange Offer should not constitute an exchange for federal income tax
purposes. Consequently, (i) no gain or loss should be realized by a U.S. Holder
upon receipt of an Exchange Note; (ii) the holding period of the Exchange Note
should include the holding period of the Senior Subordinated Note exchanged
therefor; and (iii) the adjusted tax basis of the Exchange Note should be the
same as the adjusted tax basis of the Senior Subordinated Note exchanged
therefor immediately before the exchange. Even if the exchange of a Senior
Subordinated Note for an Exchange Note were treated as an exchange, however,
such an exchange should constitute a tax-free recapitalization for federal
income tax purposes. Accordingly, an Exchange Note should have the same issue
price as a Senior Subordinated Note and a U.S. Holder should have the same
adjusted basis and holding period in the Exchange Note as it had in a Senior
Subordinated Note immediately before the exchange. As used herein, the term
"U.S. Holder" means a person who is, for United States federal income tax
purposes, (i) a citizen or resident of the United States; (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof; or (iii) an estate or trust
the income of which is subject to United States federal income taxation
regardless of its source.
Other
Participation in the Exchange Offer is voluntary, and holders should
carefully consider whether to accept the Exchange Offer and tender their Senior
Subordinated Notes. Holders of the Senior Subordinated Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Senior Subordinated Notes pursuant to the terms of, this
Exchange Offer, the Company will have fulfilled covenants contained in the
terms of the Senior Subordinated Notes and the Exchange and Registration Rights
Agreement. Holders of the Senior Subordinated Notes who do not tender their
certificates in the Exchange Offer will continue to hold such certificates and
will be entitled to all the rights, and subject to all the limitations
applicable thereto, under the Indenture, except for any such rights under the
Exchange and Registration Rights Agreement which by their terms terminate or
cease to have further effect as a result of the making of this Exchange Offer.
See "Description of the Notes." All untendered Senior Subordinated Notes will
continue to be subject to the restriction on transfer set forth in the
Indenture. To the extent that Senior Subordinated Notes are tendered and
accepted in the Exchange Offer, the trading market, if any, for the Senior
Subordinated Notes could be adversely affected. See "Risk Factors --
Consequences of Exchange and Failure to Exchange."
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 1, 1998, as adjusted to give effect to the Transactions and the
application of the net proceeds therefrom. This table should be read in
conjunction with "Summary -- Summary Consolidated Condensed Financial
Information," "Selected Historical Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Pro
Forma Financial Information" and the Consolidated Financial Statements and
Unaudited Consolidated Financial Statements of the Company and the notes
thereto included elsewhere and incorporated by reference herein.
<TABLE>
<CAPTION>
As
As of Actual
February 1, 1998 Adjusted
------------------ -----------
(In thousands)
<S> <C> <C>
Current portion of long-term debt and capital lease obligations ......... $ 9,036 $ 9,036
-------- --------
Long-term debt and capital lease obligations:
Revolving Credit Facilities (a) ........................................ 177,000 --
Senior Secured Notes ................................................... 191,393 191,393
7 5/8% Senior Subordinated Notes due 2008 .............................. -- 200,000
Capital lease obligations .............................................. 17,818 17,818
-------- --------
Total long-term debt and capital lease obligations ................... 386,211 409,211
-------- --------
Total stockholders' equity ........................................... 340,336 340,336
-------- --------
Total capitalization ................................................. $735,583 $758,583
======== ========
</TABLE>
(a) The Revolving Credit Facilities are comprised of a five-year $300 million
revolving credit facility and a 364-day $50 million revolving credit
facility provided by a bank syndicate led by The Chase Manhattan Bank
(together, the "Revolving Credit Facilities"). The commitments under the
Revolving Credit Facilities are subject to a borrowing base limitation. As
of February 1, 1998, the Company had $270.9 million of availability under
its Revolving Credit Facilities. The amount outstanding under the
Revolving Credit Facilities fluctuates throughout the year depending on
the Company's working capital needs. At the date of this Prospectus, the
Company had no outstanding borrowings under the Revolving Credit
Facilities.
23
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data and other data of the Company which should be read in conjunction with and
is qualified in its entirety by reference to "Pro Forma Financial Information"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Unaudited
Consolidated Financial Statements and the notes thereto included elsewhere and
incorporated by reference herein. The selected consolidated financial data for
the fiscal years ended May 2, 1993, May 1, 1994, April 30, 1995, April 28, 1996
and April 27, 1997 have been derived from financial statements of the Company
which have been audited by Arthur Andersen LLP. The selected consolidated
financial data for the 40-week period ended February 1, 1998 and for the
39-week period ended January 26, 1997 have been derived from unaudited
consolidated financial statements. In the opinion of management, the unaudited
information reflects all adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of the results for such periods.
Results for the period ended February 1, 1998 are not necessarily indicative of
the results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------
May 2, May 1, April 30, April 28, April 27,
1993 1994 1995 1996 1997
------------- --------------- ------------- ------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ..................................... $1,113,712 $ 1,403,485 $1,526,518 $2,383,893 $ 3,870,611
Cost of sales ............................. 1,037,628 1,287,880 1,380,586 2,203,626 3,549,673
---------- ----------- ---------- ---------- -----------
Gross profit .............................. 76,084 115,605 145,932 180,267 320,938
Selling, general and administrative
expenses ................................. 42,924 50,738 61,723 103,095 191,225
Depreciation expense ...................... 18,418 21,327 19,717 25,979 35,825
Interest expense .......................... 6,183 11,605 14,054 20,942 26,211
Plant closing costs (1) ................... 3,598 -- -- -- --
Nonrecurring charge (1) ................... -- -- -- -- --
---------- ----------- ---------- ---------- -----------
Income from continuing operations
before income taxes and change in
accounting for income taxes .............. 4,961 31,935 50,438 30,251 67,677
Income taxes .............................. 1,690 12,616 18,523 10,465 22,740
---------- ----------- ---------- ---------- -----------
Income from continuing operations
before change in accounting for
income taxes ............................. 3,271 19,319 31,915 19,786 44,937
Income (loss) from discontinued
operations ............................... (420) 383 (4,075) (3,900) --
Cumulative effect of change in
accounting for income taxes .............. 1,138 -- -- -- --
---------- ----------- ---------- ---------- -----------
Net income (2) ............................ $ 3,989 $ 19,702 $ 27,840 $ 15,886 $ 44,937
========== =========== ========== ========== ===========
OTHER DATA:
EBITDA (3) ................................ $ 34,797 $ 66,550 $ 86,619 $ 79,492 $ 132,945
EBITDA margin (4) ......................... 3.1% 4.7% 5.7% 3.3% 3.4%
Capital expenditures ...................... $ 87,992 $ 25,241 $ 90,550 $ 74,888 $ 69,147
Ratio of EBITDA to interest expense (5).... 5.6x 5.7x 6.2x 3.8x 5.1x
Ratio of net debt to EBITDA (6) ........... 5.1 2.5 2.5 3.6 2.6
Ratio of earnings to fixed charges (7) .... 1.3 3.0 3.6 2.0 2.8
BALANCE SHEET DATA (End Of Period):
Working capital ........................... $ 64,671 $ 81,529 $ 60,911 $ 88,026 $ 164,312
Total assets .............................. 399,567 452,279 550,225 857,619 995,254
Long-term debt and capital lease
obligations .............................. 124,517 118,942 155,047 188,618 288,486
Total debt (including capital lease
obligations) ............................. 178,985 180,732 234,703 312,573 373,786
Stockholders' equity ...................... 135,770 154,950 184,015 242,516 307,486
OPERATING DATA (In Thousands):
Fresh pork sales (pounds) ................. 588,284 820,203 955,290 1,635,300 2,320,477
Processed meats sales (pounds) ............ 631,521 661,783 774,615 839,341 1,218,835
Total hogs slaughtered .................... 5,767 7,414 8,678 12,211 16,869
<CAPTION>
39 Weeks 40 Weeks
Ended Ended
--------------- ---------------
January 26, February 1,
1997 1998
--------------- ---------------
(dollars in thousands)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ..................................... $2,943,075 $ 2,993,661
Cost of sales ............................. 2,722,032 2,707,844
---------- -----------
Gross profit .............................. 221,043 285,817
Selling, general and administrative
expenses ................................. 135,296 166,526
Depreciation expense ...................... 26,141 31,086
Interest expense .......................... 20,378 23,827
Plant closing costs (1) ................... -- --
Nonrecurring charge (1) ................... -- 12,600
---------- -----------
Income from continuing operations
before income taxes and change in
accounting for income taxes .............. 39,228 51,778
Income taxes .............................. 13,731 19,052
---------- -----------
Income from continuing operations
before change in accounting for
income taxes ............................. 25,497 32,726
Income (loss) from discontinued
operations ............................... -- --
Cumulative effect of change in
accounting for income taxes .............. -- --
---------- -----------
Net income (2) ............................ $ 25,497 $ 32,726
========== ===========
OTHER DATA:
EBITDA (3) ................................ $ 88,057 $ 121,797
EBITDA margin (4) ......................... 3.0% 4.1%
Capital expenditures ...................... $ 47,258 $ 73,287
Ratio of EBITDA to interest expense (5).... 4.3x 5.1x
Ratio of net debt to EBITDA (6) ........... 4.0 2.9
Ratio of earnings to fixed charges (7) .... 2.4 2.6
BALANCE SHEET DATA (End Of Period):
Working capital ........................... $ 125,868 $ 232,255
Total assets .............................. 974,846 1,062,568
Long-term debt and capital lease
obligations .............................. 265,123 386,211
Total debt (including capital lease
obligations) ............................. 373,885 395,247
Stockholders' equity ...................... 268,271 340,336
OPERATING DATA (In Thousands):
Fresh pork sales (pounds) ................. 1,794,885 1,897,666
Processed meats sales (pounds) ............ 900,172 1,015,783
Total hogs slaughtered .................... 12,811 13,312
</TABLE>
See Notes to Selected Historical Consolidated Financial Data
24
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(1) Reflects plant closing costs of $3.6 million for the year ended May 2,
1993 and a nonrecurring charge of $12.6 million for the 40 weeks ended February
1, 1998 related to civil penalties in an environmental case. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Regulation" and the Notes to Consolidated Financial Statements.
(2) Net income includes income (loss) from discontinued operations of
$(0.4) million, $0.4 million, $(4.1) million, and $(3.9) million for the fiscal
years ended May 2, 1993, May 1, 1994, April 30, 1995 and April 28, 1996,
respectively, and a gain of $1.1 million for the cumulative effect of changes
in accounting for income taxes for the fiscal year ended May 2, 1993.
(3) "EBITDA" represents earnings from continuing operations before
interest expense, income taxes, depreciation and amortization, cumulative
effects of changes in accounting principles and other charges. Such charges
include $3.6 million for plant closing costs for the fiscal year ended May 2,
1993 and a nonrecurring charge of $12.6 million for the 40 weeks ended February
1, 1998 related to civil penalties in an environmental case. The Company has
included EBITDA in Other Data because it is used by certain investors as a
measure of an issuer's ability to service debt. EBITDA should not be considered
as an alternative to operating earnings (loss), net income (loss), or net cash
provided by operating activities (or any other measure of performance
determined in accordance with generally accepted accounting principles) as a
measure of the Company's ability to meet its cash needs.
(4) Represents EBITDA as a percentage of sales.
(5) On a pro forma basis, as if the Exchange Offer the use of proceeds
therefrom had occurred on April 29, 1996, interest expense for the fiscal year
ended April 27, 1997 and the 40 weeks ended February 1, 1998 would have
increased by $2.2 million and $1.6 million, respectively, and the pro forma
ratios of EBITDA to interest expense for such periods would have been 4.7x, and
4.8x, respectively.
(6) Net Debt represents total debt plus capital lease obligations less
cash.
(7) For purposes of computing the ratios of earnings to fixed charges,
earnings represent earnings (loss) from continuing operations before taxes and
change in accounting for income taxes plus fixed charges (excluding capitalized
interest). Fixed charges include interest on indebtedness (including
capitalized interest), amortization of deferred debt issuance costs and an
estimate of the interest portion of fixed rent expense.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Historical Consolidated Financial Data," "Pro Forma Financial Information" and
the Consolidated Financial Statements and Unaudited Consolidated Financial
Statements (including the notes thereto) included elsewhere in and incorporated
by reference into this Prospectus.
General
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-percent owned subsidiary, Brown's of Carolina, Inc. ("Brown's"), and through
a 50-percent 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 33-percent participant in the
Circle Four joint hog production arrangement ("Circle Four") with Carroll's
Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc., all large
North Carolina hog producers, which conducts hog production operations in
Milford, Utah. The hogs produced by Circle Four are sold to an unrelated party.
25
<PAGE>
Recent Development
On December 18, 1997, the Company announced that it had reached an
agreement with the members of the Schneider family who control approximately
75% of the voting common shares ("Schneider Common Shares") and 17% of the
nonvoting Class A Shares ("Schneider Class A Shares") of Schneider Corporation,
a Canadian meat processor based in Kitchener, Ontario ("Schneider"), on the
terms of a proposed offer to purchase such shares. Based on filings made by
Schneider with the Ontario Securities Commission, as of December 18, 1997,
there are 738,954 Schneider Common Shares and 6,105,565 Schneider Class A
Shares outstanding. The Company intends to account for the acquisition of
Schneider using the pooling of interests method of accounting.
Under the agreement, the Company has agreed to make a registered public
exchange offer to acquire any and all Schneider Common Shares and Schneider
Class A Shares on the basis of 0.5415 of an exchangeable share ("Exchangeable
Share") of a newly incorporated, wholly-owned Canadian subsidiary of the
Company for each share of Schneider. Under the agreement, the members of the
Schneider family party to the agreement have committed to tender all of their
Schneider shares into the offer. Each whole Exchangeable Share may be exchanged
for one share of Smithfield Foods Common Stock. For purposes of establishing
the exchange ratio, the parties agreed on a value of $25.00 (Can.) for each
Schneider share and $32.50 (U.S.) for each Smithfield Foods share. The
Exchangeable Shares will have voting, dividend and liquidation rights that are,
as nearly as practicable, equivalent to those of Smithfield Food Common Stock.
Schneider products include bacon, hams, sausages, specialty sausage,
wieners, sliced meats, deli meats and grocery entrees. According to Schneider's
most recent audited financial statements filed with the Ontario Securities
Commission, and prepared in accordance with Canadian generally accepted
accounting principles, for Schneider's fiscal year ended October 25, 1997,
Schneider recorded sales of $813.4 million (Can.) and at such date Schneider
had total assets of $278.0 million (Can.) and total debt of $87.5 million
(Can.).
Subject to regulatory approvals and customary conditions, the Company
expects to consummate its exchange offer in April 1998, but there can be no
assurance that the proposed transaction will be consummated as expected. If all
Schneider Common Shares and Schneider Class A Shares are tendered and accepted
in the Company's exchange offer, the Company would over time issue
approximately 3.8 million shares of Smithfield Foods Common Stock upon
surrender of the Exchangeable Shares. The Schneider Board of Directors has not
made any recommendation with respect to the Company's proposed offer, and has
announced a position of "no recommendation" with respect to the competing
tender offer by Maple Leaf Foods, Inc. ("Maple Leaf") of $29.00 (Can.) cash
(or, at the offeree's option, equivalent value in Maple Leaf stock, provided
such amount does not exceed 6.2 million Maple Leaf common shares in the
aggregate) per Schneider share.
On January 14, 1998, two holders of Schneider Class A Shares commenced an
action in the Ontario Court (General Division), Ontario, Canada, seeking, among
other things, an order certifying the action as a class action, a declaration
that Schneider's board of directors has acted in a manner that was oppressive
and unfairly disregarded the interest of all Schneider shareholders and an
order that each holder of Schneider Class A Shares has the right to convert its
Schneider Class A Shares into Schneider Common Shares. The action is at a
preliminary stage, and Smithfield Foods is unable to assess what impact, if
any, the action might have on the Company's proposed transaction.
Results Of Operations
In December 1995, the Company acquired all of the capital stock of John
Morrell. The Company's fiscal 1997 operating results include those of John
Morrell for the full fiscal year compared to an 18-week period in fiscal 1996.
In November 1996, the Company acquired the assets and business of Lykes from
Lykes Bros. Inc. The fiscal 1997 operating results include those of Lykes for
the 25-week period from its date of acquisition. Accordingly, the substantial
increases in sales, cost of sales, gross profit, selling, general and
administrative expenses, depreciation expense and interest expense in fiscal
1997 reflect the impact of these acquisitions.
In February 1997, as a result of a shortage of market hogs and excess
industry slaughter capacity, the Company shut down the second shift at its
Sioux City, Iowa slaughter plant for six months. The impact of the Lykes
acquisition and the shutdown of the Sioux City second shift are reflected in
sales, cost of sales, gross profit, selling, general and administrative
expenses, depreciation expense and interest expense for fiscal 1997 and the 40
weeks ended February 1, 1998.
26
<PAGE>
The Company uses recognized price-risk management and commodities 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
commodities hedging activities currently are utilized in the areas of forward
sales, hog production margin management, procurement of raw materials (hams and
bacon) for seasonal demand peaks and inventory hedging. The Company recognizes
gains and losses resulting from hedging transactions when the related sales are
made and the hedges are lifted.
The fiscal quarter ended February 1, 1998 represented 40 weeks of
operations compared to the fiscal quarter ended January 26, 1997, which
represented 39 weeks of operations. Accordingly, sales and all expense
categories in the 40 weeks ended February 1, 1998 reflect the impact of an
additional week of operations in comparison to the corresponding period in
fiscal 1997.
40 Weeks Ended February 1, 1998 Compared To 39 Weeks Ended January 26, 1997
Sales in the first nine months of fiscal 1998 increased $50.6 million, or
1.7%, from the comparable period in fiscal 1997. The increase in sales
reflected an additional week's sales and a 7.2% increase in sales tonnage,
offset by a 5.1% decrease in unit sales prices reflecting the impact of lower
live hog costs. The increase in sales tonnage reflected a 5.7% increase in
fresh pork tonnage combined with a 12.8% increase in processed meat tonnage.
Cost of sales in the first nine months of fiscal 1998 were flat from the
comparable period in fiscal 1997, reflecting the increased sales tonnage, which
was offset by lower unit costs reflecting lower live hog prices.
Gross profit in the first nine months of fiscal 1998 increased $64.8
million, or 29.3%, from the comparable period in fiscal 1997. The increase in
gross profit reflected improved margins on higher sales tonnage of both fresh
pork and processed meats.
Selling, general and administrative expenses increased $31.2 million, or
23.1%, in the first nine months of fiscal 1998 from the comparable period in
fiscal 1997. The increase was related to the inclusion of the operations of
Lykes, which was acquired in November 1996, for the full fiscal period, and to
higher selling, marketing and product promotion costs associated with
intensified efforts to market branded fresh pork and processed meats.
Depreciation expense increased $4.9 million, or 18.9%, in the first nine
months of fiscal 1998 from the comparable period in fiscal 1997. The increase
was related to the inclusion of the operations of Lykes for the full fiscal
period and completed capital projects at several of the Company's processing
plants.
Interest expense increased $3.4 million, or 16.9%, in the first nine
months of fiscal 1998 from the comparable period in fiscal 1997. The increase
primarily reflected the interest costs on borrowings to finance the acquisition
of Lykes for the full period and the funding of capital projects.
A nonrecurring charge of $12.6 million 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 the first nine months of fiscal 1998
benefited from a $12.5 million profit at the Company's hog production group
compared to a $16.8 million profit in the same period of fiscal 1997. During
the 40 weeks ended February 1, 1998, the Company obtained 10.9% of the hogs it
processed from Brown's and Smithfield-Carroll's.
The effective income tax rate for the first nine months of fiscal 1998,
excluding the nonrecurring charge, decreased to 29.6% from 35.0% in the
corresponding period in fiscal 1997, reflecting a lower tax rate on increased
foreign sales, benefits related to certain insurance contracts and employment
related tax credits.
Excluding the nonrecurring charge, net income was $45.3 million, or $1.12
per diluted share, for the first nine months of fiscal 1998. Including the
nonrecurring charge, net income in the first nine months of fiscal 1998 was
$32.7 million, or $.82 per diluted share, compared to net income of $25.5
million, or $.66 per diluted share, in the comparable period in fiscal 1997.
Fiscal 1997 Compared To Fiscal 1996
Sales in fiscal 1997 increased $1.5 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 of 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
27
<PAGE>
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 the John Morrell and Lykes acquisitions.
Cost of sales increased $1.4 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) which were somewhat
offset by lower margins on sales of fresh pork (58.9% of dollar sales). Fresh
pork margins were adversely impacted by 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. This trend has
persisted for the past two fiscal years and has continued in the first quarter
of fiscal 1998. Gross profit also benefited from a reduction in cost of sales
related to profits at the Company's hog production group totalling $20.7
million in fiscal 1997 compared to $10.8 million in fiscal 1996. During fiscal
1997, the Company obtained 10.1% of the hogs it processed from Brown's and
Smithfield-Carroll's.
As of April 27, 1997, the Company had deferred $2.2 million of unrealized
hedging gains on outstanding futures contracts pending delivery of hogs in the
future and lifting of the related hedges, and the completion of open sales
transactions and lifting of the related hedges.
Selling, general and administrative expenses increased $88.1 million, or
85.5%, in fiscal 1997. This increase was primarily due to the inclusion of the
operations of John Morrell and Lykes.
Depreciation expense increased $9.8 million, or 37.9%, in fiscal 1997. The
increase was primarily due to the inclusion of the operations of 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.
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 $37.4 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 Company's hog production group.
Reflecting the factors discussed above, net income increased to $44.9
million in fiscal 1997, up from $15.9 million in fiscal 1996.
Fiscal 1996 Compared To Fiscal 1995
Sales in fiscal 1996 increased $857.4 million, or 56.2%, from fiscal 1995.
The increase was primarily due to the inclusion of the sales of John Morrell
from its date of acquisition in December 1995, an increase in unit sales prices
of both fresh pork and processed meats and increased sales of fresh pork
related to increased slaughter levels at the Company's Bladen County plant. The
increase in unit sales prices reflected the pass-through of higher raw material
costs due to a 20.0% increase in live hog costs. The increase in sales tonnage
reflected a 71.2% increase in fresh pork tonnage and an 8.4% increase in
processed meats tonnage.
Cost of sales increased $823.0 million, or 59.6%, in fiscal 1996,
reflecting the increased sales tonnage, increased live hog costs and higher
warehousing and distribution costs associated with the increase in sales
tonnage. Gross profit increased $34.3 million, or 23.5%, in fiscal 1996
compared to fiscal 1995. The increase in gross profit resulted from the
increased sales tonnage of both fresh pork (58.8% of dollar sales) and
processed meats (36.7% of dollar sales), offset by lower sales margins on both
fresh pork and processed meats. In addition, gross profit benefitted from a
reduction in cost of sales related to profits totaling $10.8 million at the
Company's hog production group. In fiscal 1995, gross profit was adversely
affected by a $0.2 million loss at the hog production group. During fiscal
1996, the Company obtained 11.3% of the hogs it processed from Brown's and
Smithfield-Carroll's. As of April 28, 1996, the Company had deferred $2.2
million of unrealized hedging gains on outstanding futures contracts pending
the completion of open sales transactions and lifting of the related hedges.
28
<PAGE>
Selling, general and administrative expenses increased $41.4 million, or
67.0%, in fiscal 1996. The increase was primarily due to the inclusion of the
operations of John Morrell and higher selling and marketing costs associated
with the increase in fresh pork tonnage.
Depreciation expense increased $6.3 million, or 31.8%, in fiscal 1996. The
increase was related to continued expansion at the Bladen County plant,
additional hog production facilities at Brown's and the inclusion of the
operations of John Morrell.
Interest expense increased $6.9 million, or 49.0%, in fiscal 1996,
reflecting increased carrying costs on long-term debt related to the funding of
capital projects at the Bladen County plant and Brown's, higher short- and
long- term interest rates and interest costs associated with the cash portion
of the purchase price related to the acquisition of John Morrell.
The effective income tax rate in fiscal 1996 decreased to 34.6% from 36.7%
in fiscal 1995, reflecting a lower tax rate on foreign sales and benefits
related to certain insurance contracts. The Company had no valuation allowance
related to income tax assets as of April 28, 1996, and there was no change in
the valuation allowance during fiscal 1996.
Income from continuing operations decreased $12.1 million in fiscal 1996,
reflecting lower sales margins on both fresh pork and processed meats compared
to fiscal 1995. The prior year's results reflected exceptionally strong margins
on fresh pork due to unusually low hog prices. John Morrell made a significant
contribution to the Company's overall profitability in fiscal 1996.
In fiscal 1996, the Company completed the disposition of the assets and
business of Ed Kelly, Inc., its former retail electronics subsidiary, resulting
in a loss from discontinued operations of $3.9 million.
Reflecting the factors discussed above, net income decreased to $15.9
million in fiscal 1996 from $27.8 million in fiscal 1995.
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
lines of credit 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.
Prior to July 1997, the Company maintained $300 million in credit
facilities, consisting of a 364-day $225 million revolver and a two-year $75
million revolver (the "Old Credit Facilities"). In July 1997, the Company,
certain subsidiaries of the Company and a bank syndicate led by The Chase
Manhattan Bank, an affiliate of the Initial Purchaser, entered into loan
agreements providing for $350 million in senior secured revolving credit
facilities, consisting of a five-year $300 million revolving credit facility
and a 364-day $50 million revolving credit facility (together, the "Revolving
Credit Facilities"). In connection with this refinancing, the Company repaid
all borrowings under the Old Credit Facilities, which were terminated. The
commitments under the Revolving Credit Facilities are subject to a requirement
that the sum of indebtedness under the Revolving Credit Facilities (including
letters of credit) and indebtedness pari passu with the indebtedness under the
Revolving Credit Facilities cannot exceed a borrowing base calculated on the
basis of the Company's accounts receivable and inventory. All borrowings
outstanding at February 1, 1998 were borrowed under the five-year revolving
credit facility and are reflected as long-term debt in the Company's financial
statements. Borrowings under the Revolving Credit Facilities are secured by
substantially all of the Company's inventories and accounts receivable. The
Revolving Credit Facilities contain financial covenants that require the
maintenance of certain levels and/or ratios for working capital, net worth,
current ratio, total liabilities to tangible net worth, tangible net worth,
EBITDA to fixed charges and capital expenditures. In addition, the Revolving
Credit Facilities impose certain restrictions on indebtedness, liens, mergers
and consolidations, investments, loans, advances, guarantees and acquisitions,
hedging agreements, restricted payments, transactions with affiliates and sale
and leaseback transactions. The borrowings under the Revolving Credit
Facilities are guaranteed by certain existing and future subsidiaries of the
Company, the assets of which are included in the calculation of the Company's
borrowing base.
Weighted average borrowings under the Old Credit Facilities were $165.1
million in fiscal 1997, $133.4 million in fiscal 1996 and $69.9 million in
fiscal 1995, at weighted average interest rates of approximately 7%, 7% and 6%,
respectively. Maximum borrowings were $215.0 million in fiscal 1997, $179.8
million in fiscal 1996 and $117.0 million in fiscal 1995. The outstanding
balances under the Old Credit Facilities totaled $150.0 million and $151.3
million as of April 27, 1997 and
29
<PAGE>
April 28, 1996, respectively, at a weighted average interest rate of 7% for
both years. The outstanding balances under the Revolving Credit Facilities
totaled $177.0 million as of February 1, 1998 at an interest rate of 6.4%.
During fiscal 1997, the Company privately placed $140 million of senior
secured notes with a group of institutional lenders. The placement consisted of
$40 million of seven-year 8.34% notes and $100 million of 10-year 8.52% notes,
secured by four of the Company's major processing plants. The proceeds of the
financing were used to repay $65.2 million of long-term bank debt and reduce
short-term borrowings. In conjunction with the placement of the senior secured
notes, the Company refinanced $59.7 million of existing institutional long-term
debt with the same institutional lenders (collectively, the "Senior Secured
Notes"). The refinancing resulted in revised maturity dates and repayment
schedules for the refinanced debt. The Senior Secured Notes contain financial
covenants that require the maintenance of certain levels and/or ratios
regarding working capital, current ratio, indebtedness as a percentage of total
capitalization, net income to fixed charges, tangible net worth and liabilities
to tangible net worth. In addition, the Senior Secured Notes impose certain
limitations on indebtedness, restrictions on dividends, restricted payments and
investments, liens, mergers and consolidations, acquisitions, transfers of
property, transactions with affiliates and lines of business.
During fiscal 1997, all of the Company's Series C 6.75% preferred stock
was converted into 1,333,332 shares of the Company's common stock at $15.00 per
share.
In November 1996, the Company acquired substantially all of the assets and
business of Lykes from Lykes Bros. Inc. for $34.8 million in cash, which was
borrowed under the Old Credit Facilities, and the assumption of $10.6 million
of current liabilities.
The Company expended $69.1 million of capital expenditures in fiscal 1997,
primarily for additional hog production facilities and a feedmill at Brown's
and for plant renovation and expansion projects at certain of its processing
plants. The capital expenditures were financed with internally generated funds
and with a portion of the net proceeds from the placement of the Senior Secured
Notes. The Company expended another $73.3 million in the first nine months of
fiscal 1998 on capital projects, including renovation and expansion projects at
certain of its processing plants as well as the acquisition of an idle
slaughter facility in South Dakota and a hog production operation in North
Carolina. In addition, in June 1997, 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's acquisition were funded with internally generated funds and net
borrowings under the Company's revolving credit facilities.
On February 9, 1998, the Company issued the Senior Subordinated Notes in a
transaction exempt from registration requirements of the U.S. Securities Act.
Substantially all the proceeds from the sale were used to pay the Revolving
Credit Facilities, with the balance invested in short-term marketable debt
securities. On February 10, 1998, the 364-day $50 million revolving credit
faciltity was terminated.
As of February 1, 1998, the Company had definitive commitments of $13.1
million for capital expenditures primarily to increase its processed meats and
value-added fresh pork capacity at several of its processing plants and to
replace and upgrade portions of its hardware and software in response to the
Year 2000 issue. The Company believes that the total costs of the Year 2000
issue will not have a material effect on the Company's results of operations
nor pose significant operational problems. The Company plans to make additional
capital expenditures in fiscal 1998 and beyond to expand its hog production
operations and to increase its processed meats business through strategic
acquisitions and joint ventures. The net proceeds to the Company from its sale
of the Notes described herein, internally generated funds and additional
borrowings under the Revolving Credit Facilities will fund such capital
expenditures.
Income Per Common Share
Income per common share is computed on the basis of weighted average
common shares outstanding and common equivalent shares in the form of stock
options. The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share," during the third quarter of
fiscal 1998. All income per common share amounts have been restated in
accordance with this standard.
30
<PAGE>
Quarterly Results
The Company's business is seasonal, with the highest percentage of sales
typically occurring in the third quarter of the fiscal year, and the lowest
percentage in the first quarter. This seasonality is due to the impact of the
"holiday season" on consumer demand for pork products. The following table sets
forth summary unaudited quarterly financial information for the last two
quarters in fiscal 1996, each quarter in fiscal 1997 and the first three
quarters of fiscal 1998. In the opinion of management, such information has
been prepared on the same basis as the financial statements appearing elsewhere
in this Prospectus and reflects all necessary adjustments (consisting of only
normal recurring adjustments) for a fair presentation of such unaudited
quarterly results when read in conjunction with the financial statements and
the related notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period and there can be no
assurance that any trends reflected in such results will continue in the
future.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997 Fiscal 1998
----------------------- ------------------------------------------------- -----------------------
3rd 4th 1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- ------------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales ................. $687,000 $873,766 $892,870 $969,226 $1,080,979 $927,536 $914,963 $982,699
Gross profit .......... 56,319 67,513 58,762 73,577 88,704 99,895 75,184 93,970
Income (loss) from
continuing
operations before
income taxes ......... 16,460 10,776 1,161 14,100 23,967 28,449 (3,690) 22,404
EBITDA ................ 29,422 25,212 16,679 30,314 41,064 44,888 26,748 41,618
<CAPTION>
3rd
Quarter
-------------
<S> <C>
Sales ................. $1,095,999
Gross profit .......... 116,663
Income (loss) from
continuing
operations before
income taxes ......... 33,064
EBITDA ................ 53,431
</TABLE>
31
<PAGE>
BUSINESS
General
Smithfield Foods believes it is the largest combined hog slaughterer and
further processor of pork in the United States. The Company produces a wide
variety of fresh pork and processed meat products which it markets
domestically, and increasingly, 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 an 86-percent owned subsidiary and
through a joint hog production arrangement with one of the nation's largest hog
producers. These hog production operations collectively accounted for 10.1% of
the hogs the Company slaughtered in fiscal 1997. In addition, the Company
obtains 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 41.5% of the hogs
the Company slaughtered in fiscal 1997.
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 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
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.
In June 1997, the Company acquired the assets and business of Curly's,
which operates a meat processing plant in Sioux City, Iowa. Curly's produces a
variety of further processed meat products for customers, primarily food
service, throughout the United States and internationally.
32
<PAGE>
The Company's business is based on 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 commerically 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 from 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 1997, the Company processed
1.6 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.
<TABLE>
<CAPTION>
First Nine
Months
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fresh Pork .............. 41 % 48 % 51 % 59 % 59 % 58%
Processed Meats ......... 55 % 49 % 45 % 37 % 37 % 39%
Other Products .......... 4 % 3 % 4 % 4 % 4 % 3%
------- ------- ------- ------- ------- --
100 % 100 % 100 % 100 % 100 % 100%
</TABLE>
The increase in percentage of revenues derived from fresh pork since
fiscal 1993 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 an aggregate slaughter capacity of
81,000 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.
33
<PAGE>
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 brands 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.
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 10.1% of the hogs it
processed in fiscal 1997 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 41.5% of the hogs processed by the Company in fiscal
1997.
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 salesmen
as well as independent commission brokers to sell its products. In fiscal 1997,
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 trademarks have been
important to the success of its branded processed meat products.
34
<PAGE>
The Company in recent years has placed major emphasis on growing and
expanding its international sales. In fiscal 1997, 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 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 1997. 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 general economic
conditions, 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 commodities 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
commodities 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 December 31, 1997, the Company had approximately 18,800 employees,
approximately 10,800 of whom are covered by collective bargaining agreements
expiring between March 29, 1998 and February 5, 2002. The Company believes that
its relationship with its employees is good. With respect to approximately 250
employees at the Company's Copaz processing facility in Cincinnati, Ohio, the
related collective bargaining agreement expired January 18, 1998; the Company
and the union are negotiating the terms of a new collective bargaining
agreement and the Company expects to enter into a new collective bargaining
agreement on satisfactory terms.
35
<PAGE>
Legal Proceedings
The Company and its subsidiaries and affiliates are from time to time
party to lawsuits arising in the ordinary course of business, excluding certain
environmental litigation and investigations discussed under " -- Regulation"
below. In the opinion of management, any ultimate liability with respect to
such matters will not have a material adverse effect on the Company's financial
position or results of operations. For a discussion of the environmental
litigation and investigations, see " -- Regulation."
Regulation
Regulation Generally. 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 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 and Natural Resources, as well as the United
States Department of Agriculture, the United States Food and Drug
Administration and the Occupational Safety and Health Administration.
Management believes that the Company 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 matters 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
Company's 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 federal 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 the Company. In January and February 1998, several
Company employees responsible for wastewater treatment were subpoenaed and
testified before a federal grand jury in Norfolk, Virginia. During this period,
the grand jury issued
36
<PAGE>
subpoenas requiring production of various environmental materials relating to
the Company's Smithfield, Virginia wastewater. 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.
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 the Company 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 is
mainly attributable to their different methods of counting violations. The same
categories of violations were involved in both suits, except that the
Commonwealth 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 the Company'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. The Company has asked the Court to dismiss this second suit on
double jeopardy and res judicata grounds. If the Commonwealth's charges go to
trial again, the Company will argue that no economic benefit accrued to the
Company and that no environmental damage was caused by the violations. There
can be no assurance as to the outcome of any such proceeding.
Bladen County, North Carolina Plant. The Company has been notified that
the North Carolina DENR is considering enforcement action with respect to
alleged violations of wastewater discharge limits at the Company's Bladen
County, North Carolina plant. There can be no assurance as to the result of
this investigation, but the Company does not expect the result to have a
significant impact on the Company's financial position or results of
operations.
37
<PAGE>
MANAGEMENT
Directors And Executive Officers Of The Company
The directors and executive officers of the Company are set forth below.
<TABLE>
<CAPTION>
Years In Pork Positions With The Company And
Name Age Industry Other Information
- -------------------------------- ----- --------------- -------------------------------------------
<S> <C> <C> <C>
Joseph W. Luter, III 58 29 Director; Chairman of the Board and Chief
Executive Officer of the Company
Lewis R. Little 54 34 Director; President and Chief Operating
Officer of the Company and Smithfield
Packing
Timothy A. Seely 48 26 President and Chief Operating Officer of
Gwaltney
Joseph B. Sebring 50 22 Director; President and Chief Operating
Officer of John Morrell
Roger R. Kapella 56 34 Director; President and Chief Operating
Officer of Patrick Cudahy
Larry P. Swafford 51 22 President and Chief Operating Officer of
Lykes
Aaron D. Trub 62 27 Director; Vice President, Secretary and
Treasurer of the Company
C. Larry Pope 43 16 Vice President and Controller of the
Company
Robert L. Burrus, Jr. 63 -- Director; Chairman of the law firm of
McGuire, Woods, Battle & Boothe LLP,
Richmond, Virginia
F. J. Faison, Jr. 63 24 Director; President of Carroll's Foods,
Inc.,* Warsaw, North Carolina, a hog
and turkey producer
Joel W. Greenberg 59 -- Director; Commodity Analyst, Alaron
Trading Corp., Chicago, Illinois, a
commodities brokerage firm
George E. Hamilton, Jr. 82 60 Director; Retired President and Chief
Operating Officer of Smithfield Packing
Richard J. Holland 72 -- Director; Chairman of the Board of The
Farmers Bank, Windsor, Virginia
H. Gordon Maxwell, III 59 45 Director; President and Chief Executive
Officer of Goldsboro Milling Co., Inc.,*
Goldsboro, North Carolina, a hog and
turkey producer
Wendell H. Murphy 59 35 Director; Chairman of the Board and Chief
Executive Officer of Murphy Family
Farms, Inc.,* Rose Hill, North Carolina,
a hog producer
William H. Prestage 62 30 Director; Chairman of the Board, President
and Chief Executive Officer of Prestage
Farms, Inc.,* Clinton, North Carolina, a
hog and turkey producer
</TABLE>
* As discussed elsewhere in this Prospectus, this producer is a party to
various hog supply contracts and/or hog production arrangements with the
Company. For further information, see "Business -- Business Strategy," " -- Raw
Materials" and "Related Party Transactions."
38
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning (i) the
share ownership of each person known to the Company to be the beneficial owner
of more than five percent of the outstanding shares of the Company's Common
Stock and (ii) the share ownership of the Company's Common Stock by all
Directors and executive officers as a group, in each case as of December 31,
1997.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
Name and Address of (Number of Shares Percent
Beneficial Owner Benefically Owned) of Class
- --------------------------------------------------- --------------------- ---------
<S> <C> <C>
Joseph W. Luter, III 3,935,682 (1) 10.2%
Smithfield Foods, Inc
999 Waterside Drive,
Suite 900
Norfolk, VA 23510
Carroll's Foods, Inc. 2,956,000 (2) 7.9%
P. O. Drawer 356
Warsaw, NC 28398
Montgomery Asset Management L.P. 2,490,000 6.6%
101 California Street
San Francisco, CA 94111
Directors and Executive Officers as a group 8,585,246 (3) 22.2%
</TABLE>
(1) Includes 650,064 shares owned by Luter Packing Company, a corporation of
which Mr. Luter is an officer, director and the owner of 81-percent of its
capital stock and 1,000,000 shares which Mr. Luter has the right to
acquire pursuant to the exercise of presently exercisable stock options.
Mr. Luter has sole voting power and sole dispositive power with respect to
the 650,064 shares owned by Luter Packing Company. Mr. Luter may be deemed
a control person of the Company.
(2) The number of shares in the table is based upon an amended Schedule 13D,
dated January 10, 1996, filed by Carroll's Foods, Inc. The reported shares
are owned of record by Carroll's Swine Investment Partnership, which is a
Virginia general partnership between Carroll's Foods, Inc. and Carroll's
Foods of Virginia, Inc. F. J. Faison, Jr., a director of the Company, is
an officer and director of Carroll's Foods, Inc. and Carroll's Foods of
Virginia, Inc., but is not a stockholder of either corporation. Mr. Faison
disclaims personal beneficial ownership of the reported shares.
(3) Includes 1,180,000 shares subject to presently exercisable stock options.
39
<PAGE>
RELATED PARTY TRANSACTIONS
Joseph W. Luter, III, a Director and the Chairman of the Board and Chief
Executive Officer of the Company, is an officer, director and the owner of
81-percent of the capital stock of Luter Packing Company, a wholesale
distributor of meat and other food products. The Company sold $266,000 of its
fresh pork and processed meat products to Luter Packing Company in fiscal 1997.
The sales to Luter Packing Company were made by the Company in the ordinary
course of its business, and in the opinion of the Company's management, the
terms of those transactions were as favorable to the Company as those made to
unaffiliated parties. In addition, Gwaltney purchased $12,772,000 of comminuted
chicken meat for use in its frank and bologna products from a company
48-percent of the capital stock of which is owned by Mr. Luter's three adult
children. The Company believes that the terms under which Gwaltney made such
purchases were as advantageous to Gwaltney as those Gwaltney would have
received from any other comminuted chicken meat producer.
Mr. Luter's daughter and son-in-law are the sole members of Fishing Creek
Farms LLC ("Fishing Creek"). Brown's, an 86-percent owned subsidiary of the
Company, has arrangements with B&G Farms LLC ("B&G"), a limited liability
company in which Brown's and Fishing Creek each have a 50-percent interest, for
the production of hogs for the Company's pork processing plants. The
arrangements involve, inter alia, (i) the lease of certain hog production
facilities by B&G to Brown's until December 31, 2009 at an annual rent of
approximately $465,000 per year, and (ii) advances by B&G to Brown's of cash
for working capital. Working capital advances totaling $1,430,000 were
outstanding as of April 27, 1997. All profits and losses from the hog
production operations on land owned by B&G and leased by Brown's are shared
equally by Brown's and Fishing Creek. All advances made pursuant to the
arrangements accrue interest at a rate equal to the prime rate charged by one
of the Company's lending banks. Brown's hog production operations on the B&G
land generated $6.4 million of sales to other subsidiaries of the Company in
fiscal 1997 and the Company anticipates about the same volume of business in
fiscal 1998. The Company believes that the terms of the foregoing arrangements
are no less favorable to the Company than if entered into with unaffiliated
parties.
F. J. Faison, Jr., a director of the Company, is the president and a
director of Carroll's Foods, Inc. ("CFI") and its affiliates, Carroll's Farms
of Virginia, Inc. ("CFAV") and Carroll's Foods of Virginia, Inc. ("CFOV"). The
Company has arrangements with CFI and its affiliates for production of hogs for
the Company's meat processing plants. The arrangements involve, inter alia, (i)
Smithfield-Carroll's Farms, a partnership consisting of Smithfield Hog Farms,
Inc., a wholly-owned subsidiary of the Company, and CFAV, which partnership
owns hog raising facilities and leases them to CFOV, and (ii) contracts between
the Company and CFOV and CFI which obligate the Company to purchase hogs
produced by CFOV and CFI. Substantially all revenues of the
Smithfield-Carroll's Farms partnership consist of CFOV's lease payments, which
cover debt service, depreciation charges and other operating expenses. Such
revenues were $8,227,000 in fiscal 1997 and are expected to be the same amount
or slightly less in fiscal 1998. Pursuant to the purchase agreements, the
Company purchased $93,049,000 and $269,499,000 of live hogs from CFOV and CFI,
respectively, in fiscal 1997 and anticipates a greater volume of business under
these agreements in fiscal 1998. The Company believes that the prices paid
under the purchase agreement with CFI are equivalent to market.
The purchase agreement with CFOV results in decreased raw material costs
to the Company during periods when hog production is profitable and,
conversely, an increase in such costs when such production is unprofitable. The
agreement with CFOV resulted in decreased raw material costs to the Company (as
compared to market costs) of $5,245,000 in fiscal 1997 compared to decreased
raw material costs of $2,617,000 in fiscal 1996.
Wendell H. Murphy, a director of the Company, is the chairman of the board
and chief executive officer and the principal stockholder of Murphy Family
Farms, Inc. ("MFF"), a hog producer located in Rose Hill, North Carolina. The
Company has a contract with MFF which obligates the Company to purchase hogs
finished by MFF in the Southeast. Pursuant to the purchase agreement, the
Company purchased $433,861,000 of live hogs from MFF in fiscal 1997 and
anticipates a greater volume of business under this agreement in fiscal 1998.
The Company believes that the prices paid under the purchase agreement with MFF
are equivalent to market.
William H. Prestage, a director of the Company, is the chairman of the
board, president and chief executive officer of Prestage Farms, Inc. ("PFI"), a
hog and turkey producer located in Clinton, North Carolina. The Company has a
contract with PFI which obligates the Company to purchase hogs produced by PFI
in the states of Virginia, North Carolina and South Carolina. Pursuant to the
purchase agreement, the Company purchased $182,576,000 of live hogs from PFI in
fiscal 1997 and anticipates a greater volume of business under this agreement
in fiscal 1998. The Company believes that the prices paid under the purchase
agreement with PFI are equivalent to market.
Smithfield of Utah, Inc. ("Smithfield-Utah"), a wholly-owned subsidiary of
the Company, has entered into a joint hog production arrangement with three
companies to produce hogs in the state of Utah for sale to an unrelated party.
40
<PAGE>
The other companies participating in the joint hog production arrangement are
(i) Carroll's Foods of Utah, Inc. (an affiliate of Carroll's Foods, Inc.), of
which F. J. Faison, Jr., a director of the Company, is the president and a
director, (ii) West Isle Partners, Inc., of which Wendell H. Murphy, a director
of the Company, is the president and a director and members of Mr. Murphy's
family are the sole stockholders, and (iii) Prestage Farms of Utah, Inc., of
which William H. Prestage, a director of the Company, is the president and a
director and Mr. Prestage and his wife are the sole stockholders. As of April
27, 1997, Smithfield-Utah had contributed a total of $12,673,000 to the
arrangement and had a 33-percent interest in its profits or losses. The Company
believes that the terms of the joint arrangement are no less favorable to the
Company than if entered into with unaffiliated parties.
Cecil W. Gwaltney, who was serving as a director of the Company at the
time of his death in September 1997, was chairman of the board of Gwaltney
Motor Company ("GMC"), which was paid $677,000 by the Company in fiscal 1997
for automotive equipment and parts, and maintenance and leasing services. The
Company leases substantially all of its automobiles under three-year leases
arranged by GMC. As of April 27, 1997, the Company was obligated to make a
total of $1,008,000 in future lease payments under such leases in effect on
that date. The Company believes that the terms of all of its purchase
transactions with GMC and the terms of the leases arranged by GMC are
comparable to those available from other suppliers.
H. Gordon Maxwell, III, a director of the Company, is a director and owns
50% of the voting stock of Maxwell Foods, Inc. ("MFI"), a hog producer located
in Goldsboro, North Carolina. The Company has a contract with MFI which
obligates the Company to purchase hogs produced by MFI in the State of North
Carolina. Pursuant to the purchase agreement, the Company purchased
$109,470,000 of live hogs from MFI in fiscal 1997 and anticipates a greater
volume of business under this agreement in fiscal 1998. The Company believes
that the prices paid under the purchase agreement with MFI are equivalent to
market. In addition, Mr. Maxwell is a stockholder of a corporation which owns a
controlling interest in Carolina Turkeys, Inc. ("CTI"). During fiscal 1997, the
Company purchased $971,000 of comminuted chicken meat from CTI. The Company
believes that the terms under which it made such purchases were as advantageous
to the Company as those it would have received from any other comminuted
chicken meat producer.
41
<PAGE>
DESCRIPTION OF NOTES
General
The Exchange Notes will be issued, and the Senior Subordinated Notes were
issued, under an Indenture, dated as of Feburary 9, 1998 (the "Indenture"),
between the Company and SunTrust Bank, Atlanta, as Trustee (the "Trustee"), a
copy of which is available upon request to the Company.
The following summary of certain provisions of the Indenture and the Notes
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended ("TIA"). Capitalized terms used herein
and not otherwise defined have the meanings set forth in the section " --
Certain Definitions."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company, in the except that, at the option of the Company, payment of
interest may be made by check mailed to the registered holders of the Notes at
their registered addresses.
The Notes are, and will be unsecured senior subordinated obligations of
the Company, ranking subordinate in right of payment to all Senior Indebtedness
of the Company.
The Exchange Notes will be issued, and the Senior Subordinated Notes were
issued, only in fully registered form, without coupons, in denominations of
$1,000 and any integral multiple of $1,000. No service charge was made, or will
be made, for any registration of transfer or exchange of Senior Subordinated
Notes or Exchange Notes, as the case may be, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
Terms of the Notes
The Exchange Notes will be limited to $200,000,000 aggregate principal
amount, and will mature on February 15, 2008. Each Exchange Note will bear
interest at a rate per annum shown on the front cover of this Prospectus from
the date of issuance, or from the most recent date to which interest has been
paid or provided for, payable semi-annually on February 15 and August 15 of
each year, commencing August 15, 1998 to Holders of record at the close of
business on the February 1 or August 1 immediately preceding the interest
payment date.
No Sinking Fund or Redemption
The Notes will not be redeemable at the option of the Company and will not
be entitled to the benefit of any sinking fund.
Ranking
The payment of Indebtedness evidenced by, and all other obligations in
respect of, the Exchange Notes is subordinated in right of payment, as set
forth in the Indenture, to the prior payment in full in cash or Cash
Equivalents when due of all existing and future Senior Indebtedness of the
Company. However, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust described under "Defeasance" below is
not subordinate to any Senior Indebtedness or subject to the restrictions
described herein. As of February 1, 1998 the outstanding Senior Indebtedness of
the Company was $200.4 million (exclusive of outstanding letters of credit and
unused commitments of $350.0 million). Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company may
incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness. See
"Certain Covenants -- Limitation on Indebtedness," "Risk Factors -- Leverage"
and " -- Subordination of the Exchange Notes; Holding Company Structure; Asset
Encumbrances."
"Senior Indebtedness" means, whether outstanding on the Issue Date or
thereafter issued, (i) Bank Indebtedness and the Senior Secured Notes and (ii)
all other Indebtedness of the Company, including interest and fees thereon,
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that the obligations in respect of such
Indebtedness are not superior in right of, or are subordinated to, payment to
the Exchange Notes; provided, however, that Senior Indebtedness will not
include (i) any obligation of the Company to any Subsidiary, (ii) any liability
for Federal, state, foreign, local or other taxes owed or owing by the Company,
(iii) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (iv) any Indebtedness, Guarantee or obligation of
the Company that is expressly subordinate or junior
42
<PAGE>
in right of payment to any other Indebtedness, Guarantee or obligation of the
Company, including any Senior Subordinated Indebtedness and any Subordinated
Indebtedness or (v) any Capital Stock.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Exchange Notes in accordance with the provisions of the
Indenture. The Exchange Notes will in all respects rank pari passu with all
other Senior Subordinated Indebtedness of the Company. The Company has agreed
in the Indenture that it will not incur, directly or indirectly, any
Indebtedness that is subordinate or junior in ranking in any respect to Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness.
Unsecured Indebtedness is not deemed to be subordinate or junior to Secured
Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium, if any, or interest on, or
make any payment on account of any other obligations with respect to, the
Exchange Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise purchase or retire any Exchange Notes
(collectively, "pay the Exchange Notes") if (i) any Senior Indebtedness is not
paid when due in cash or Cash Equivalents or (ii) any other default on Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms unless, in either case, the default has been cured
or waived and any such acceleration has been rescinded in writing or such
Senior Indebtedness has been paid in full in cash or Cash Equivalents. However,
the Company may pay the Exchange Notes without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment from the
Representative of the Senior Indebtedness with respect to which either of the
events set forth in clause (i) or (ii) of the immediately preceding sentence
has occurred and is continuing.
During the continuance of any default (other than a default described in
clause (i) or (ii) of the second preceding sentence) with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not pay the Exchange Notes for a period (a "Payment
Blockage Period") commencing upon the receipt by the Trustee (with a copy to
the Company) of written notice (a "Blockage Notice") of such default from the
Representative of the holders of such Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written notice
to the Trustee and the Company from the Person or Persons who gave such
Blockage Notice, (ii) because the default giving rise to such Blockage Notice
is no longer continuing or (iii) because such Designated Senior Indebtedness
has been repaid in full in cash or Cash Equivalents). Notwithstanding the
provisions described in the immediately preceding sentence, unless the holders
of such Designated Senior Indebtedness or the Representative of such holders
have accelerated the maturity of such Designated Senior Indebtedness, the
Company may resume payments on the Exchange Notes after the end of such Payment
Blockage Period. Not more than one Blockage Notice may be given, and not more
than one Payment Blockage Period may occur, in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization or bankruptcy of or
similar proceeding relating to the Company or its property, the holders of
Senior Indebtedness will be entitled to receive payment in full in cash or Cash
Equivalents of the Senior Indebtedness before the holders of the Exchange Notes
are entitled to receive any payment, and until the Senior Indebtedness is paid
in full in cash or Cash Equivalents, any payment or distribution to which
holders of the Exchange Notes would be entitled but for the subordination
provisions of the Indenture will be made to holders of the Senior Indebtedness
as their interests may appear. If a distribution is made to Holders of the
Exchange Notes that, due to the subordination provisions, should not have been
made to them, such Holders are required to hold it in trust for the holders of
Senior Indebtedness and pay it over to them as their interests may appear.
If payment of the Exchange Notes is accelerated because of an Event of
Default, the Company or the Trustee shall promptly notify the holders of the
Designated Senior Indebtedness or the Representative of such holders of the
acceleration; provided, however, that the Company and the Trustee shall be
obligated to notify such a Representative only if such Representative has
delivered or caused to be delivered to the Company and the Trustee an address
for the service of such a notice (and the Company and the Trustee shall only be
obligated to deliver the notice to the address so specified). The Company may
not pay the Exchange Notes until five Business Days after such holders or the
Representative of the Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Exchange Notes only if the
subordination provisions of the Indenture otherwise permit payment at that
time. In addition, the Indenture does not prohibit the transfer or contribution
of the assets of the Company to its Wholly Owned Subsidiaries. In the event of
any such transfer or contribution, holders of the Exchange Notes will be
effectively subordinated to the claims of creditors of such Wholly Owned
Subsidiaries against such assets.
43
<PAGE>
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders. See "Risk Factors
- -- Subordination of the Notes; Holding Company Structure; Asset Encumbrances."
Change of Control
Upon the occurrence of any of the following events (each, a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Exchange Notes at a purchase price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(i) any sale, transfer or other conveyance, whether direct or indirect,
of all or substantially all of the fair market value of the assets of the
Company on a consolidated basis, in one transaction or a series of related
transactions, to any Person or Persons other than the Company or one or
more of its Restricted Subsidiaries;
(ii) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire within one year), directly or indirectly, of more than 50% of the
Voting Stock of the Company (or its successor by merger, consolidation or
purchase of all or substantially all of its assets);
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors of the Company then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any reason
to constitute a majority of the Board of Directors then in office; or
(iv) the adoption of a plan relating to the liquidation or dissolution of
the Company.
In the event that at the time of such Change of Control the terms of any
Indebtedness restrict or prohibit the repurchase of Exchange Notes pursuant to
this covenant, then the Indenture requires that prior to the mailing of the
notice to Holders provided for in the immediately following paragraph but in
any event within 30 days following any Change of Control, the Company shall
either (i) repay in full all Indebtedness or offer to repay in full all such
Indebtedness and repay the Indebtedness of each lender who has accepted such
offer or (ii) obtain the requisite consent under the agreements governing such
Indebtedness to permit the repurchase of the Exchange Notes as provided for in
the immediately following paragraph. The Company will first comply with the
covenant in the preceding sentence before the Company will be required to make
the Change of Control Offer or to purchase the Exchange Notes pursuant to the
provisions described herein; provided that such compliance will not extend the
time periods set forth in the Indenture for the Company to make an offer to
repurchase the Exchange Notes in connection with a Change of Control.
Within 30 days following any Change of Control, the Company shall mail a
notice (the "Change of Control Offer") to each Holder with a copy to the
Trustee stating: (1) that a Change of Control has occurred and that such Holder
has the right to require the Company to purchase such Holder's Exchange Notes
at a purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on a record date to receive interest on the relevant
interest payment date); (2) the circumstances and relevant facts and financial
information regarding such Change of Control; (3) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed) (the "Change of Control Payment Date"); (4) that any Exchange
Note not tendered will continue to accrue interest pursuant to its terms; (5)
that, unless the Company defaults in the payment of the purchase price, any
Exchange Note accepted for payment pursuant to the Change of Control Offer
shall cease to accrue interest on and after the Change of Control Payment Date;
and (6) the instructions determined by the Company, consistent with this
covenant, that a Holder must follow in order to have its Exchange Notes
purchased or to cancel such order of purchase.
On or before the Change of Control Payment Date, the Company shall: (i)
accept for payment Exchange Notes or portions thereof tendered pursuant to the
Change of Control Offer; (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Exchange Notes or portions thereof so accepted;
and (iii) deliver, or cause to be delivered, to the Trustee, all Exchange Notes
or portions thereof so accepted together with an Officers' Certificate
specifying the Exchange Notes or portions thereof accepted for payment by the
Company. The Paying Agent shall promptly mail, to the Holders of
44
<PAGE>
Exchange Notes so accepted, payment in an amount equal to the purchase price,
and the Trustee shall promptly authenticate and mail to such Holders a new
Exchange Note equal in principal amount to any unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall
be in a principal amount of $1,000 or integral multiples thereof. The Company
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date. For purposes of the
"Change of Control" covenant of the Indenture, the Trustee shall act as Paying
Agent.
The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Exchange Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its Indenture obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. The Company has no present plans to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings.
If the Company is unable to repay all of its indebtedness that would
prohibit repurchase of the Exchange Notes or is unable to obtain the consents
of the holders of indebtedness, if any, of the Company outstanding at the time
of a Change of Control whose consent would be so required to permit the
repurchase of Exchange Notes, then the Company will have breached the "Change
of Control" covenant of the Indenture. This breach will constitute an Event of
Default under the Indenture if it continues for a period of 30 consecutive days
after written notice is given to the Company by the Trustee or the Holders of
at least 25% in aggregate principal amount of the Exchange Notes outstanding.
In addition, the failure by the Company to repurchase Exchange Notes at the
conclusion of the Change of Control Offer will constitute an Event of Default
without any waiting period or notice requirements.
The occurrence of a Change of Control would constitute a default under the
Revolving Credit Facilities. Furthermore, the Company is required upon the
occurrence of certain change of control events (including, but not limited to,
certain events which would constitute a Change of Control) to make an offer to
repurchase the Senior Secured Notes. Future Senior Indebtedness of the Company
and its Subsidiaries may contain prohibitions of certain events which would
constitute a Change of Control or require such other Senior Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Exchange Notes could cause
a default under agreements evidencing Senior Indebtedness, even if the Change
of Control itself does not, due to the financial effect of such repurchase on
the Company. Finally, the Company's ability to pay cash to the Holders upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any required repurchases of either of the Exchange Notes or
of any indebtedness outstanding that would prohibit such a Exchange Note
repurchase.
The definition of "Change of Control" (see clause (i) of such definition)
includes a disposition of all or substantially all of the property and assets
of the Company and its Subsidiaries. With respect to the disposition of
property or assets, the phrase "all or substantially all" as used in the
Indenture varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under New York law and is
subject to judicial interpretation. Accordingly, in certain circumstances there
may be a degree of uncertainty in ascertaining whether a particular transaction
would involve a disposition of "all or substantially all" of the property or
assets of a Person, and therefore it may be unclear as to whether a Change of
Control has occurred and whether the Company is required to make an offer to
repurchase the Exchange Notes as described above.
None of the provisions of the Indenture relating to a purchase of the
Exchange Notes upon a Change of Control is waivable by the Company's Board of
Directors. Without the consent of each Noteholder affected thereby, after the
mailing of the notice of a Change of Control Offer, no amendment of the
Indenture may, directly or indirectly, affect the Company's obligation to
consummate a Change of Control Offer or waive any default in the performance
thereof or modify any of the provisions of the definitions with respect to any
such offer.
Certain Covenants
The Indenture contains covenants including, among others, the following:
45
<PAGE>
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur any Indebtedness (including Acquired
Indebtedness); provided, however, that the Company and its Restricted
Subsidiaries may Incur Indebtedness if on the date of the Incurrence of such
Indebtedness the Consolidated Coverage Ratio would be equal to or greater than
2.00:1.00.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries, as set forth below, may Incur the following
Indebtedness:
(i) (A) Indebtedness of the Company Incurred pursuant to the Revolving
Credit Facilities and (B) the Incurrence by a Receivables Entity of
Indebtedness in a Qualified Receivables Transaction that is nonrecourse to
the Company or any Subsidiary of the Company (except for Standard
Securitization Undertakings) in an aggregate principal amount for
Indebtedness Incurred under clauses (A) and (B) outstanding at any one time
not to exceed the greater of (x) $400.0 million, less the aggregate amount
of all repayments of principal actually made under the Revolving Credit
Facilities since the Issue Date with Net Available Cash from Asset
Dispositions pursuant to clause (a)(iii)(A) of the covenant described under
" -- Limitation on Sales of Asset Sales" and (y) the Borrowing Base;
(ii) the incurrence by the Company of Indebtedness represented by the
Exchange Notes;
(iii) Indebtedness (A) of the Company to any Wholly Owned Subsidiary and
(B) of any Restricted Subsidiary to the Company or any other Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock or any other event that results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any other subsequent
transfer of any such Indebtedness (except to the Company or a Wholly Owned
Subsidiary) will be deemed, in each case, an Incurrence of Indebtedness by
the Company or such Restricted Subsidiary, as the case may be;
(iv) any Indebtedness (other than the Indebtedness described in clauses
(i) or (iii) above) outstanding on the date of the Indenture, including the
Senior Secured Notes and the Guarantees related thereto, and any
Refinancing Indebtedness Incurred in respect of any Indebtedness described
in this clause (iv) or paragraph (a);
(v) Indebtedness represented by the Note Guarantees and Guarantees of
Indebtedness Incurred pursuant to clause (i) above;
(vi) Indebtedness in respect of performance, surety or appeal bonds
provided in the ordinary course of business;
(vii) Indebtedness under Hedging Obligations; provided, however, that
such Hedging Obligations are entered into for bona fide hedging purposes of
the Company or any Restricted Subsidiary in the ordinary course of
business;
(viii) Indebtedness (in addition to Indebtedness described in clauses
(i), (iii) and (iv)) of the Company or any Restricted Subsidiary
attributable to Capitalized Lease Obligations, or Incurred to finance the
acquisition, construction or improvement of fixed or capital assets, or
constituting Attributable Debt in respect of Sale/Leaseback Transactions,
in an aggregate principal amount at any time outstanding not in excess of
$50.0 million;
(ix) Indebtedness of a Restricted Subsidiary issued and outstanding on or
prior to the date on which such Restricted Subsidiary was acquired by the
Company (other than Indebtedness Incurred (A) as consideration in, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by the Company or (B) otherwise in connection with, or in
contemplation of, such acquisition) and any Refinancing Indebtedness with
respect thereto; provided, however, that on the date of any such
acquisition of a Restricted Subsidiary, the Company shall have been able to
Incur at least an additional $1.00 of Indebtedness under paragraph (a)
above after giving effect to such acquisition; and
(x) Indebtedness (in addition to Indebtedness described in clauses
(i)-(ix)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(x) and then outstanding, will not in the aggregate exceed $50.0 million.
(c) Notwithstanding the foregoing, the Company will not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof
are used, directly or indirectly, to refinance any Subordinated Indebtedness
unless such Indebtedness (i) will be subordinated to the Exchange Notes to at
least the same extent as such Subordinated Indebtedness and (ii) will not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to
the remaining Average Life of the Indebtedness to be refinanced or refunded.
46
<PAGE>
(d) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Indebtedness; provided, however, if any
such Indebtedness ceases to be Non-Recourse Indebtedness, such event shall be
deemed to constitute an Incurrence of Indebtedness by the Company or a
Restricted Subsidiary.
(e) For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify such item of
Indebtedness at the time of Incurrence and only be required to include the
amount and type of such Indebtedness in one of such clauses.
Limitation on Layering. The Company will not, and will not permit any
Exchange Note Guarantor, if any, to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness) if such Indebtedness is
subordinate in right of payment to any Senior Indebtedness of the Company or
any Indebtedness of any Exchange Note Guarantor, as the case may be, unless
such Indebtedness is either (a) Senior Subordinated Indebtedness or (b)
subordinate in right of payment to the Exchange Notes.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except (x) dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock) and (y) dividends or
distributions payable to the Company or any of its Subsidiaries (and, if such
Subsidiary is not directly or indirectly owned 100% by the Company, to its
other stockholders on a pro rata basis), (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of the Company or any Restricted
Subsidiary held by Persons other than the Company or any of its Subsidiaries,
(iii) purchase, repurchase, redeem, prepay interest, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment
or scheduled sinking fund payment, any Subordinated Indebtedness (other than
the purchase, repurchase or other acquisition of Subordinated Indebtedness
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
purchase, repurchase or acquisition) or (iv) make any Restricted Investment in
any Person (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment referred to in clauses
(i) through (iv) being herein referred to as a "Restricted Payment") if at the
time the Company or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company could not Incur at least an additional $1.00 of
Indebtedness under paragraph (a) of the covenant described under " --
Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Company's Board of Directors, whose
determination shall be conclusive and evidenced by a resolution of the
Company's Board of Directors) declared or made subsequent to the date of the
Indenture would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period (treated
as one accounting period) commencing on the Issue Date to the end of the
most recent fiscal quarter ending prior to the date of such Restricted
Payment as to which financial results are available (but in no event ending
more than 135 days prior to the date of such Restricted Payment) (or, in
case such Consolidated Net Income shall be a deficit, minus 100% of such
deficit);
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock) or
other cash capital contributions subsequent to the Issue Date (other than
an issuance or sale to a Subsidiary of the Company and other than an
issuance or sale to an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries for the benefit of
their employees to the extent the purchase by such plan or trust is
financed by Indebtedness of such plan or trust and for which the Company or
any Restricted Subsidiary is the lender or is liable as guarantor or
otherwise);
(C) the sum of (i) the amount by which Indebtedness of the Company is
reduced on the Company's balance sheet upon the conversion or exchange
(other than by a Subsidiary of the Company) subsequent to the Issue Date,
of any Indebtedness of the Company or its Restricted Subsidiaries
convertible or exchangeable for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash or other property (other
than Capital Stock) distributed by the Company upon such conversion or
exchange) and (ii) the aggregate Net Cash Proceeds received by the Company
(less any contingent amounts that the Company may be required to refund or
return) upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date of any Indebtedness of the Company or
its Restricted Subsidiaries convertible or exchangeable for Capital Stock
(other than Disqualified Stock);
47
<PAGE>
(D) the amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from (i) repayments of loans or advances or other
transfers of assets to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries or (ii) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in
the definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary, which
amount was treated as a Restricted Payment (and, with respect to clauses
(i) and (ii), without duplication of any amounts included in Consolidated
Net Income); and
(E) to the extent that any Restricted Investment that was made after the
Issue Date is sold for cash or otherwise liquidated or repaid for cash, the
lesser of (A) the net proceeds of such sale, liquidation or repayment and
(B) the net book value of such Restricted Investment.
(b) So long as there is no Default or Event of Default continuing, the
provisions of the foregoing paragraph (a) will not prohibit:
(i) any purchase, defeasance or redemption of Capital Stock or
Subordinated Indebtedness of the Company made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital Stock issued
or sold to a Subsidiary of the Company or an employee stock ownership plan
or other trust established by the Company or any of its Subsidiaries for
the benefit of their employees to the extent the purchase by such plan or
trust is financed by Indebtedness by such plan or trust and for which the
Company or any Restricted Subsidiary is the lender or is liable as a
guarantor or otherwise); provided, however, that (A) such purchase,
defeasance or redemption shall be excluded in subsequent calculations of
the amount of Restricted Payments and (B) the Net Cash Proceeds from such
sale of Capital Stock shall be excluded in calculations under clause (3)(B)
of paragraph (a);
(ii) any purchase, defeasance or redemption of Subordinated Indebtedness
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Indebtedness of the Company that is
Refinancing Indebtedness; provided, however, that (A) such Indebtedness is
subordinated to the Senior Indebtedness and the Exchange Notes at least to
the same extent as such Subordinated Indebtedness so purchased or redeemed
and (B) such purchase, defeasance or redemption shall be excluded in
subsequent calculations of the amount of Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with
paragraph (a); provided, however, that such dividend shall be included in
subsequent calculations of the amount of Restricted Payments;
(iv) any repurchase of an Equity Interest deemed to occur upon exercise
of stock options if such Equity Interests represent a portion of the
exercise price of such options;
(v) Permitted Employee Payments in an aggregate amount not in excess of
$5.0 million; provided, however, that such payments shall be included in
the calculation of Restricted Payments; or
(vi) the repurchase of common Equity Interests of Brown's of Carolina,
Inc. outstanding but not owned by the Company on the Issue Date.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its
Capital Stock or pay any Indebtedness or other obligations owed to the
Company or any other Restricted Subsidiary, (ii) make any loans or advances
to the Company or any other Restricted Subsidiary or (iii) transfer any of
its property or assets to the Company or any other Restricted Subsidiary,
except:
(1) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date, including pursuant to the Indenture, the
Revolving Credit Facilities and the Senior Secured Notes;
(2) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company) and outstanding on
such date;
48
<PAGE>
(3) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refinancing of Indebtedness
Incurred pursuant to an agreement referred to in clause (1) or (2) of this
covenant or this clause (3) or contained in any amendment to an agreement
referred to in clause (1) or (2) of this covenant or this clause (3);
provided, however, that the encumbrances and restrictions contained in any
such refinancing agreement or amendment are no less favorable to the
Holders of the Exchange Notes taken as a whole than the original
encumbrances and restrictions contained in such agreements;
(4) in the case of clause (iii) above, any encumbrance or restriction (A)
that restricts in a customary manner the subletting, assignment or transfer
of any property or asset that is subject to a lease, license or similar
contract, (B) by virtue of any transfer of, agreement to transfer, option
or right with respect to, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture, (C)
contained in security agreements securing Indebtedness of a Restricted
Subsidiary to the extent such encumbrance or restrictions restrict the
transfer of the property subject to such security agreements and (D)
ordinary course provisions restricting the assignability of contracts;
(5) any restriction with respect to the Company or a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of the
Company or such Restricted Subsidiary pending the closing of such sale or
disposition;
(6) restrictions created in connection with a Qualified Receivables
Transaction that, in the good faith determination of the Board of
Directors, are necessary to effect such Qualified Receivables Transaction;
provided that such restrictions apply only to such Receivables Entity; and
(7) any restriction by operation of applicable law.
Limitation on Sales of Assets. (a) The Company will not, and will not
permit any Restricted Subsidiary to, make any Asset Disposition unless (i)
the Company or such Restricted Subsidiary receives consideration (including
by way of relief from, or by any other Person assuming sole responsibility
for, any liabilities, contingent or otherwise) at the time of such Asset
Disposition at least equal to the fair market value of the shares and
assets subject to such Asset Disposition (as determined in good faith by
the management of the Company, or if such Asset Disposition involves
consideration in excess of $20.0 million, by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee),
(ii) at least 75% of the consideration thereof received by the Company or
such Restricted Subsidiary is in the form of cash and/or Cash Equivalents
(except such requirement of cash and/or Cash Equivalents shall not apply to
any property, plant, equipment or other facility closed and designated as
unused, idle or obsolete by either Senior Management or by resolution of
the Board of Directors, and in either case set forth in an Officers'
Certificate delivered to the Trustee) and (iii) an amount equal to 100% of
the Net Available Cash from such Asset Disposition is applied by the
Company (or such Restricted Subsidiary, as the case may be) as follows:
(A) FIRST, to the extent the Company or such Restricted Subsidiary elects
(or is required by the terms of any Senior Indebtedness), to prepay, repay
or purchase Senior Indebtedness (and to correspondingly reduce commitments
with respect thereto) within 365 days after the date of such Asset
Disposition; (B) SECOND, to the extent of the balance of Net Available Cash
after application in accordance with clause (A), to the extent the Company
or such Restricted Subsidiary elects, to reinvest in Additional Assets
(including by means of an Investment in Additional Assets by a Restricted
Subsidiary with Net Available Cash received by the Company or another
Restricted Subsidiary) within 365 days from the date of such Asset
Disposition; (C) THIRD, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A) and (B), to make an
offer to purchase Exchange Notes and Senior Subordinated Indebtedness with
similar asset sale provisions, pro rata at 100% of the tendered principal
amount thereof (or 100% of the accreted value of such other Senior
Subordinated Indebtedness so tendered, if such Senior Subordinated
Indebtedness was offered at a discount) plus accrued and unpaid interest,
if any, thereon to the purchase date and (D) FOURTH, to the extent of the
balance of such Net Available Cash after application in accordance with
clauses (A), (B) and (C) above, to fund (to the extent consistent with any
other applicable provision of the Indenture) any corporate purpose;
provided, however, that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) or (C) above, the Company
or such Restricted Subsidiary will retire such Indebtedness and will cause
the related loan commitment (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries shall not be required to apply any Net
Available Cash in accordance with this covenant except to the extent that
the aggregate Net Available Cash from all Asset Dispositions that is not
yet applied in accordance with this covenant exceeds $10.0 million.
49
<PAGE>
For the purposes of this covenant, the following are deemed to be cash:
(x) the assumption of Indebtedness of the Company (other than Disqualified
Stock of the Company) or any Restricted Subsidiary and the release of the
Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee
that are converted within 30 days by the Company or such Restricted
Subsidiary into cash. Upon the completion of the application of the Net
Available Cash from any Asset Disposition pursuant to this paragraph (a)
above, the amount of Net Available Cash attributable to such Asset
Disposition shall be deemed to be zero.
(b) In the event of an Asset Disposition that requires the purchase of
Exchange Notes pursuant to clause (a)(iii)(C), the Company will be required to
apply such Excess Proceeds (as defined below) to the repayment of the Exchange
Notes and any other Senior Subordinated Indebtedness outstanding with similar
provisions requiring the Company to make an offer to purchase such Indebtedness
with the proceeds from any Asset Disposition as follows: (A) the Company will
make an offer to purchase (an "Offer") within ten days of such time from all
holders of the Exchange Notes in accordance with the procedures set forth in
the Indenture in the maximum principal amount (expressed as a multiple of
$1,000) of Exchange Notes that may be purchased out of an amount (the "Exchange
Note Amount") equal to the product of such Excess Proceeds multiplied by a
fraction, the numerator of which is the outstanding principal amount of the
Exchange Notes and the denominator of which is the sum of the outstanding
principal amount of the Exchange Notes and such Senior Subordinated
Indebtedness and (B) to the extent required by such Senior Subordinated
Indebtedness to permanently reduce the principal amount of such Senior
Subordinated Indebtedness, the Company will make an offer to purchase or
otherwise repurchase or redeem Senior Subordinated Indebtedness (a "Pari Passu
Offer") in an amount equal to the excess of the Excess Proceeds over the
Exchange Note Amount at a purchase price of 100% of their principal amount plus
accrued and unpaid interest (or 100% of the accreted value of such Senior
Subordinated Indebtedness, if such Senior Subordinated Indebtedness was offered
at a discount) to the purchase date in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture with respect to the Offer and in the documentation governing such
Senior Subordinated Indebtedness with respect to the Pari Passu Offer. If the
aggregate purchase price of the Exchange Notes tendered pursuant to the Offer
and Pari Passu Offer is less than the Excess Proceeds, the remaining Excess
Proceeds will be available to the Company for use in accordance with clause
(a)(iii)(D) above. The Company shall not be required to make an Offer for
Exchange Notes pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (a)(iii)(A)
and (a)(iii)(B) above) ("Excess Proceeds") is less than $10.0 million (which
lesser amounts shall be carried forward for purposes of determining whether an
Offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Exchange Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this paragraph (c) by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into or conduct any transaction or series of transactions (including the
purchase, sale, lease or exchange of any property or assets or the rendering of
any service or the making of any Investment) with any Affiliate of the Company
(an "Affiliate Transaction") on terms (i) that are less favorable to the
Company or such Restricted Subsidiary, as the case may be, than those that
could be obtained at the time of such transaction in arm's length dealings with
a Person who is not an Affiliate and (ii) that, in the event such Affiliate
Transaction involves an aggregate amount in excess of $10.0 million, are not in
writing and have not been approved or negotiated and entered into on behalf of
the Company or such Restricted Subsidiary by Senior Management acting pursuant
to authorizing resolutions adopted by a majority of the members of the Board of
Directors or by a majority of the members of the Board of Directors having no
personal stake in such Affiliate Transaction (and such majority or majorities,
as the case may be, determines that such Affiliate Transaction satisfies the
criteria in (i) above). In addition, any Affiliate Transaction involving
aggregate payments or other transfers by the Company and its Restricted
Subsidiaries in excess of $20.0 million will also require an opinion from an
independent investment banking firm or appraiser, as appropriate, of national
prominence, to the effect that the terms of such transaction are either (i) no
less favorable to the Company or such Restricted Subsidiary, as the case may
be, than those that could be obtained at the time of such transaction in arm's
length dealings with a Person who is not an Affiliate or (ii) fair to the
Company or such Restricted Subsidiary, as the case may be, from a financial
point of view.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment or Permitted Investment permitted to be paid pursuant to
the covenant described under " -- Limitation on Restricted Payments", (ii) the
performance
50
<PAGE>
of the Company's or Restricted Subsidiary's obligations under any collective
bargaining agreement, employee benefit plan, related trust agreement or any
other similar arrangement heretofore or hereafter entered into in the ordinary
course of business, (iii) payment of reasonable fees and compensation to
employees, officers or directors as determined in good faith by the Company's
Board of Directors or senior management (including indemnification to the
fullest extent permitted by applicable law, directors' and officers' insurance
and similar arrangements, employment contracts, non-competition and
confidentiality agreements and similar instruments or payments) entered into in
the ordinary course of business, (iv) maintenance in the ordinary course of
business of reasonable benefit programs or arrangements for employees, officers
or directors, including vacation plans, health and life insurance plans, SERPs,
split-dollar life insurance plans, deferred compensation plans, and retirement
or savings plans and similar plans as determined in good faith by the Company's
Board of Directors or Senior Management, (v) any transaction between the
Company and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries,
(vi) transactions effected as part of a Qualified Receivables Transaction,
(vii) any issuance by the Company of Capital Stock (other than Disqualified
Stock) or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and
stock ownership plans to the extent reasonable, as determined in good faith by
the Company's Board of Directors in the ordinary course of business, and loans
or advances to employees in the ordinary course of business of the Company or
its Restricted Subsidiaries consistent with past practices, (viii) transactions
with customers, suppliers, or purchasers or sellers of goods or services, in
each case, in the ordinary course of business and otherwise in compliance with
the terms of the Indenture which are fair to the Company or the Restricted
Subsidiaries or are on terms at least as favorable as might reasonably have
been obtained at such time from an unaffiliated third party, in the reasonable
determination of the Board of Directors of the Company or the Senior Management
thereof, and (ix) any agreement as in effect on the Issue Date or any amendment
thereto (so long as any such amendment is not disadvantageous to the holders of
the Exchange Notes in any material respect).
Limitation on the Sales or Issuance of Capital Stock of Restricted
Subsidiaries. The Company (i) will not, and will not permit any Restricted
Subsidiary to, transfer, convey, lease, sell or otherwise dispose of any shares
of Capital Stock of a Restricted Subsidiary to any Person (other than to the
Company or a Wholly Owned Subsidiary), and (ii) will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell any shares of its Capital
Stock (other than directors' qualifying shares) to any Person (other than to
the Company or a Wholly Owned Subsidiary); provided, however, that (i) the
Company is permitted to sell all the Capital Stock of a Restricted Subsidiary
as long as the Company is in compliance with the terms of the covenant
described under " -- Limitation on Sales of Assets" and (ii) the Company is
permitted to sell less than all of the Capital Stock of a Restricted Subsidiary
if (A) immediately after giving effect to such sale such Restricted Subsidiary
would no longer constitute a Restricted Subsidiary and any Investment in such
Person remaining after giving effect to such sale would have been permitted to
be made under " -- Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale and (B) the Company is in compliance with the
terms of the covenant described under " -- Limitation on Sales of Assets".
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly create, incur, assume or
suffer to exist any Lien that secures obligations under any Senior Subordinated
Indebtedness or Subordinated Indebtedness on any asset or property of the
Company or such Restricted Subsidiary, or any income or profits therefrom, or
assign or convey any right to receive income therefrom, unless the Exchange
Notes are equally and ratably secured with the obligations so secured (or
senior to, in the event the Lien relates to a Subordinated Indebtedness) or
until such time as such obligations are no longer secured by a Lien.
The Indenture provides that no Exchange Note Guarantor will directly or
indirectly create, incur, assume or suffer to exist any Lien that secures
obligations under any Senior Subordinated Indebtedness or Subordinated
Indebtedness of such Exchange Note Guarantor on any asset or property of such
Exchange Note Guarantor or any income or profits therefrom, or assign or convey
any right to receive income therefrom, unless the Guarantee of such Exchange
Note Guarantor is equally and ratably secured with the obligations so secured
(or senior to, in the event the Lien relates to a Subordinated Indebtedness) or
until such time as such obligations are no longer secured by a Lien.
Notwithstanding the foregoing, Liens on assets transferred to a
Receivables Entity or on assets of a Receivables Entity incurred in connection
with a Qualified Receivables Transaction will not require such equal and
ratable security.
SEC Reports. Notwithstanding that the Company may not remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company will file (if then permitted to do so) with the SEC and provide
(whether or not so filed with the SEC) the Trustee and Noteholders and
prospective Noteholders (upon request) within 15 days of the date of filing
with the SEC or, if not filed, on the date that such reports would be required
to be filed with the SEC if the Company was a reporting company, with the
annual reports and the information, documents and other reports, which are
specified in Sections 13 and 15(d) of the Exchange Act; provided, however, that
the Company shall provide one copy of the
51
<PAGE>
exhibits of the foregoing to the Trustee and shall (upon request) provide
additional copies of such exhibits to any Noteholder or prospective Noteholder.
The Company also will comply with the other provisions of TIA ss. 314(a).
Future Guarantees. (a) The Company will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of the Company or any
Indebtedness of any other Restricted Subsidiary unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Guarantee of payment of the Exchange Notes by such
Restricted Subsidiary (an "Exchange Note Guarantee") except that with respect
to a guarantee of Indebtedness of the Company (A) if the Exchange Notes are
subordinated in right of payment to such Indebtedness, the Exchange Note
Guarantee shall be subordinated to such Restricted Subsidiary's guarantee with
respect to such Indebtedness substantially to the same extent as the Exchange
Notes are subordinated to such Indebtedness under the Indenture and (B) if such
Indebtedness is by its express terms subordinated in right of payment to the
Exchange Notes, any such guarantee of such Restricted Subsidiary with respect
to such Indebtedness shall be subordinated in right of payment to such
Restricted Subsidiary's Exchange Note Guarantee with respect to the Exchange
Notes substantially to the same extent as such Indebtedness is subordinated to
the Exchange Notes; (ii) such Restricted Subsidiary waives and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Exchange Note Guarantee; and (iii) such
Restricted Subsidiary shall deliver to the Trustee an opinion of counsel to the
effect that (A) such Exchange Note Guarantee has been duly executed and
authorized and (B) such Exchange Note Guarantee constitutes a valid, binding
and enforceable obligation of such Restricted Subsidiary, subject to
bankruptcy, insolvency or similar laws (including, without limitation, all laws
relating to fraudulent transfers) and general principles of equity; provided
that this paragraph (a) shall not be applicable to any guarantee of any
Restricted Subsidiary (x) that (A) existed at the time such Person became a
Restricted Subsidiary of the Company and (B) was not incurred in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary of
the Company or (y) that guarantees the payment of obligations of the Company or
any Restricted Subsidiary under the Revolving Credit Facilities, the Senior
Secured Notes or any other Senior Indebtedness and any refunding, refinancing
or replacement thereof, in whole or in part, provided that such refunding,
refinancing or replacement thereof constitutes Senior Indebtedness and is not
incurred pursuant to a registered offering of securities under the Securities
Act or a private placement of securities (including under Rule 144A) pursuant
to an exemption from the registration requirements of the Securities Act, which
private placement provides for registration rights under the Securities Act
(any guarantee excluded by operations of this clause (y) being an "Excluded
Guarantee").
(b) Notwithstanding the foregoing and the other provisions of the
Indenture, any Exchange Note Guarantee by a Restricted Subsidiary shall provide
by its terms that it shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture), (ii) the release or
discharge of the guarantee which resulted in the creation of such Exchange Note
Guarantee, except a discharge or release by or as a result of payment under
such guarantee or (iii) such Restricted Subsidiary is designated an
Unrestricted Subsidiary of the Company in accordance with the terms of the
Indenture by the Company's Board of Directors.
Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business other than a Related
Business.
Merger and Consolidation
The Company will not, in a single transaction or series of related
transactions, consolidate with or merge with or into, or convey, transfer,
lease or otherwise dispose of all or substantially all its assets to, any
Person nor permit any Person to merge with or into the Company, unless: (i) the
resulting, surviving or transferee Person (the "Successor Company") will be a
Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
the Company) will expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Exchange Notes and the Indenture; (ii)
immediately before and after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred
by the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default or Event of Default will have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of Indebtedness
under paragraph (a) of the covenant described under " -- Limitation on
Indebtedness"; (iv) each Exchange Note Guarantor, if any, shall have delivered
a written instrument in form and substance satisfactory to the Trustee
confirming its Exchange Note Guarantee; and (v) the Company will
52
<PAGE>
have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture. For purposes of the
foregoing, the transfer (by lease, assignment, sale or otherwise, in a single
transactions or series of transactions) of all or substantially all of the
properties and assets of one or more Subsidiaries of the Company, the Capital
Stock of which constitutes all or substantially all of the properties and
assets of the Company, shall be deemed to be the transfer of all or
substantially all of the properties and assets of the Company.
Subject to paragraph (b) of " -- Future Guarantees," each Exchange Note
Guarantor will not, in a single transaction or series of related transactions,
consolidate with or merge with or into, or convey, transfer, lease or otherwise
dispose of all or substantially all its assets to, any Person nor permit any
Person to merge with or into such Exchange Note Guarantor, unless, (i) the
resulting, surviving or transferee Person (the "Successor Guarantor") will be a
Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Guarantor (if
not the Exchange Note Guarantor) will expressly assume in writing all the
obligations of such Exchange Note Guarantor under the Exchange Note Guarantee;
(ii) immediately before and after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Guarantor or any Restricted Subsidiary as a result of such transaction as
having been Incurred by the Successor Guarantor or such Restricted Subsidiary
at the time of such transaction), no Default or Event of Default will have
occurred and be continuing; (iii) immediately after giving effect to such
transaction, the Company would be able to Incur an additional $1.00 of
Indebtedness under paragraph (a) of the covenant described under " --
Limitation on Indebtedness"; (iv) each other Exchange Note Guarantor shall have
delivered a written instrument in form and substance satisfactory to the
Trustee confirming its Exchange Note Guarantee; and (v) the Company will have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer and such assumption of
the Exchange Note Guarantee, if applicable, comply with the Indenture. For
purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties and assets of one or more Subsidiaries of
such Exchange Note Guarantor, the Capital Stock of which constitutes all or
substantially of all of the properties and assets of such Exchange Note
Guarantor, shall be deemed to be the transfer of all or substantially all of
the properties and assets of such Note Guarantor.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a conveyance, transfer or lease of all or
substantially all its assets will not be released from the obligation to pay
the principal of and interest on the Exchange Notes. Solely for the purpose of
computing amounts described in clause 3(A) of " -- Limitation on Restricted
Payments," the Successor Company shall only be deemed to have succeeded and be
substituted for the Company with respect to periods subsequent to the effective
time of such merger, consolidation, combination or transfer of assets.
Notwithstanding the foregoing clauses (ii) and (iii) of the first
paragraph of this convenant, (1) any Restricted Subsidiary may consolidate
with, merge into or transfer all or part of its properties and assets to the
Company and (2) the Company may merge with an Affiliate incorporated
exclusively for the purpose of reincorporating the Company in another
jurisdiction to realize tax or other benefits.
Defaults
An Event of Default is defined in the Indenture as (i) a default in the
payment of principal of or premium, if any, on any Exchange Note when due at
its Stated Maturity, upon required repurchase, upon declaration or otherwise,
(ii) a default in any payment of interest on any Exchange Note when due,
continued for 30 days, (iii) the failure by the Company to comply with its
obligations under the covenant described under " -- Merger and Consolidation"
above, (iv) the failure by the Company to comply for 30 days after notice with
any of its obligations under the covenants described under " -- Change of
Control" or " -- Certain Covenants" above (in each case, other than a failure
to purchase Exchange Notes), (v) a default by the Company in the performance of
or a breach by the Company of any other covenant or agreement of the Company in
the Indenture or under the Exchange Notes and such default continues for a
period of 60 consecutive days after receipt by the Company of notice of such
default or breach, (vi) the failure by any Exchange Note Guarantor that is a
Significant Subsidiary (if any) to comply with its obligations under any
Exchange Note Guarantee to which such Exchange Note Guarantor is a party, after
any applicable grace period, (vii) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by the
holders thereof if the total amount of such Indebtedness unpaid or accelerated
exceeds $25.0 million or its foreign currency equivalent (the "cross
acceleration provision"), (viii) certain events of bankruptcy, insolvency or
reorganization, whether voluntary or involuntary, of the Company or a
Significant Subsidiary (the "bankruptcy provisions"), (ix) the rendering of
53
<PAGE>
any judgment or decree for the payment of money in excess of $25.0 million or
its foreign currency equivalent in the aggregate for all such final judgments
or orders against the Company or a Significant Subsidiary if (A) an enforcement
proceeding thereon is commenced and not discharged within ten days or (B) such
judgment or decree remains outstanding for a period of 60 days following such
judgment or decree and is not discharged, waived, stayed or bonded (the
"judgment default provision"), or (x) the failure of any Exchange Note
Guarantee by an Exchange Note Guarantor (if any) which is a Significant
Subsidiary to be in full force and effect (except as contemplated by the terms
thereof) or the denial or disaffirmation by any such Exchange Note Guarantor of
its obligations under any Exchange Note Guarantee if such Default continues for
30 days.
The foregoing will constitute Events of Default whatever the reason for
any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body.
However, a Default under clause (iv) or (v) will not constitute an Event
of Default until the Trustee or the Holders of at least 25% in principal amount
of the outstanding Exchange Notes notify the Company of the Default and the
Company does not cure such Default within the time specified in clauses (iv)
and (v) hereof after receipt of such notice.
If an Event of Default (other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary) occurs and is continuing, the Trustee by notice to the Company, or
the Holders of at least 25% in aggregate principal amount of the outstanding
Exchange Notes by notice to the Company and the Trustee, may, and the Trustee
at the request of such Holders shall, declare the principal of, premium, if
any, and accrued but unpaid interest on all the Exchange Notes to be due and
payable. Upon such a declaration, such principal and interest will be due and
payable immediately. In the event of a declaration of acceleration because an
Event of Default set forth in clause (vii) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default or payment default triggering such Event
of Default pursuant to clause (vii) shall be remedied or cured by the Company
and/or the relevant Significant Subsidiaries or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary occurs and is continuing, the principal of, premium, if any, and
interest on all the Exchange Notes will become immediately due and payable
without any declaration or other act on the part of the Trustee or any Holders.
The Holders of a majority in principal amount of the outstanding Exchange Notes
may waive all past defaults (except with respect to nonpayment of principal,
premium or interest) and rescind any such acceleration with respect to the
Exchange Notes and its consequences if (i) all existing Events of Default,
other than the nonpayment of the principal of, premium, if any, and interest on
the Exchange Notes that have become due solely by such declaration of
acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Exchange Notes unless (i) such
Holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount of the outstanding
Exchange Notes have requested the Trustee to pursue the remedy, (iii) such
Holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt of the request and the offer of security or
indemnity and (v) the Holders of a majority in principal amount of the
outstanding Exchange Notes have not given the Trustee a direction inconsistent
with such request within such 60-day period. Subject to certain restrictions,
the Holders of a majority in principal amount of the outstanding Exchange Notes
are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust
or power conferred on the Trustee. The Trustee, however, may refuse to follow
any direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that
would involve the Trustee in personal liability. Prior to taking any action
under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses
caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium (if any) or interest on any Exchange Note, the
Trustee may withhold notice if and so long as a committee of its Trust Officers
in good faith determines that withholding notice is in the interests of the
Noteholders. In addition,
54
<PAGE>
the Company is required to deliver to the Trustee, within 120 days after the
end of each fiscal year, a certificate indicating whether the signers thereof
know of any Default that occurred during the previous year. The Company also is
required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
Defeasance
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Exchange Note Guarantors discharged with
respect to the outstanding Exchange Notes ("Legal Defeasance"). Such Legal
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by the outstanding Exchange Notes, except
for (i) the rights of holders of the Exchange Notes to receive payments in
respect of the principal of, premium, if any, and interest on the Exchange
Notes when such payments are due, (ii) the Company's obligations with respect
to the Exchange Notes concerning issuing temporary Exchange Notes, registration
of Exchange Notes, mutilated, destroyed, lost or stolen Exchange Notes and the
maintenance of an office or agency for payments, (iii) the rights, powers,
trust, duties and immunities of the Trustee and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Exchange Notes.
The Company may exercise its Legal Defeasance option notwithstanding its
prior exercise of its Covenant Defeasance option. If the Company exercises its
Legal Defeasance option, payment of the Exchange Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its Covenant Defeasance option, payment of the Exchange Notes may not be
accelerated because of an Event of Default specified in clause (iv), (v), (vi),
(vii), (viii) (with respect to Significant Subsidiaries), (ix) or (x) under
"Events of Default" above or because of the failure of the Company to comply
with clause (iii) or (iv) under "Certain Covenants -- Merger and Consolidation"
above.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of the Exchange Notes cash in U.S. dollars, non-callable
U.S. Government Obligations, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the Exchange Notes on the stated date for payment thereof or on the applicable
redemption date, as the case may be; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the holders the Exchange
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that the holders of the Exchange Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
at the same times as would have been the case if such Covenant Defeasance had
not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default with respect to the Indenture resulting from the incurrence of
Indebtedness, all or a portion of which will be used to defease the Exchange
Notes concurrently with such incurrence); (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a
default under the Indenture or any other material agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound; (vi) the Company shall have delivered to
the Trustee an opinion of counsel to the effect that (A) the Exchange Notes and
(B) assuming no intervening bankruptcy of the Company between the date of
deposit and the 91st day following the deposit and that no Holder of the
Exchange Notes is an insider of the Company, after 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; and (vii) certain other customary conditions precedent are
satisfied. ard thereto or any change in events, conditions are satisfied.
55
<PAGE>
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Exchange Notes
then outstanding and any past default (other than with resect to nonpayment) or
compliance with any provisions may be waived with the consent of the Holders of
a majority in principal amount of the Exchange Notes then outstanding. However,
without the consent of each Holder of an outstanding Exchange Note affected, no
amendment may, among other things, (i) reduce the principal amount of Exchange
Notes whose Holders must consent to an amendment, (ii) reduce the rate of or
extend the time for payment of interest on any Exchange Note, (iii) reduce the
principal of or extend the Stated Maturity of any Exchange Note, (iv) reduce
the premium payable upon repurchase or change the time at which any Exchange
Note may be repurchased under "Change of Control" and "Limitations on Sales of
Assets," (v) make any Exchange Note payable in money other than that stated in
the Exchange Note, (vi) impair the right of any Holder to receive payment of
principal of and interest on such Holder's Exchange Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Exchange Notes, (vii) release any Exchange Note
Guarantor (if any) from any of its obligations under its Exchange Note
Guarantee or the Indenture, except in compliance with the terms thereof, or
(viii) make any change in the amendment provisions which require each Holder's
consent or in the waiver provisions.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to (i) cure any ambiguity, omission, defect or inconsistency, (ii) to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, (iii) to provide for uncertificated Exchange Notes
in addition to or in place of certificated Exchange Notes (provided, however,
that the uncertificated Exchange Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), (iv)
to add Guarantees with respect to the Exchange Notes, (v) to secure the
Exchange Notes, (vi) to add to the covenants of the Company for the benefit of
the Noteholders or to surrender any right or power conferred upon the Company
and (vii) to make any change that does not adversely affect the rights of any
Holder or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment. After an amendment
under the Indenture becomes effective, the Company is required to mail to
Noteholders a notice briefly describing such amendment. However, the failure to
give such notice to all Noteholders, or any defect therein, will not impair or
affect the validity of the amendment.
No Personal Liability of Incorporators, Shareholders, Officers, Directors, or
Employees
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, shareholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Exchange Notes, waives and releases all such
liability. Such waiver and release are not intended to affect the rights of
Holders under the federal securities laws.
Concerning the Trustee
SunTrust Bank, Atlanta is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Exchange Notes.
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as
are specifically set forth in such Indenture. If an Event of Default has
occurred and is continuing, the Trustee is to use the same degree of care and
skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
56
<PAGE>
Governing Law
The Indenture provides that it and the Exchange Notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness (i) of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
or (ii) assumed in connection with the acquisition of assets from such Person,
in each case whether or not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
of the Company or such acquisition. Acquired Indebtedness shall be deemed to
have been incurred, with respect to clause (i) of the preceding sentence, on
the date such Person becomes a Restricted Subsidiary and, with respect to
clause (ii) of the preceding sentence, on the date of consummation of such
acquisition of assets. Notwithstanding the foregoing, no Person (other than the
Company or any Subsidiary of the Company) in whom a Receivables Entity makes an
Investment in connection with a Qualified Receivables Transaction shall be
deemed to be an Affiliate of the Company or any of its Subsidiaries solely by
reason of such Investment.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is or will
thereupon become a Restricted Subsidiary; provided, however, that, in the case
of clauses (ii) and (iii), such Restricted Subsidiary is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means (i) any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person, (ii) any Person who is a director or
officer (a) of such Person, (b) of any Subsidiary of such Person or (c) of any
Person described in clause (i) above and (iii) any beneficial owner of shares
representing 5% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Voting Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to clauses (i) and (ii). For
the purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other issuance or
disposition (or series of related sales, leases, transfers, issuance or
dispositions that are part of a common plan) of shares of Capital Stock of a
Subsidiary (other than directors' qualifying shares), property or other assets
(each referred to for the purposes of this definition as a "disposition") by
the Company or any of its Restricted Subsidiaries (including any disposition by
means of a sale and leaseback, merger, consolidation or similar transaction,
but excluding any disposition by means of any pledge of assets or stock by the
Company or any of its Subsidiaries otherwise permitted under the Indenture, and
any transaction or series of related transactions from which the Company or any
of its Subsidiaries receives an aggregate consideration of less than $500,000)
other than (i) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) a
disposition of assets held for resale in the ordinary course of business, (iii)
the sale of Temporary Cash Investments in the ordinary course of business, (iv)
the sale or other disposition of damaged, worn, unneeded or obsolete equipment
in the ordinary course of business, (v) for purposes of the covenant described
under " -- Limitation on Sales of Assets" only, a disposition subject to the
covenant described under " -- Limitation on Restricted Payments," (vi) the sale
of other assets so long as the fair market value of the assets disposed of
pursuant to this clause (vi) does not exceed $2.0 million in the aggregate in
any fiscal year and $10.0 million in the aggregate prior to February 15, 2008,
(vii) any disposition of assets pursuant to and in accordance with the
provisions described under "Merger and Consolidation" and/or "Change of
Control", (viii) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute Additional Assets or an
Investment in a Permitted Joint Venture that in each case complies with the "
- -- Limitation on Restricted Payments" covenant and (ix) sales of accounts
receivable and related assets of the type specified in the definition of
"Qualified Receivables Transaction" to a Receivables Entity for the fair market
value thereof, including cash in an amount at least equal to 75% of the book
value thereof as determined in accordance with GAAP.
57
<PAGE>
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as
at the time of determination, the present value (discounted at the interest
rate assumed in making calculations in accordance with FAS 13) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Revolving Credit Facilities and any Refinancing Indebtedness with
respect to the foregoing, as amended from time to time, including principal,
premium (if any), interest (including interest accruing on or after the filing
of any petition in bankruptcy or for reorganization relating to the Company
whether or not a claim for postfiling interest is allowed in such proceedings),
fees, charges, expenses, reimbursement obligations, guarantees and all other
amounts payable thereunder or in respect thereof (including, without
limitation, cash collateralization of letters of credit).
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board with respect
to the relevant matter.
"Borrowing Base" means, as of the date of determination, an amount equal
to the sum, without duplication of (i) 75% of the net book value of the
Company's and its Restricted Subsidiaries' accounts receivable at such date and
(ii) 75% of the net book value of the Company's and its Restricted
Subsidiaries' inventories at such date. Net book value shall be determined in
accordance with GAAP and shall be that reflected on the most recent available
balance sheet (it being understood that the accounts receivable and inventories
of an acquired business may be included if such acquisition has been completed
on or prior to the date of determination).
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banking institutions are authorized or required by law to
close in New York City.
"Capital Stock" of any Person means (i) with respect to any Person that is
a corporation, any and all shares, interests, rights to purchase, warrants,
options, participations or other equivalents of or interests in (however
designated) equity of such Person, including any Preferred Stock, and (ii) with
respect to any Person that is not a corporation, any and all partnership or
other equity interests of such Person but in each case excluding any debt
securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined
in accordance with GAAP, and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof, (ii) certificates of deposit, time deposits and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any commercial bank having capital
and surplus in excess of $500 million and the commercial paper of the holding
company of which is rated at least "A-1" or the equivalent thereof by S&P or
"P-1" or the equivalent thereof by Moody's, (iii) repurchase obligations for
underlying securities of the types described in clauses (i) and (ii) entered
into with any financial institution meeting the qualifications specified in
clause (ii) above, (iv) commercial paper rated "A-1" or the equivalent thereof
by S&P or "P-1" or the equivalent thereof by Moody's and in each case maturing
within one year after the date of acquisition thereof, (v) investment funds
investing 95% of their assets in securities of the type described in clauses
(i)-(iv) above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA of the Company and its Restricted
Subsidiaries for the period of the most recent four consecutive fiscal quarters
ending prior to the date of such determination for which consolidated financial
statements of the Company are available to (ii) Consolidated Interest Expense
of the Company and its Restricted Subsidiaries for such four consecutive fiscal
quarters; provided, however, that:
58
<PAGE>
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding on
such date of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as
if such Indebtedness had been Incurred on the first day of such period and
the discharge of any other Indebtedness repaid, repurchased, defeased or
otherwise discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period,
(2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the assets that are the subject of such Asset
Disposition for such period or increased by an amount equal to the EBITDA
(if negative) directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged (to the extent the related
commitment is permanently reduced) with respect to the Company and its
continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary to
the extent the Company and its continuing Restricted Subsidiaries are no
longer liable for such Indebtedness after such sale),
(3) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary)
or an acquisition of assets, including any Investment in a Restricted
Subsidiary or any acquisition of assets occurring in connection with a
transaction causing a calculation to be made hereunder, which constitutes
all or substantially all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness and including the pro forma expenses and cost reductions
calculated on a basis consistent with Regulation S-X of the Securities Act)
as if such Investment or acquisition occurred on the first day of such
period and without regard to clause (ii) of the definition of Consolidated
Net Income, and
(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or
any Restricted Subsidiary since the beginning of such period) shall have
made any Asset Disposition or any Investment or acquisition of assets that
would have required an adjustment pursuant to clause (2) or (3) above if
made by the Company or a Restricted Subsidiary during such period, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given
to a transaction, the pro forma calculations shall be determined in good faith
by a responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for
the entire period (taking into account any Interest Rate Agreement applicable
to such Indebtedness if such Interest Rate Agreement has a remaining term as at
the date of determination in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total
consolidated cash and non-cash interest expense (excluding capitalized
interest) of the Company and its Restricted Subsidiaries, determined in
accordance with GAAP, plus, to the extent incurred by the Company and its
Restricted Subsidiaries in such period but not included in such interest
expense, (i) interest expense attributable to Capitalized Lease Obligations and
imputed interest with respect to Attributable Debt, (ii) amortization of debt
discount and debt issuance cost (other than those debt discounts and debt
issuance costs incurred on the Issue Date), (iii) capitalized interest, (iv)
non-cash interest expense, (v) commissions, discounts and other fees and
charges attributable to letters of credit and bankers' acceptance financing,
(vi) interest actually paid by the Company or any Restricted Subsidiary under
any Guarantee of Indebtedness or other obligation of any other Person, (vii)
net costs associated with Hedging Obligations (or minus net gains associated
with Hedging Obligations), (viii) the product of (A) Preferred Stock dividends
in respect of all Preferred Stock of Restricted Subsidiaries and Disqualified
Stock of the Company held by Persons other than the Company or a Wholly Owned
Subsidiary multiplied by (B) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of the Company, expressed as a decimal, in each case,
determined on a consolidated basis in accordance with GAAP; and (ix) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan
59
<PAGE>
or trust to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust. For purposes of
the foregoing, gross interest expense shall be determined after giving effect
to any net payments made or received by the Company and its Restricted
Subsidiaries with respect to Interest Rate Agreements.
"Consolidated Net Income" means, for any period, without duplication, the
consolidated net income (loss) of the Company and its Restricted Subsidiaries;
provided, however, that there shall not be included in such Consolidated Net
Income:
(i) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained
in clause (iv) below, the Company's equity in the net income of any such
Person for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated
Net Income,
(ii) any net income (loss) of any Person acquired by the Company or a
Restricted Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition,
(iii) any net income (loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that
(A) subject to the limitations contained in (iv) below, the Company's
equity in the net income of any such Restricted Subsidiary for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash distributed by such Restricted Subsidiary during such period
to the Company or another Restricted Subsidiary as a dividend (subject, in
the case of a dividend that could have been made to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income,
(iv) any gain (but not loss) realized upon the sale or other disposition
of any asset of the Company or its Restricted Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise
disposed of in the ordinary course of business and any gain (but not loss)
realized upon the sale or other disposition of any Capital Stock of any
Person,
(v) any extraordinary gain or loss,
(vi) the cumulative effect of a change in accounting principles, and
(vii) for purposes of clause (a)(3)(A) of "Limitation on Restricted
Payments", amounts otherwise included in Consolidated Net Income that have
the effect of reducing the aggregate amount of Investments under clause
(vii) of the definition of Permitted Investments.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and the
Senior Secured Notes and (ii) any other Senior Indebtedness which, at the date
of determination, has an aggregate principal amount of or under which, at the
date of determination, the holders thereof are committed to lend up to, at
least $25.0 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for the purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person that by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable or exercisable) or upon the
happening of any event (i) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise, (ii) is convertible or exchangeable for
Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the
holder thereof, in whole or in part, in each case on or prior to 123 days after
the Stated Maturity of the Exchange Notes; provided that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Exchange Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the
holders of such Capital Stock than the provisions contained in "Limitation on
Sales of Assets" and "Change of Control" covenants contained in the Indenture
and
60
<PAGE>
such Capital Stock specifically provides that such Person will not repurchase
or redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Exchange Notes as are required to be repurchased pursuant to
the "Limitation on Sales of Assets" and "Change of Control" covenants.
"EBITDA" means, for any period, the Consolidated Net Income for such
period, plus, without duplication and to the extent deducted in calculating
such Consolidated Net Income, (i) income tax expense, (ii) Consolidated
Interest Expense, (iii) depreciation expense, (iv) amortization of intangibles
and (v) other non-cash charges or non-cash losses (other than non-cash charges
to the extent they represent an accrual of or reserve for cash charges in any
future period or amortization of a prepaid expense that was paid in a prior
period), less, without duplication, non-cash items increasing Consolidated Net
Income of such Person for such period (excluding any items which represent the
reversal of any accrual of, or cash reserve for, anticipated cash charges in
any prior period); provided, that if any Restricted Subsidiary is not directly
or indirectly owned 100% by the Company, EBITDA shall be reduced (to the extent
not otherwise reduced in accordance with GAAP) by an amount equal to (A) the
amount of the EBITDA attributable to such Restricted Subsidiary multiplied by
(B) the quotient of (1) the number of shares of outstanding common Equity
Interests of such Restricted Subsidiary not owned directly or indirectly by the
Company on the last day of such period by the Company divided by (2) the total
number of shares of outstanding common Equity Interests of such Restricted
Subsidiary on the last day of such period.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of common stock of the
Company (excluding Disqualified Stock), other than public offerings with
respect to the Company's common stock registered on Form S-8.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Note Guarantee" means any guarantee that may from time to time
be executed and delivered by a Restricted Subsidiary pursuant to the covenant
described under " -- Future Guarantees."
"Exchange Note Guarantor" means any Subsidiary that has issued a Exchange
Note Guarantee.
"Exchange Note Register" means the register of Exchange Notes, maintained
by the Trustee, pursuant to the Indenture.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other nonfinancial
obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or such other
obligation of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name an Exchange Note
is registered in the Exchange Note Register.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. Any Indebtedness issued at a
discount (including Indebtedness on which interest is payable through the
issuance of additional Indebtedness) shall be deemed incurred at the time of
original issuance of the Indebtedness at the initial accreted amount thereof.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
61
<PAGE>
(i) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money,
(ii) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments,
(iii) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto) (other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (i), (ii) and (v))
entered into in the ordinary course of business of such Person to the
extent that such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the third
business day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than six months after the date of placing such
property in final service or taking final delivery and title thereto or the
completion of such services,
(v) all Capitalized Lease Obligations and Attributable Debt of such
Person,
(vi) the redemption, repayment or other repurchase amount of such Person
with respect to any Disqualified Stock or, with respect to any Subsidiary
of the Company, any Preferred Stock (but excluding, in each case, any
accrued dividends),
(vii) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of Indebtedness of such Person shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other
Persons,
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person, and
(ix) to the extent not otherwise included in this definition, net Hedging
Obligations of such Person (such obligations to be equal at any time to the
termination value of such agreement or arrangement giving rise to such
Hedging Obligation that would be payable by such Person at such time).
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are,
in conformity with GAAP, recorded as accounts receivable on the balance sheet
of the Company or its Restricted Subsidiaries) or other extension of credit
(including by way of Guarantee or similar arrangement) or capital contribution
to (by means of any transfer of cash or other property to others or any payment
for property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by such Person. For purposes of the definition of "Unrestricted Subsidiary" and
the covenant described under " -- Limitation on Restricted Payments," (i)
"Investment" shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at the
time of such redesignation less (y) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time of such redesignation; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith either by the Board of Directors or Senior Management.
"Issue Date" means the date on which the Exchange Notes are originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof, any option or other agreement to
sell, or any filing of, or any agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc., and its successors.
62
<PAGE>
"Net Available Cash" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form) therefrom, in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred (including fees and expenses of counsel, accountants and
investment bankers), and all Federal, state, provincial, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition, (ii) all payments made on any
Indebtedness that is secured by any assets subject to such Asset Disposition,
in accordance with the terms of any Lien upon such assets, or that must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or
by applicable law be repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition, (iv) appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
assets disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition and (v) any portion of the
purchase price from an Asset Disposition placed in escrow (whether as a reserve
for adjustment of the purchase price, or for satisfaction of indemnities in
respect of such Asset Disposition), provided, however, that upon the
termination of such escrow, Net Available Cash shall be increased by any
portion of funds therein released to the Company or any Restricted Subsidiary.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock or Indebtedness, the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Non-Recourse Indebtedness" means Indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (A) provides credit support
pursuant to any undertaking, agreement or instrument that would constitute
Indebtedness or (B) is directly or indirectly liable and (ii) no default with
respect to which would permit (upon notice, lapse of time or both) any holder
of any other Indebtedness of the Company or any of its Restricted Subsidiaries
to declare a default on such Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Officer" means any one of the Chairman of the Board, the Chief Executive
Officer, the President, the Chief Operating Officer, Vice President, Treasurer,
Secretary or Controller of the Company.
"Officers' Certificate" means a certificate signed by two or more
Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Employee Payments" means Restricted Payments by the Company or
any Restricted Subsidiary in respect of (i) the repurchase of Capital Stock by
the Company or any Restricted Subsidiary from an employee of the Company or any
Restricted Subsidiary or their assigns, estates or heirs upon the death,
retirement or termination of such employee or (ii) loans or advances to
employees of the Company or any of its Subsidiaries made in the ordinary course
of business.
"Permitted Holders" means Joseph W. Luter, III or any Person the majority
of the equity interests of which is beneficially owned by Joseph W. Luter, III.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) a Restricted Subsidiary, the Company or a Person
that will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Related Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys
all or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that the primary business of such Person is a Related
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary
deems reasonable under the circumstances; (v) securities received as
consideration in Asset Dispositions made in compliance with the covenant
described under " -- Limitation on Sales of Assets" with the exception of
securities received as consideration for Asset Dispositions of any property,
plant, equipment or other facility closed and designated in accordance with
clause (a) (ii) of the " -- Limitation on Sales of Assets" covenant; (vi)
Investments in existence on the Issue Date (but not in excess of the amount of
such Investments in existence on the Issue Date without giving effect to
increases or decreases attributable to accounting for the net income of such
Investments or subsequent changes in value); (vii) any
63
<PAGE>
Investment by the Company or a Wholly Owned Subsidiary in a Receivables Entity
or any Investment by a Receivables Entity in any other Person in connection
with a Qualified Receivables Transaction; provided that any Investment in a
Receivables Entity is in the form of a Purchase Money Note or an Equity
Interest and (viii) additional Investments in a Related Business having an
aggregate fair market value, taken together with all other Investments made
pursuant to this clause (viii) that are at that time outstanding, not to exceed
15% of Total Assets at the time of such Investment (with the fair market value
of each Investment being measured at the time made and without giving effect to
subsequent changes in value).
"Permitted Joint Venture" means any Person in which the Company or a
Restricted Subsidiary owns, directly or indirectly, an ownership interest
(other than a Subsidiary) and whose primary business is related, ancillary or
complementary to any of the businesses of the Company and its Restricted
Subsidiaries at the time of determination.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) that is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Purchase Money Note" means a promissory note of a Receivables Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Subsidiary of the Company in connection with a Qualified Receivables
Transaction to a Receivables Entity, which note shall be repaid from cash
available to the Receivables Entity, other than amounts required to be
established as reserves pursuant to agreements, amounts paid to investors in
respect of interest, principal and other amounts owing to such investors and
amounts owing to such investors and amounts paid in connection with the
purchase of newly generated receivables.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Subsidiaries
pursuant to which the Company or any of its Subsidiaries may sell, convey or
otherwise transfer to (a) a Receivables Entity (in the case of a transfer by
the Company or any of its Subsidiaries) and (b) any other Person (in the case
of a transfer by a Receivables Entity), or may grant a security interest in,
any accounts receivable (whether now existing or arising in the future) of the
Company or any of its Subsidiaries, and any assets related thereto including,
without limitation, all collateral securing such accounts receivable, all
contracts and all guarantees or other obligations in respect of such accounts
receivable, proceeds of such accounts receivable and other assets which are
customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable.
"Receivables Entity" means a Wholly Owned Subsidiary of the Company (or
another Person in which the Company or any Subsidiary of the Company makes an
Investment and to which the Company or any Subsidiary of the Company transfers
accounts receivable and related assets) which engages in no activities other
than in connection with the financing of accounts receivable and which is
designated by the Board of Directors of the Company (as provided below) as a
Receivables Entity, (a) no portion of the Indebtedness or any other obligations
(contingent or otherwise) of which (i) is guaranteed by the Company or any
Subsidiary of the Company (excluding guarantees of obligations (other than the
principal of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings), (ii) is recourse to or obligates the Company or
any Subsidiary of the Company in any way other than pursuant to Standard
Securitization Undertakings or (iii) subjects any property or asset of the
Company or any Subsidiary of the Company, directly or indirectly, contingently
or otherwise, to the satisfaction thereof, other than pursuant to Standard
Securitization Undertakings, (b) with which neither the Company nor any
Subsidiary of the Company has any material contract, agreement, arrangement or
understanding other than on terms no less favorable to the Company or such
Subsidiary than those that might be obtained at the time from Persons that are
not Affiliates of the Company, other than fees payable in the ordinary course
of business in connection with servicing accounts receivable, and (c) to which
neither the Company nor any Subsidiary of the Company has any obligation to
maintain or preserve such entity's financial condition or cause such entity to
achieve certain levels of operating results. Any such designation by the Board
of Directors of the Company shall be evidenced to the Trustee by filing with
the Trustee a certified copy of the resolution of the Board of Directors of the
Company giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"Recourse Indebtedness" means Indebtedness that is not Non-Recourse
Indebtedness.
64
<PAGE>
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "Refinances," and
"Refinanced" shall have a correlative meaning) any Indebtedness existing on the
Issue Date or Incurred in compliance with the Indenture (including Indebtedness
of the Company that refinances Indebtedness of any Restricted Subsidiary (to
the extent permitted by the Indenture) and Indebtedness of any Restricted
Subsidiary that refinances Indebtedness of another Restricted Subsidiary
(except that an Exchange Note Guarantor shall not refinance Indebtedness of a
Restricted Subsidiary that is not an Exchange Note Guarantor)) including
Indebtedness that refinances Refinancing Indebtedness; provided, however, that
(i) the Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being refinanced, (ii) the Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being refinanced and (iii) such Refinancing Indebtedness is Incurred in an
aggregate principal amount (or if issued with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if issued with original issue discount, the aggregate accreted
value) then outstanding of the Indebtedness being refinanced, plus fees,
underwriting discounts, premiums, unpaid accrued interest and other costs and
expenses incurred in connection with such Refinancing Indebtedness; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Restricted Subsidiary that refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business which is the same as or related,
complementary or ancillary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture.
"Representative" means the trustee, agent or representative (if any) for
an issue of Senior Indebtedness.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Revolving Credit Facilities" means the collective reference to (i) the
Five-Year Credit Agreement, dated as of July 15, 1997, among the Company, the
subsidiary guarantors thereto, the lenders party thereto and The Chase
Manhattan Bank, as administrative agent and (ii) the 364-Day Credit Agreement
dated as of July 15, 1997, among the Company, the subsidiary guarantors
thereto, the lenders party thereto and The Chase Manhattan Bank, as
administrative agent, each as may be amended, supplemented or modified from
time to time and any renewal, extension, refunding, restructuring, replacement
or refinancing thereof (whether with the original administrative agent and
lenders or another administrative agent or agents or one or more other lenders
and whether provided under the original Revolving Credit Facilities or one or
more other credit or other agreements or indentures).
"Sale/Leaseback Transaction" means any direct or indirect arrangement
relating to property now owned or hereafter acquired by the Company or a
Restricted Subsidiary whereby the Company or such Restricted Subsidiary
transfers such property to a Person and the Company or such Restricted
Subsidiary leases it from such Person, other than leases between the Company
and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Management" means with respect to the Company or any of its
Subsidiaries, as the case may be, any one of the Chairman of the Board, the
Chief Executive Officer, the President and the Chief Operating Officer or any
combination of the foregoing.
"Senior Secured Notes" means collectively, the 6.24% Series A Senior
Secured Notes Due November 1, 1998, the 8.41% Series B Senior Secured Notes Due
August 1, 2006, the 8.34% Series C Senior Secured Notes Due August 1, 2003, the
9.80% Series D Senior Secured Notes Due August 1, 2003, the 10.75% Series E
Senior Secured Notes Due August 1, 2005, the 8.52% Series F Senior Secured
Notes Due August 1, 2006, the 9.85% Series G Senior Secured Notes Due November
1, 2006 and the 8.41% Series H Senior Secured Notes Due August 1, 2004, each
issued pursuant to the Note Purchase Agreement, dated as of July 15, 1996,
among the Company and each of the several purchasers named therein, as the same
may be amended, supplemented or otherwise modified from time to time.
"Senior Subordinated Indebtedness" means any Indebtedness that is pari
passu in right of payment to the Exchange Notes.
"Significant Subsidiary" means any Restricted Subsidiary that is a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
65
<PAGE>
"S&P" means Standard & Poor's Ratings Service, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company which are reasonably customary in an accounts receivable transaction.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer, unless such contingency has
occurred).
"Subordinated Indebtedness" means any Indebtedness of the Company (whether
outstanding on the date of the Indenture or thereafter Incurred) which is
subordinate or junior in right of payment to the Exchange Notes pursuant to a
written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership or joint
venture interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person
or (ii) one or more Subsidiaries of such Person.
"Successor Company" shall have the meaning assigned thereto in clause (i)
under " -- Merger and Consolidation."
"Temporary Cash Investments" means any of the following: (i) any
Investment in direct obligations (x) of the United States of America or any
agency thereof or obligations Guaranteed by the United States of America or any
agency thereof or (y) of any foreign country recognized by the United States of
America rated at least "A" by S&P or "A-1" by Moody's, (ii) Investments in time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank or trust
company that is organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America
having capital and surplus aggregating in excess of $250 million (or the
foreign currency equivalent thereof) and whose long-term debt is rated "A" by
S&P or "A-1" by Moody's, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i) or
(ii) above entered into with a bank meeting the qualifications described in
clause (ii) above, (iv) Investments in commercial paper, maturing not more than
270 days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any Investment therein is made
of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to
S&P, (v) Investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state, commonwealth
or territory of the United States of America, or by any political subdivision
or taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's
and (vi) any money market deposit accounts issued or offered by a domestic
commercial bank or a commercial bank organized and located in a country
recognized by the United States of America, in each case, having capital and
surplus in excess of $250 million (or the foreign currency equivalent thereof),
or investments in money market funds complying with the risk limiting
conditions of Rule 2a-7 (or any short-term successor rule) of the SEC, under
the Investment Company Act of 1940, as amended.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939 (15
U.S.C. ss.ss. 77aaa- 77bbbb), as in effect from time to time.
"Total Assets" means, with respect to any Person, the total consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the recent
balance sheet of such Person.
"Trade Payables" means, with respect to any Person, any accounts payable
or any indebtedness or monetary obligation to trade creditors created, assumed
or Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
66
<PAGE>
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any Restricted Subsidiary (except a Restricted Subsidiary
which upon such designation becomes an Unrestricted Subsidiary in accordance
with the Indenture); povided that (i) such designation would be permitted under
the "Limitation on Restricted Payments" covenant described above, (ii) no
portion of the Indebtedness or any other obligation (contingent or otherwise)
of such Subsidiary (A) is Guaranteed by the Company or any Restricted
Subsidiary, (B) is Recourse Indebtedness or (C) subjects any property or asset
of the Company or any Restricted Subsidiary, directly or indirectly,
contingently or otherwise, to the satisfaction thereof, and (iii) no default or
event of default with respect to any Indebtedness of such Subsidiary would
permit any holder of any Indebtedness of the Company or any Restricted
Subsidiary to declare such Indebtedness of the Company or any Restricted
Subsidiary due and payable prior to its maturity. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that immediately after giving effect to such designation (x) the Company could
Incur $1.00 of additional Indebtedness under paragraph (a) of " -- Limitation
on Indebtedness" and (y) no Default or Event of Default shall have occurred and
be continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of an entity means all classes of Capital Stock of such
entity then outstanding and normally entitled to vote in the election of
directors or all interests in such entity with the ability to control the
management or actions of such entity.
"Wholly Owned Subsidiary" means a Restricted Subsidiary 80% or more of the
Capital Stock of which (other than directors' qualifying shares) is owned
directly or indirectly by the Company.
67
<PAGE>
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. The Company expects that the Exchange Notes will be issued
initially in the form of a permanent global certificate in fully registered
form (the "Global Note") and will be deposited with the Trustee as custodian
for the Depository Trust Company ("DTC") and registered in the name of a
nominee of DTC.
The Global Note
The descriptions of the operations and procedures of DTC, Euroclear System
("Euroclear") and Cedel Bank, societe anonyme ("Cedel") set forth below are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to change by them from time to time. Neither the Company nor the Initial
Purchaser takes any responsibility for these operations or procedures, and
investors are urged to contact the relevant system or its participants directly
to discuss these matters.
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a "banking
organization" within the meaning of the New York Banking Law, (iii) a member of
the Federal Reserve System, (iv) a "clearing corporation" within the meaning of
the Uniform Commercial Code, as amended, and (v) a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its participants (collectively, the "Participants") and facilitates the
clearance and settlement of securities transactions between Participants
through electronic book-entry changes to the accounts of its Participants,
thereby eliminating the need for physical transfer and delivery of
certificates. DTC's Participants include securities brokers and dealers
(including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Indirect access to DTC's system
is also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants") that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly. Investors who are not Participants may beneficially own securities
held by or on behalf of DTC only through Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i)
upon deposit of each Global Note, DTC will credit the accounts of Participants
designated by the Initial Purchaser with an interest in the Global Note and
(ii) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the interests of Participants) and the records of Participants and the
Indirect Participants (with respect to the interests of persons other than
Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Exchange Notes
represented by a Global Note to such persons may be limited. In addition,
because DTC can act only on behalf of its Participants, who in turn act on
behalf of persons who hold interests through Participants, the ability of a
person having an interest in Exchange Notes represented by a Global Note to
pledge or transfer such interest to persons or entities that do not participate
in DTC's system, or to otherwise take actions in respect of such interest, may
be affected by the lack of a physical definitive security in respect of such
interest.
So long as DTC or its nominee is the registered owner of a Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the Exchange Notes represented by the Global Note for all purposes
under the Indenture. Except as provided below, owners of beneficial interests
in a Global Note will not be entitled to have Exchange Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Exchange Notes in a physical, certified form
("Certified Notes"), and will not be considered the owners or holders thereof
under the Indenture for any purpose, including with respect to the giving of
any direction, instruction or approval to the Trustee thereunder. Accordingly,
each holder owning a beneficial interest in a Global Note must rely on the
procedures of DTC and, if such holder is not a Participant or an Indirect
Participant, on the procedures of the Participant through which such holder
owns its interest, to exercise any rights of a holder of Exchange Notes under
the Indenture or such Global Note. The Company understands that under existing
industry practice, in the event that the Company requests any action of holders
of Exchange Notes, or a holder that is an owner of a beneficial interest in a
Global Note desires to take any action that DTC, as the holder of such Global
Note, is entitled to take, DTC would authorize the Participants to take such
action and the Participants would authorize holders owning through such
Participants to take such action or would otherwise act upon the instruction of
such holders. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of Exchange Notes by DTC, or for maintaining, supervising or reviewing
any records of DTC relating to such Exchange Notes.
68
<PAGE>
Payments with respect to the principal of, and premium, if any, Liquidated
Damages, if any, and interest on, any Exchange Notes represented by a Global
Note registered in the name of DTC or its nominee on the applicable record date
will be payable by the Trustee to or at the direction of DTC or its nominee in
its capacity as the registered holder of the Global Note representing such
Exchange Notes under the Indenture. Under the terms of the Indenture, the
Company and the Trustee may treat the persons in whose names the Exchange
Notes, including the Global Notes, are registered as the owners thereof for the
purpose of receiving payment thereon and for any and all other purposes
whatsoever. Accordingly, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to owners of
beneficial interests in a Global Note (including principal, premium, if any,
Liquidated Damages, if any, and interest). Payments by the Participants and the
Indirect Participants to the owners of beneficial interests in a Global Note
will be governed by standing instructions and customary industry practice and
will be the responsibility of the Participants or the Indirect Participants and
DTC.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same- day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Exchange Notes, cross-market transfers between the Participants in DTC, on the
one hand, and Euroclear or Cedel participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Cedel, as the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of such system. Euroclear or Cedel, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf
by delivering or receiving interests in the relevant Global Notes in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositaries for
Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear and Cedel) immediately following
the settlement date of DTC. Cash received in Euroclear or Cedel as a result of
sales of interest in a Global Note by or through a Euroclear or Cedel
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or Cedel
cash account only as of the business day for Euroclear or Cedel following DTC's
settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the Global Notes among participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. Neither the Company nor the Trustee will have any responsibility for
the performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Certificated Notes
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
Exchange Notes in definitive form under the Indenture or (iii) upon the
occurrence of certain other events as provided in the Indenture, then, upon
surrender by DTC of the Global Notes, Certificated Notes will be issued to each
person that DTC identifies as the beneficial owner of the Exchange Notes
represented by the Global Notes. Upon any such issuance, the Trustee is
required to register such Certificated Notes in the name of such person or
persons (or the nominee of any thereof) and cause the same to be delivered
thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC
or any Participant or Indirect Participant in identifying the beneficial owners
of the related Exchange Notes and each such person may conclusively rely on,
and shall be protected in relying on, instructions from DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the Exchange Notes to be issued).
69
<PAGE>
SENIOR SUBORDINATED NOTES REGISTRATION RIGHTS
The Company and the Initial Purchaser entered into the Exchange and
Registration Rights Agreement concurrent with the issuance of the Senior
Subordinated Notes. Pursuant to the Exchange and Registration Rights Agreement,
the Company agreed, (i) to file with the Commission on or prior to 60 days
after the date of issuance of the Senior Subordinated Notes (the "Issue Date")
a registration statement on Form S-1 or Form S-4 if the use of such form is
then available (the "Exchange Offer Registration Statement"), relating to a
registered exchange offer (the "Exchange Offer") for the Senior Subordinated
Notes under the Securities Act and (ii) use its reasonable best efforts to
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act within 120 days after the Issue Date. As soon as practicable
after the effectiveness of the Exchange Offer Registration Statement, the
Company will offer to the holders of Transfer Restricted Securities (as defined
below) who are not prohibited by any law or policy of the Commission from
participating in the Exchange Offer the opportunity to exchange their Transfer
Restricted Securities for Exchange Notes, that are identical in all material
respects to the Notes (except that the Exchange Notes will not contain terms
with respect to transfer restrictions), and that would be registered under the
Securities Act. The Company will keep the Exchange Offer open for not less than
30 days (or longer, if required by applicable law) after the date on which
notice of the Exchange Offer is mailed to the Holders of the Senior
Subordinated Notes.
If (i) because of any change in law or applicable interpretations thereof
by the staff of the Commission, the Company is not permitted to effect the
Exchange Offer as contemplated hereby, (ii) any Senior Subordinated Notes
validly tendered pursuant to the Exchange Offer are not exchanged for Exchange
Notes within 150 days after the Issue Date, (iii) the Initial Purchaser so
requests with respect to Senior Subordinated Notes not eligible to be exchanged
for Exchange Notes in the Exchange Offer, (iv) any applicable laws or
interpretations do not permit any Holder of Senior Subordinated Notes to
participate in the Exchange Offer or (v) any Holder of Senior Subordinated
Notes that participates in the Exchange Offer does not receive freely
transferable Exchange Notes in exchange for tendered Senior Subordinated Notes,
then the Company will file with the Commission a shelf registration statement
(the "Shelf Registration Statement") to cover resales of Transfer Restricted
Securities by such Holders who satisfy certain conditions relating to the
provision of information in connection with the Shelf Registration Statement.
For purposes of the foregoing, "Transfer Restricted Securities" means each Note
until (i) the date on which such Senior Subordinated Note has been exchanged
for a freely transferable Exchange Note in the Exchange Offer, (ii) the date on
which such Senior Subordinated Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iii) the date on which such Senior Subordinated Note is
distributed to the public pursuant to Rule 144 under the Securities Act or is
saleable pursuant to Rule 144(k) under the Securities Act.
The Company will use its reasonable best efforts to have the Exchange
Offer Registration Statement or, if applicable, the Shelf Registration
Statement (each, a "Registration Statement") declared effective by the
Commission as promptly as practicable after the filing thereof. Unless the
Exchange Offer would not be permitted by policy of the Commission, the Company
will commence the Exchange Offer and will use its reasonable best efforts to
consummate the Exchange Offer as promptly as practicable, but in any event
prior to 150 days after the Issue Date. If applicable, the Company will use its
reasonable best efforts to keep the Shelf Registration Statement effective for
a period of two years after the Issue Date.
If (i) the applicable Registration Statement is not filed with the
Commission on or prior to 60 days after the Issue Date, (ii) the Exchange Offer
Registration Statement or the Shelf Registration Statement, as the case may be,
is not declared effective within 120 days after the Issue Date, (iii) the
Exchange Offer is not consummated on or prior to 150 days after the Issue Date
or (iv) the Shelf Registration Statement is filed and declared effective within
120 days after the Issue Date but shall thereafter cease to be effective (at
any time that the Company is obligated to maintain the effectiveness thereof)
without being succeeded within 60 days by an additional Shelf Registration
Statement filed and declared effective (each such event referred to in clauses
(i) through (iv), a "Registration Default"), the Company will be obligated to
pay liquidated damages to each holder of Transfer Restricted Securities, during
the period of one or more such Registration Defaults, in an amount equal to
$0.192 per week per $1,000 principal amount of the Notes constituting Transfer
Restricted Securities held by such holder until the applicable Registration
Statement is filed, the Exchange Offer Registration Statement is declared
effective, the Exchange Offer is consummated or the Shelf Registration
Statement is declared effective or again becomes effective, as the case may be.
All accrued liquidated damages shall be paid to Holders in the same manner as
interest payments on the Notes on semiannual payment dates which correspond to
interest payment dates for the Notes. Following the cure of all Registration
Defaults, the accrual of liquidated damages will cease.
The Exchange and Registration Rights Agreement also provides that the
Company (i) shall make available for a period of 90 days after the consummation
of the Exchange Offer a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any such
Exchange Notes and (ii) shall pay all expenses incident
70
<PAGE>
to the Exchange Offer (including the expenses of one counsel to the Holders of
the Senior Subordinated Notes) and will indemnify certain Holders of the Senior
Subordinated Notes (including any broker-dealer) against certain liabilities,
including liabilities under the Securities Act. A broker-dealer that delivers
such a prospectus to purchasers in connection with such resales will be subject
to certain of the civil liability provisions under the Securities Act, and will
be bound by the provisions of the Exchange and Registration Rights Agreement
(including certain indemnification rights and obligations).
Each Holder of the Notes who wishes to exchange such Senior Subordinated
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received pursuant to the Exchange Offer are being acquired in the ordinary
course of the business of the person receiving such Exchange Notes, whether or
not such person is the Holder, (ii) neither the Holder nor any such other
person has an arrangement or understanding with any person to participate in
the distribution of the Exchange Notes and (iii) neither the Holder nor any
such other person is an "affiliate" (as defined in Rule 405 of the Securities
Act) of the Company, or if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
If the Holder is not a broker-dealer, it will be required to represent
that it is not engaged in, and does not intend to engage in, the distribution
of the Exchange Notes. If the Holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Senior Subordinated Notes
that were acquired as a result of market-making activities or other trading
activities (an "Exchanging Dealer"), it will be required to acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
Holders of the Senior Subordinated Notes will be required to make certain
representations to the Company (as described above) in order to participate in
the Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their Senior
Subordinated Notes included in the Shelf Registration Statement and benefit
from the provisions regarding liquidated damages set forth in the preceding
paragraphs. A Holder who sells Senior Subordinated Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Exchange and Registration Rights Agreement which are
applicable to such a Holder (including certain indemnification obligations).
For so long as the Senior Subordinated Notes are outstanding, the Company
will continue to provide to Holders of the Senior Subordinated Notes and to
prospective purchasers of the Senior Subordinated Notes the information
required by paragraph (d)(4) of Rule 144A.
The foregoing description of the Exchange and Registration Rights
Agreement is a summary only, does not purport to be complete and is qualified
in its entirety by reference to all provisions of the Exchange and Registration
Rights Agreement.
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters
issued to third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Senior Subordinated Notes may be
offered for resale, resold and otherwise transferred by holders thereof (other
than any holder which is (i) an "Affiliate," (ii) a broker-dealer who acquired
Senior Subordinated Notes directly from the Company or (iii) broker-dealers who
acquired Senior Subordinated Notes as a result of market-making or other
trading activities) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holders' business and such holders
have no arrangement with any person to participate in a distribution of such
Exchange Notes; provided that broker-dealers receiving Exchange Notes in the
Exchange Offer will be subject to a prospectus delivery requirement with
respect to resales of such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Senior Subordinated Notes where Senior Subordinated Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 90 days after the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
, 1998, all dealers effecting transactions in the Exchange Notes may be
required to deliver a prospectus.
71
<PAGE>
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify such holders (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by McGuire, Woods, Battle & Boothe LLP, Richmond, Virginia, a
limited liability partnership. Robert L. Burrus, Jr., a partner of McGuire,
Woods, Battle & Boothe LLP, is a director of the Company and owns 1,000 shares
of the Company's Common Stock.
EXPERTS
The audited consolidated financial statements of the Company included in
and incorporated by reference in this Prospectus and Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The combined financial statements of Lykes Meat Group as of September 30,
1996 and 1995 and for each of the three years in the period ended September 30,
1996, incorporated in this Prospectus and Registration Statement by reference
to Form 8-K dated January 17, 1997, have been so incorporated in reliance on
the report of Price Waterhouse LLP, independent certified public accountants,
given on the authority of said firm as experts in auditing and accounting.
Smithfield has agreed to indemnify Price Waterhouse LLP for the payment of
all legal costs and expenses incurred in Price Waterhouse LLP's successful
defense of any legal action or proceeding that arises as a result of inclusion
of Price Waterhouse LLP's audit reports on the combined financial statements of
Smithfield Foods in this Prospectus and Registration Statement.
72
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------------
<S> <C>
Audited Year-End Financial Statements
Report of Independent Public Accountants ................................................. F-2
Consolidated Balance Sheets at April 27, 1997 and April 28, 1996 ......................... F-3
Consolidated Statements of Income for the Years Ended April 27, 1997, April 28, 1996,
and April 30, 1995 F-4
Consolidated Statements of Cash Flows for the Years ended April 27, 1997, April 28, 1996,
and April 30, 1995 ...................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended April 27, 1997,
April 28, 1996 and April 30, 1995 ....................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7 to F-22
Unaudited Interim Financial Statements
Consolidated Condensed Balance Sheets at October 26, 1997 and February 1, 1998 ........... F-23
Consolidated Condensed Statements of Income for the 14 Weeks ended February 1, 1998, 13
Weeks
ended January 26, 1997, 40 Weeks ended February 1, 1998 and 39 Weeks ended January 26, F-24
1997
Consolidated Condensed Statements of Cash Flows for the 40 Weeks ended February 1, 1998
and 39
Weeks ended January 26, 1997 ............................................................ F-25
Notes to Consolidated Condensed Financial Statements ..................................... F-26 to F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Smithfield Foods, Inc.:
We have audited the accompanying consolidated balance sheets of Smithfield
Foods, Inc. (a Delaware corporation), and subsidiaries as of April 27, 1997,
and April 28, 1996, and the related consolidated statements of income, cash
flows, and stockholders' equity for each of the three years in the period ended
April 27, 1997. 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 April 27, 1997, and April 28, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
April 27, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Richmond, Virginia
June 6, 1997
F-2
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------
April 27, April 28,
1997 1996
------------- -------------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash ....................................................................... $ 25,791 $ 28,529
Accounts receivable less allowances of $1,499,000 and $1,084,000 ........... 166,094 144,956
Inventories ................................................................ 253,276 210,759
Net advances to joint hog production arrangements .......................... -- 7,578
Prepaid expenses and other current assets .................................. 43,217 28,585
---------- ----------
Total Current Assets ...................................................... 488,378 420,407
---------- ----------
Property, Plant and Equipment:
Land ....................................................................... 13,964 12,453
Buildings and improvements ................................................. 205,523 146,545
Machinery and equipment .................................................... 344,328 303,384
Construction in progress ................................................... 50,578 74,207
---------- ----------
614,393 536,589
Less accumulated depreciation .............................................. (187,518) (163,866)
---------- ----------
Net Property, Plant and Equipment ......................................... 426,875 372,723
---------- ----------
Other Assets:
Investments in partnerships ................................................ 44,582 29,662
Deferred income taxes ...................................................... -- 10,235
Other ...................................................................... 35,419 24,592
---------- ----------
Total Other Assets ........................................................ 80,001 64,489
---------- ----------
$ 995,254 $ 857,619
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable .............................................................. $ 77,500 $ 110,563
Current portion of long-term debt and capital lease obligations ............ 7,800 13,392
Accounts payable ........................................................... 132,268 113,344
Accrued expenses and other current liabilities ............................. 106,498 95,082
---------- ----------
Total Current Liabilities ................................................. 324,066 332,381
---------- ----------
Long-term Debt and Capital Lease Obligations ................................ 288,486 188,618
---------- ----------
Other Noncurrent Liabilities:
Pension and postretirement benefits ........................................ 55,320 59,128
Deferred income taxes ...................................................... 7,260 --
Other ...................................................................... 12,636 14,975
---------- ----------
Total Other Noncurrent Liabilities ........................................ 75,216 74,103
---------- ----------
Commitments and Contingencies ...............................................
Convertible Preferred Stock ................................................. -- 20,000
---------- ----------
Stockholders' Equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares .............. -- --
Common stock, $.50 par value, 25,000,0001 authorized shares; 38,393,3622
and 18,453,015 issued .................................................... 19,1972 9,227
Additional paid-in capital ................................................. 104,0622 92,762
Retained earnings .......................................................... 191,870 148,171
Treasury stock, at cost, 874,0002 and 437,000 shares ....................... (7,643) (7,643)
---------- ----------
Total Stockholders' Equity ................................................ 307,486 242,517
---------- ----------
$ 995,254 $ 857,619
========== ==========
</TABLE>
- ---------
(1) Authorized shares were increased from 25,000,000 to 100,000,000 effective
August 28, 1997.
(2) Adjusted for 2-for-1 stock split effective September 26, 1997.
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
-----------------------------------------------
1997 1996 1995
--------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Sales ......................................................... $3,870,611 $2,383,893 $1,526,518
Cost of sales ................................................. 3,549,673 2,203,626 1,380,586
---------- ---------- ----------
Gross profit .................................................. 320,938 180,267 145,932
Selling, general and administrative expenses .................. 191,225 103,095 61,723
Depreciation expense .......................................... 35,825 25,979 19,717
Interest expense .............................................. 26,211 20,942 14,054
---------- ---------- ----------
Income from continuing operations before income taxes ......... 67,677 30,251 50,438
Income taxes .................................................. 22,740 10,465 18,523
---------- ---------- ----------
Income from continuing operations ............................. 44,937 19,786 31,915
Loss from discontinued operations, net of tax ................. -- (3,900) (4,075)
---------- ---------- ----------
Net income .................................................... $ 44,937 $ 15,886 $ 27,840
========== ========== ==========
Net income available to common stockholders ................... $ 43,699 $ 14,734 $ 27,165
========== ========== ==========
Basic income (loss) per common share:(1)
Continuing operations ........................................ $ 1.21 $ .55 $ .95
Discontinued operations ...................................... -- (.11) (.12)
---------- ---------- ----------
Net income ................................................... $ 1.21 $ .44 $ .83
========== ========== ==========
Diluted income (loss) per common share:(1)
Continuing operations ........................................ $ 1.17 $ .53 $ .92
Discontinued operations ...................................... -- (.11) (.12)
--------- ---------- ----------
Net income ................................................... $ 1.17 $ .42 $ .80
========== ========== ==========
</TABLE>
- ---------
(1) Adjusted for 2-for-1 stock split effective September 26, 1997.
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
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 44,937 $ 15,886 $ 27,840
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................ 39,057 28,299 22,127
Increase in accounts receivable .......................................... (12,606) (9,251) (6,141)
Increase in inventories .................................................. (30,008) (41,316) (1,717)
(Increase) decrease in prepaid expenses and other current assets ......... (1,605) 1,535 (2,802)
(Increase) decrease in other assets ...................................... (10,410) 22,682 (8,121)
Increase in accounts payable, accrued expenses and other liabilities ..... 9,377 19,166 8,272
Increase (decrease) in deferred income taxes ............................. 7,810 (27,059) 6,637
(Gain) loss on sale of property and equipment ............................ (3,288) 2,168 1,130
---------- --------- ---------
Net cash provided by operating activities .................................... 43,264 12,110 47,225
---------- --------- ---------
Cash flows from investing activities:
Capital expenditures ........................................................ (69,147) (74,888) (90,550)
Business acquisitions, net of cash acquired ................................. (34,835) (14,079) --
Investments in partnerships ................................................. (7,293) (2,486) (4,037)
Net advances to joint hog production arrangements ........................... (113) 6,464 (6,364)
Proceeds from sale of property and equipment ................................ 4,141 82 969
---------- --------- ---------
Net cash used in investing activities ........................................ (107,247) (84,907) (99,982)
---------- --------- ---------
Cash flows from financing activities:
Net (repayments) borrowings on notes payable ................................ (33,063) 33,592 17,560
Proceeds from issuance of long-term debt and capital lease obligations ...... 171,250 50,000 50,000
Principal payments on long-term debt and capital lease obligations .......... (76,974) (16,672) (13,588)
Proceeds from issuance of preferred stock ................................... -- 20,000 --
Exercise of common stock options ............................................ 1,270 768 1,900
Dividends on preferred stock ................................................ (1,238) (1,152) (675)
---------- --------- ---------
Net cash provided by financing activities .................................... 61,245 86,536 55,197
---------- --------- ---------
Net (decrease) increase in cash .............................................. (2,738) 13,739 2,440
Cash at beginning of year .................................................... 28,529 14,790 12,350
---------- --------- ---------
Cash at end of year .......................................................... $ 25,791 $ 28,529 $ 14,790
========== ========= =========
Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized .................................... $ 25,751 $ 20,684 $ 14,630
========== ========= =========
Income taxes paid, net ...................................................... $ 15,043 $ 1,685 $ 16,254
========== ========= =========
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 advances to joint hog production arrangements to
investments in partnerships .............................................. $ 7,691 $ -- $ 12,500
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
---------- ----------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Balance, May 1, 1994 ............................................... $ 8,357 $ 47,964 $106,272 $ (7,643)
Net income ........................................................ -- -- 27,840 --
Exercise of stock options ......................................... 60 1,840 -- --
Dividends on preferred stock ...................................... -- -- (675) --
------- -------- -------- --------
Balance, April 30, 1995 ............................................ 8,417 49,804 133,437 (7,643)
Net income ........................................................ -- -- 15,886 --
Common stock issued for acquisition of John Morrell & Co. ......... 547 32,453 -- --
Conversion of preferred stock ..................................... 233 9,767 -- --
Exercise of stock options ......................................... 30 738 -- --
Dividends on preferred stock ...................................... -- -- (1,152) --
------- -------- -------- --------
Balance, April 28, 1996 ............................................ 9,227 92,762 148,171 (7,643)
Net income ........................................................ -- -- 44,937 --
Conversion of preferred stock ..................................... 333 19,667 -- --
Exercise of stock options ......................................... 38 1,232 -- --
Dividends on preferred stock ...................................... -- -- (1,238) --
------- -------- -------- --------
Balance, April 27, 1997 ............................................ $ 9,598 $113,661 $191,870 $ (7,643)
======= ======== ======== ========
Balance, April 27, 1997 adjusted for 2-for-1 stock split effective
September 26, 1997 ................................................ $19,197 $104,062 $191,870 $ (7,643)
======= ======== ======== ========
</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
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Smithfield Foods, Inc. and subsidiaries (the "Company"). The Company's
principal subsidiaries include Brown's of Carolina, Inc. ("Brown's"), 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"). All
material intercompany balances and transactions have been eliminated.
Fiscal Year
The Company's fiscal year is the 52 or 53 week period which ends on the
Sunday nearest April 30. All years presented were 52 week periods.
Inventories
The Company's inventories are valued at the lower of first-in, first-out
(FIFO) cost or market. Inventories consist of the following:
<TABLE>
<CAPTION>
April 27, April 28,
1997 1996
----------- ----------
(In thousands)
<S> <C> <C>
Fresh and processed meats ......... $183,480 $156,232
Hogs on farms ..................... 44,563 36,337
Manufacturing supplies ............ 15,732 12,686
Other ............................. 9,501 5,504
-------- --------
$253,276 $210,759
======== ========
</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 15 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 $2,640,000 in fiscal 1997, $2,021,000 in
fiscal 1996 and $842,000 in fiscal 1995. Repair and maintenance expenses
totaled $89,670,000, $59,951,000 and $50,975,000 in fiscal 1997, 1996 and 1995,
respectively.
Other Assets
Cost in excess of net assets acquired is amortized over 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.
Start-up costs associated with hog production are amortized over a three-year
period.
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/or cleanups are probable and the cost can be reasonably
estimated. Other than for assessments, the timing of these accruals coincides
with the Company's commitment to a formal plan of action (See Note 12).
F-7
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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.
Price-Risk Management and Hedging
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 (hams and bacon) for seasonal
demand peaks and inventory hedging. Contracts related to sales or purchase
commitments are accounted for as hedges. Gains and losses on these contracts
are deferred and recorded to cost of sales when the sales or purchase
commitments are fulfilled. As of April 27, 1997 and April 28, 1996, the Company
had deferred unrealized hedging gains of $2,183,000 and $2,160,000,
respectively, on outstanding futures contracts. As of April 27, 1997 and April
28, 1996, the Company had open futures contracts with contract values of
$44,291,000 and $31,819,000, respectively.
Stock Split
On September 26, 1997, the Company effected a 2-for-1 stock split in the
form of a stock dividend. All common share numbers and per share amounts in
these notes to consolidated financial statements and, where indicated, on the
consolidated financial statements have been adjusted to give effect to this
stock split.
Income Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," ("SFAS 128") which became effective for the Company
in the third quarter of fiscal 1998. All income per share amounts for all
periods are presented to conform the SFAS 128 requirements. All share and per
share amounts are adjusted for a 2-for-1 stock split effective September 28,
1997. The computation for basic and dilutive net income per share follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Income from continuing operations ..................... $ 44,937 $ 19,786 $ 31,915
Loss from discontinued operation, net of tax .......... -- (3,900) (4,075)
-------- -------- --------
Net income ............................................ 44,937 15,886 27,840
Dividends on preferred stock .......................... (1,238) (1,152) (675)
-------- -------- --------
Net income available to common stockholders ........... $ 43,699 $ 14,734 $ 27,165
======== ======== ========
Average common shares outstanding:
Basic ................................................. 36,121 33,865 32,705
Dilutive stock options ................................ 1,144 1,135 1,218
-------- -------- --------
Diluted ............................................... 37,265 35,000 33,923
======== ======== ========
Basic income (loss) per common share:
Continuing operations ................................. $ 1.21 $ 0.55 $ 0.95
Discontinued operations ............................... -- (0.11) (0.12)
-------- -------- --------
Net income ............................................ $ 1.21 $ 0.44 $ 0.83
======== ======== ========
Diluted income (loss) per common share:
Continuing operations ................................. $ 1.17 $ 0.53 $ 0.92
Discontinued operations ............................... -- (0.11) (0.12)
-------- -------- --------
Net income ............................................ $ 1.17 $ 0.42 $ 0.80
======== ======== ========
</TABLE>
F-8
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This new
standard defines a fair value method of accounting for employee stock option
plans. SFAS 123 allows the choice of recognizing compensation expense for stock
option plans by adopting the new fair value standard or to continue measuring
compensation using the intrinsic value approach of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). If APB
25 is elected, SFAS 123 requires supplemental disclosure to show the pro forma
effects as if the new method was applied. The Company has elected to continue
applying APB 25 to account for its stock option plans and adopt the
supplemental disclosure requirements of SFAS 123 (see Note 7). Accordingly,
SFAS 123 does not affect the Company's financial position or results of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the Company's financial position and amounts reported
in results of operations. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been restated to conform to 1997
presentations.
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 ......... 37,214 12,291
Net income ................................ 37,214 8,391
Basic income per common share:
Continuing operations .................... $ 1.00 $ .33
Net income ............................... 1.00 .21
Diluted income per common share:
Continuing operations ................... $ .97 $ .32
Net income .............................. $ .97 $ .21
</TABLE>
On December 20, 1995, the Company acquired all of the capital stock of
John Morrell from Chiquita Brands International, Inc. ("Chiquita"), for
$58,000,000, consisting of $25,000,000 in cash and $33,000,000 of the Company's
common stock (2,188,546 shares), plus the assumption of all of John Morrell's
liabilities.
F-9
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 -- ACQUISITIONS -- Continued
The following unaudited pro forma information combines the operating
results of the Company and John Morrell assuming the acquisition had been made
as of the beginning of each of the periods presented.
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
(In thousands, except
per share data)
<S> <C> <C>
Sales ..................................... $ 3,414,561 $ 2,949,426
Income from continuing operations ......... 25,094 49,257
Net income ................................ 21,194 45,182
Basic income per common share:
Continuing operations .................... $ .68 $ 1.39
Net income ............................... .57 1.28
Diluted income per common share:
Continuing operations .................... $ .66 $ 1.35
Net income ............................... $ .55 $ 1.23
</TABLE>
The Company accounted for these 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.
The pro forma amounts above 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.
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 involves: (1) Smithfield-Carroll's Farms
("Smithfield-Carroll's"), 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 April 27, 1997 and April 28, 1996, the Company had investments of
$27,943,000 and $20,252,000, respectively, in the partnership which are
accounted for using the equity method. Profits and losses are shared equally
under the arrangement. During fiscal 1997 and 1995, the Company converted
$7,691,000 and $12,500,000, respectively, of advances to partners' equity,
which are included in the investments above. In addition, as of April 27, 1997,
the Company had $1,414,000 of working capital loans outstanding to the
partnership. These demand loans are expected to be repaid in fiscal 1998.
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 1997, 1996 and 1995, revenues were $8,227,000,
$8,912,000 and $9,479,000, respectively.
Pursuant to the long-term purchase contract, the Company purchased
$93,049,000, $70,540,000 and $54,081,000 of live hogs from CFOV in fiscal years
1997, 1996 and 1995, respectively. The contract resulted in decreased raw
material costs (as compared to market costs) of $5,245,000 and $2,617,000 in
fiscal 1997 and 1996, respectively, and increased raw material costs of
$2,615,000 in fiscal 1995. 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 $269,499,000, $201,878,000 and $134,937,000 of
hogs in fiscal 1997, 1996 and 1995, respectively.
F-10
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Circle Four
The Company has an arrangement with three 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 serve
as directors of the Company. As of April 27, 1997, the Company had a 33%
interest in the arrangement, which is accounted for using the equity method. As
of April 27, 1997 and April 28, 1996, the Company had investments of
$12,673,000 and $7,083,000, 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
April 27, 1997 and April 28, 1996, B&G had advanced $1,430,000 and $1,527,000,
respectively, to Brown's for working capital. As of April 27, 1997 and April
28, 1996, the Company had investments of $1,291,000 and $1,260,000,
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 $6,439,000 and $7,990,000
of hogs in fiscal 1997 and 1996, respectively.
The summarized unaudited financial information which follows represents an
aggregation of the financial position of the unconsolidated hog production
operations of Smithfield-Carroll's, Circle Four and B&G.
<TABLE>
<CAPTION>
April 27, April 28,
1997 1996
----------- ----------
(In thousands)
<S> <C> <C>
Current assets ...................... $ 17,116 $ 6,532
Property and equipment, net ......... 134,937 107,996
Other assets ........................ 6,978 6,094
-------- --------
$159,031 $120,622
======== ========
Current liabilities ................. $ 15,721 $ 11,785
Long-term debt ...................... 71,094 54,926
Equity .............................. 72,216 53,911
-------- --------
$159,031 $120,622
======== ========
</TABLE>
F-11
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4 -- DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 27, April 28,
1997 1996
----------- ------------
(In thousands)
<S> <C> <C>
Notes payable to institutional lenders:
8.52% notes, payable through August 2006 .............. $100,000 $ --
8.34% notes, payable through August 2003 .............. 40,000 --
8.41% notes, payable through August 2004 .............. 14,779 15,000
9.85% notes, payable through November 2006 ............ 13,000 14,333
8.41% notes, payable through August 2006 .............. 9,853 10,000
10.75% notes, payable through August 2005 ............. 8,500 9,500
9.80% notes, payable through August 2003 .............. 8,437 9,187
6.24% notes, payable through November 1998 ............ 1,977 3,108
7.15% notes, payable through October 1997 ............. 1,052 3,044
7.00% notes, payable through September 1998 ........... 895 1,429
Notes payable to banks: .................................
Long-term credit facility, expiring July 1998 ......... 75,000 43,750
Notes based on prime rate ............................. -- 45,000
6.48% notes ........................................... -- 20,700
7.10% notes ........................................... -- 2,290
Other notes payable ..................................... 112 407
-------- ---------
273,605 177,748
Less current portion .................................... (5,949) (11,810)
-------- ---------
$267,656 $ 165,938
======== =========
</TABLE>
Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(In Thousands)
---------------
<S> <C>
Fiscal year
1998 ............... $ 5,949
1999 ............... 79,253
2000 ............... 3,083
2001 ............... 3,084
2002 ............... 3,083
Thereafter ......... 179,153
--------
$273,605
========
</TABLE>
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
secured by four of the Company's major processing plants. 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.
As of April 27, 1997, the Company had credit facilities totaling
$300,000,000, consisting of a 364-day $225,000,000 revolving credit facility
and a two-year $75,000,000 revolving credit facility. The short-term facility
is used for seasonal inventory and receivable needs, and the long-term facility
is used for working capital and capital expenditures. The line
F-12
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4 -- DEBT -- Continued
expires in July 1997 (the two-year facility expires in July 1998) and is
expected to be refinanced in the first quarter of fiscal 1998. The facilities
have no compensating balance requirements but require commitment fees of
one-quarter of one percent per annum on the unused portion.
Weighted average borrowings under the facilities were $165,071,000 in
fiscal 1997, $133,400,000 in fiscal 1996 and $69,900,000 in fiscal 1995 at
weighted average interest rates of approximately 7%, 7% and 6%, respectively.
Maximum borrowings were $215,000,000 in fiscal 1997, $179,800,000 in fiscal
1996 and $117,000,000 in fiscal 1995. The outstanding balances under the
facilities totaled $150,000,000 and $151,300,000 as of April 27, 1997 and April
28, 1996, respectively, at a weighted average interest rate of 7% for both
years.
Notes payable to institutional lenders are secured by four of the
Company's major processing plants and certain other property, plant and
equipment. The credit facilities are collateralized with substantially all of
the Company's inventories and accounts receivable. As of April 27, 1997, the
fair value of long-term debt, based on the market value of debt with similar
maturities and covenants, approximates recorded values.
The Company's various debt agreements contain covenants regarding current
ratio, fixed charges coverage, minimum net worth and, among other restrictions,
limit additional borrowings, the acquisition, disposition and leasing of assets
and payments of dividends to stockholders.
NOTE 5 -- INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Income from continuing operations ......... $22,740 $ 10,465 $ 18,523
Discontinued operations ................... -- (2,600) (2,716)
------- -------- --------
$22,740 $ 7,865 $ 15,807
======= ======== ========
</TABLE>
Income tax expense attributable to income from continuing operations
consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Current tax expense:
Federal ..................... $ 12,765 $ 8,850 $10,373
State ....................... 2,805 1,530 1,835
-------- ------- -------
15,570 10,380 12,208
-------- ------- -------
Deferred tax expense (benefit):
Federal ..................... 9,424 (129) 5,301
State ....................... (2,254) 214 1,014
-------- ------- -------
7,170 85 6,315
-------- ------- -------
$ 22,740 $10,465 $18,523
======== ======= =======
</TABLE>
A reconciliation of taxes computed at the federal statutory rate to the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(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 ......... 1.7 3.9 3.6
Other .................................................. (3.1) (4.3) (1.9)
---- ---- ----
33.6% 34.6% 36.7%
==== ==== ====
</TABLE>
F-13
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 -- INCOME TAXES -- Continued
The tax effects of temporary differences consist of the following:
<TABLE>
<CAPTION>
April 27, April 28,
1997 1996
----------- ----------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Employee benefits ........................................... $28,986 $35,925
Alternative minimum tax credit .............................. 12,278 5,607
Tax credits, carryforwards and net operating losses ......... 11,807 12,523
Inventories ................................................. 1,377 1,297
Other assets ................................................ (903) 317
Accrued expenses ............................................ 12,519 12,004
------- -------
$66,064 $67,673
======= =======
Deferred tax liabilities:
Property, plant and equipment ............................... $35,072 $33,643
Investments in subsidiaries ................................. 3,154 574
Start-up costs .............................................. 1,197 1,805
------- -------
$39,423 $36,022
======= =======
</TABLE>
As of April 27, 1997 and April 28, 1996, the Company had $33,901,000 and
$21,416,000, 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 April 27, 1997 or April 28, 1996,
and there was no change in the valuation allowance during fiscal 1997 and 1996.
The tax credits, carryforwards, and net operating losses expire from
fiscal 1998 to 2011. The alternative minimum tax credits do not expire.
NOTE 6 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
April 27, April 28,
1997 1996
----------- ----------
(In thousands)
<S> <C> <C>
Payroll and related benefits ................ $ 43,723 $42,737
Self-insurance reserves ..................... 18,112 18,914
Pension and postretirement benefits ......... 17,518 16,006
Other ....................................... 27,145 17,425
-------- -------
$106,498 $95,082
======== =======
</TABLE>
NOTE 7 -- STOCKHOLDERS' EQUITY AND PREFERRED STOCK
Stock Split
On September 26, 1997, the Company effected a 2-for-1 stock split in the
form of a stock dividend. All common share numbers and per share amounts in
these notes to consolidated financial statements and, where indicated, on the
consolidated financial statements have been adjusted to give effect to this
stock split.
Issuance of Common Stock
In fiscal 1996, the Company issued 2,188,546 shares of its common stock to
Chiquita as part of the acquisition of John Morrell (See Note 2).
F-14
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7 -- STOCKHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
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 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
shares of the Company's common stock at $10.75 per share.
Stock Options
In fiscal 1997, as discussed in Note 1, the Company adopted SFAS 123 and
elected to continue to account for its stock option plans under APB 25.
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 has reserved 2,500,000 shares of
common stock under the 1992 Plan. As of April 27, 1997, there were 709,000
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 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Average Price
Stock Options Per Share
--------------- --------------
(In thousands)
<S> <C> <C>
Outstanding at May 1, 1994 ............ 3,304,000 $ 7.40
Granted ............................. 120,000 15.31
Exercised ........................... (241,800) 3.94
Canceled ............................ (50,000) 11.53
--------- ------
Outstanding at April 30, 1995 ......... 3,132,200 7.90
Granted ............................. 690,000 12.65
Exercised ........................... (119,200) 3.30
Canceled ............................ (100,000) 11.53
--------- ------
Outstanding at April 28, 1996 ......... 3,603,000 8.86
Granted ............................. 160,000 15.67
Exercised ........................... (154,000) 3.11
Canceled ............................ (540,000) 12.29
--------- ------
Outstanding at April 27, 1997 ......... 3,069,000 $ 8.90
========= ======
</TABLE>
As of April 27, 1997, April 28, 1996 and April 30, 1995, the number of
options exercisable were 1,278,000, 1,432,000 and 1,551,200, respectively, at
average per share exercise prices of $4.06, $3.96 and $3.91, respectively.
F-15
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7 -- STOCKHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
The following table summarizes information about stock options outstanding
as of April 27, 1997.
<TABLE>
<CAPTION>
Weighted
Stock Options Average Weighted
Exercise Outstanding Remaining Average
Price Range April 27, 1997 Contractual Life Exercise Price
- ------------------------ ---------------- ------------------ ---------------
<S> <C> <C> <C>
$ 4.06 1,278,000 2.1 $ 4.06
10.72 to 11.53 1,241,000 6.5 11.51
13.63 to 15.31 450,000 8.7 13.70
16.47 to 17.84 100,000 9.6 16.88
</TABLE>
Stock options with an exercise price of $4.06 are the only options
exercisable as of April 27, 1997.
The fair value of each stock option granted in fiscal 1997 and 1996 is
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for both years: dividend yield of 0%, expected
volatility of 35%, weighted average risk-free interest rate of 5.8% and
expected lives of six years. The weighted average fair value of options granted
is $7.62 and $6.01 for fiscal 1997 and 1996, respectively. Pro forma net income
and income per share based on the fair value method as defined in SFAS 123 for
fiscal 1997 and 1996 approximate recorded values.
Preferred Share Purchase Rights
In fiscal 1992, 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 five ten-thousandths of a share
of Series A junior participating preferred stock, par value $1.00 per share, at
an exercise price of $75 subject to adjustment. Each share of Series A junior
participating preferred stock 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. Currently, 25,000 shares of Series A junior
participating preferred stock have been reserved. The Rights will expire in
fiscal 2002 unless previously exercised or redeemed at the option of the board
of directors for $.005 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 plans covering
substantially all employees. Plans covering salaried employees provide benefits
based on years of service and average salary levels. Plans covering hourly
employees provide benefits of stated amounts for each year of service. The
Company's funding policy is to contribute annually the minimum amount required
under ERISA. The plans' assets are invested primarily in equities, debt
securities, insurance contracts and money market funds.
In connection with the John Morrell acquisition, the Company assumed the
obligations under two non-contributory, defined benefit pension plans for
substantially all full-time salaried and hourly employees. Benefit accrual for
substantially all hourly employees under the defined benefit pension plan
ceased as of March 1991. Current benefits for these employees are provided by a
defined contribution plan covering both salaried and hourly employees.
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 plans and the components of pension expense
are as follows:
<TABLE>
<CAPTION>
April 27, 1997 April 28, 1996
---------------------------- ---------------------------
Overfunded Underfunded Overfunded Underfunded
Plans Plans Plans Plans
------------ ------------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Accumulated benefit obligation ............................. $ 30,974 $ 170,850 $ 29,548 $ 175,103
========= ========== ========= ==========
Vested benefit obligation .................................. $ 26,483 $ 168,222 $ 25,591 $ 169,468
========= ========== ========= ==========
Plan assets at fair value .................................. $ 47,179 $ 123,417 $ 39,127 $ 116,542
Projected benefit obligation ............................... (38,805) (177,114) (36,434) (181,306)
--------- ---------- --------- ----------
Excess (deficiency) of plan assets over projected
benefit obligation ........................................ 8,374 (53,697) 2,693 (64,764)
Items not recorded on balance sheets: ......................
Unrecognized net transition gain .......................... (90) -- (181) --
Unrecognized net gain from experience differences ......... (6,799) (10,173) (3,356) (8,710)
Unrecognized prior service cost ........................... 992 88 1,188 175
--------- ---------- --------- ----------
Prepaid (accrued) pension costs .......................... $ 2,477 $ (63,782) $ 344 $ (73,299)
========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net periodic pension cost included the following:
Service costs for benefits earned ........................ $ 4,054 $ 2,662 $ 2,079
Interest accrued on projected benefit obligation ......... 16,299 7,532 3,089
Actual return on plan assets ............................. (15,556) (6,691) (2,558)
Net amortization and deferral ............................ 878 (200) (304)
--------- -------- --------
Net periodic pension cost .............................. $ 5,675 $ 3,303 $ 2,306
========= ======== ========
</TABLE>
In determining the projected benefit obligation in fiscal 1997 and 1996,
the weighted average assumed discount rate was 8% and 7.75%, respectively,
while the assumed rate of increase in future compensation was 5% in fiscal 1997
and 5% to 6% in fiscal 1996. The weighted average expected long-term rate of
return on plan assets was 9% in fiscal 1997 and 1996.
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 plans are as follows:
<TABLE>
<CAPTION>
April 27, April 28,
1997 1996
----------- ----------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents ..................................... $ 8,226 $ 8,996
Active plan participants .................................... 1,404 1,300
------- -------
Total accumulated postretirement benefit obligation ......... 9,630 10,296
Unrecognized net gain ....................................... 651 --
------- -------
Accrued postretirement benefit cost ........................... $10,281 $10,296
======= =======
</TABLE>
In determining the accumulated postretirement benefit obligation in fiscal
1997 and 1996, the weighted average assumed discount rate was 8% and 7.75%,
respectively. The assumed annual rate of increase in per capita cost of covered
health care benefits is 7.5% for fiscal 1997, 6.5% for fiscal 1998 and 5.5%
thereafter.
F-17
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued
The total cost of postretirement benefits was $1,072,000, $673,000 and
$406,000 in fiscal 1997, 1996 and 1995, respectively.
NOTE 9 -- LEASE OBLIGATIONS AND COMMITMENTS
The Company leases transportation equipment under operating leases ranging
from 1 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 1997, 1996 and 1995, the Company paid $5,372,000,
$4,641,000 and $5,986,000, respectively, in fees for use of the facilities. As
of April 27, 1997 and April 28, 1996, the Company had investments of $1,137,000
and $1,067,000, respectively, in the partnership which are accounted for using
the equity method.
Minimum rental commitments under all noncancelable operating leases and
maintenance agreements are as follows:
<TABLE>
<CAPTION>
(In thousands)
---------------
<S> <C>
Fiscal year
1998 ............... $ 19,083
1999 ............... 16,995
2000 ............... 14,938
2001 ............... 12,970
2002 ............... 17,023
Thereafter ......... 24,239
--------
$105,248
========
</TABLE>
Rental expense was $24,270,000 in fiscal 1997, $17,664,000 in fiscal 1996
and $15,025,000 in fiscal 1995. Rental expense in fiscal 1997, 1996 and 1995
included $3,593,000, $3,389,000 and $2,681,000 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 after 10 years.
Property, plant, and equipment under capital leases as of April 27, 1997
consists of land of $2,659,000, buildings and improvements of $7,017,000 and
machinery and equipment of $6,701,000, less accumulated depreciation of
$5,361,000.
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
1998 .......................... $ 3,876
1999 .......................... 3,991
2000 .......................... 4,046
2001 .......................... 3,672
2002 .......................... 3,190
Thereafter .................... 12,793
--------
31,568
Less amounts representing interest (8,888)
--------
Present value of net minimum
obligation..................... 22,680
Less current portion .......... (1,851)
--------
Long-term capital lease
obligations................... $ 20,829
========
</TABLE>
As of April 27, 1997, the Company had outstanding commitments for
construction of hog production facilities and plant expansion projects of
approximately $20,964,000.
NOTE 10 -- RELATED PARTY TRANSACTIONS
A director of the Company is the chairman and chief executive officer and
a director of Murphy Family Farms, Inc. ("MFF"). 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 $433,861,000, $330,033,000 and $232,130,000 of hogs in fiscal
1997, 1996 and 1995, respectively.
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 $182,576,000, $129,577,000 and $79,292,000 of hogs in
fiscal 1997, 1996 and 1995, respectively.
A director of the Company is a director and owns 50% of the voting stock
of Maxwell Foods, Inc. ("MFI"). 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 $109,470,000, $76,448,000 and $7,784,000 of hogs in fiscal 1997, 1996
and 1995, respectively.
In fiscal 1997, 1996 and 1995, the Company purchased raw materials
totaling $12,772,000, $10,069,000 and $7,535,000, respectively, from a company
which is 48% owned by the chairman and chief executive officer's children. In
the opinion of management, these purchases are made at prices which are
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 and $4,100,000 is
reflected in fiscal 1996 and 1995, respectively.
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 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 United States Department of Agriculture and the Occupational
Safety and Health Administration. Management believes that the Company complies
with all such laws and regulations in all material respects, except as set
forth immediately below.
The wastewater discharge permit for Smithfield Packing's and Gwaltney's
plants in Smithfield, Virginia, which was last reissued in 1992, imposed more
stringent effluent limitations on phosphorus and two species of nitrogen
(ammonia and total Keldjahl nitrogen) than the wastewater treatment facilities
at those plants were designed to meet or can meet. To achieve compliance, the
Company agreed in 1991 to discontinue its 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 a consent
order issued by the VSWCB in 1991 (the "1991 Order"). The entry of the 1991
Order followed several years of extensive negotiations and litigation,
including an application for a variance from the phosphorus limitations, and
preceded the reissuance of the wastewater discharge permit in 1992. The 1991
Order excused the Company from compliance with the permit's phosphorus effluent
limitations and allowed the Company to operate under less stringent limitations
on total Keldjahl nitrogen than the permit would otherwise require, pending
connection of the two wastewater treatment facilities to the HRSD system.
Another VSWCB consent order (the "1994 Order") excused the Company from
compliance with certain other permit terms pending connection to the HRSD
system.
The Company connected its Gwaltney wastewater treatment facilities to the
HRSD system in June 1996 and is connecting its Smithfield Packing facilities to
that system in July 1997. The HRSD system was not available for the Company's
use prior to these dates. The Company has made more than $2,700,000 in capital
expenditures to upgrade its existing wastewater treatment facilities (and must
continue to operate these facilities) to produce a wastewater that is suitable
for treatment by the HRSD system. In addition to these continuing operational
costs, the Company expects to pay HRSD sewer use charges in excess of
$1,500,000 per year. The Company will account for these wastewater treatment
costs as current period charges in the years in which such costs are incurred.
Prior to connecting to the HRSD system, the Smithfield Packing and
Gwaltney plants were operated under the 1991 Order and the 1994 Order. During a
period from May 1994 to January 1995, the two plants had a number of violations
of the permit and the consent orders. Although the Company corrected the
conditions that caused these violations, the Company continued to experience
intermittent exceedances and permit compliance problems at its Gwaltney and
Smithfield Packing plants prior to connecting to the HRSD system.
The Company regularly conducts tests of its wastewater discharges to
assure compliance with the provisions of its wastewater discharge permits.
Federal and state laws require that records of 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 the course of a VSWCB inspection of the
Smithfield Packing and Gwaltney plants in July 1994, it was discovered that
records of certain tests conducted by the Company from 1991 through early 1994
could not be located. The employee responsible for the supervision of the tests
and maintenance of the test records was replaced. The U.S. Department of
Justice ("DOJ"), EPA and the Federal Bureau of Investigation undertook an
investigation of possible criminal charges of false reporting and destruction
of records. The Company cooperated fully with this federal investigation. On
October 22, 1996, the former employee entered a guilty plea and was convicted
in the United States District Court for the Eastern District of Virginia on 23
violations of the federal Clean Water Act, including making false reports.
Eight of these violations related to his duties as the Company's employee at
its Smithfield Packing and Gwaltney plants, while 15 violations were committed
in connection with the former employee's outside consulting business activities
for public and private entities unrelated to the Company. Neither the Company
nor any of its other present or former employees has been charged with any
criminal violation arising from this investigation.
On August 30, 1996, VDEQ filed a civil suit against the Company in the
Circuit Court of the County of Isle of Wight, Virginia, concerning permit
exceedances at the Company's Smithfield Packing and Gwaltney plants. This suit,
which was
F-20
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 -- REGULATION AND LITIGATION -- Continued
filed under the Virginia State Water Control Law, concerns all permit
violations, including record-keeping violations, from 1986 to date that were
not excused by the 1991 Order and the 1994 Order, as well as several violations
of effluent limitations that were prescribed by such orders. Each violation is
subject to a maximum penalty of $25,000. In March 1997, the Virginia Attorney
General filed a bill of particulars specifying approximately 23,000 alleged
violations, the vast majority of which concern the requirement to conduct
certain tests of chlorine levels at each plant on each hour of each day. The
case was initially brought to trial in state court on July 7, 1997. The VDEQ
contended that the Company received an economic benefit of $4,000,000, and
should pay civil penalties in that amount plus $2,000,000 for the violations.
On July 9, 1997, the VDEQ withdrew its suit against the Company, but stated its
intention to refile the suit at a later time. The Company intends to defend the
suit vigorously, and expects to prove that essentially no economic benefit
accrued to the Company and no environmental damage occurred as a result of the
violations.
On December 16, 1996, the DOJ, on behalf of the EPA, filed a civil suit
against the Company, Gwaltney and Smithfield Packing under the federal Clean
Water Act in the United States District Court for the Eastern District of
Virginia in Norfolk, Virginia. This action seeks to recover civil penalties
against the Company for approximately 5,500 alleged federal Clean Water Act
violations at the Company's Smithfield Packing and Gwaltney plants in
Smithfield, Virginia. Each violation is subject to a civil penalty not to
exceed $25,000. The vast majority of the alleged violations concern permit
exceedances during the last five years that were expressly excused by the 1991
Order and the 1994 Order. The remaining alleged violations duplicate the VDEQ's
allegations. The Commonwealth of Virginia, acting through the VSWCB, which has
primary enforcement responsibility in the Clean Water Act's cooperative
federal-State permitting scheme, advised federal authorities of the 1991 Order
and the 1994 Order when issued. Not-withstanding this, in its suit, the EPA
asserted that the State-issued administrative consent orders do not bar a
federal action seeking relief for permit violations.
In an opinion dated May 30, 1997, the District Court granted the EPA's
motion for summary judgment in part on liability issues, holding that the 1991
Order and the 1994 Order did not excuse the alleged permit violations and that
the federal action was not otherwise precluded or barred by estoppel. In the
suit by the Commonwealth of Virginia discussed above, however, the Circuit
Court of the County of Isle of Wight, Virginia, based upon a cross claim filed
by the Company, issued a judicial decree reforming the Company's permit and
setting the compliance deadlines consistent with the Company's connection
deadlines to the HRSD system. This matter has been set for trial on July 21,
1997, on the liability issues and on the issue of appropriate civil penalties.
In determining the civil penalties to be assessed, the federal Clean Water Act
requires that the District Court consider the seriousness of the violations,
the economic benefit (if any) resulting from the violations, any history of
such violations, any good-faith efforts to comply with the applicable
requirements, the economic impact of the penalties on the Company, and such
other matters as justice may require. The Company intends to defend the suit
vigorously.
The EPA is expected to contend that the Company should have spent
approximately $10,000,000 in 1990 to comply with the phosphorus permit
limitation in addition to connecting its facilities to the HRSD system when
available. The EPA is expected to seek civil penalties which include this
claimed economic benefit plus an additional gravity-based amount for the permit
violations. The Company expects to prove that no economic benefit accrued to
the Company and that no environmental damage occurred as a result of the
violations. The Company will also show that it has acted in good faith and has
complied with the VSWCB's consent order requirements, at great expense, to
connect to the HRSD system and discontinue its discharges into the Pagan River.
Based on its knowledge, as summarized above, of the facts and
circumstances surrounding the alleged violations in these suits, the Company
believes that the ultimate resolution of the suits will not have a material
adverse effect on the Company's financial position or annual results of
operations.
F-21
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
----------- ------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
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:(1)
Basic ........................................... .01 .24 .43 .53
Diluted ......................................... .01 .23 .40 .50
1996
Sales ............................................ $367,328 $ 455,799 $ 687,000 $ 873,766
Gross profit ..................................... 21,023 35,412 56,319 67,513
Income (loss) from continuing operations ......... (2,594) 4,615 10,787 6,978
Discontinued operations .......................... (1,800) -- (2,100) --
Net income (loss) ................................ (4,394) 4,615 8,687 6,978
Basic income (loss) per common share:(1)
Continuing operations ........................... $ (.08) $ .13 $ .30 $ .18
Discontinued operations ......................... (.05) -- (.06) --
Net income (loss) ............................... (.13) .13 .24 .18
Diluted income (loss) per common share:(1)
Continuing operations ........................... (.08) .13 .29 .17
Discontinued operations ......................... (.05) -- (.06) --
Net income (loss) ............................... (.13) .13 .23 .17
</TABLE>
- ---------
(1) Adjusted for 2-for-1 stock split effective September 26, 1997.
F-22
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
February 1, 1998 April 27, 1997
------------------ ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash .......................................................................... $ 36,416 $ 25,791
Accounts receivable, net ...................................................... 161,227 166,094
Inventories ................................................................... 252,460 253,276
Prepaid expenses and other current assets ..................................... 55,101 43,217
---------- ----------
Total Current Assets ......................................................... 505,204 488,378
---------- ----------
Property, plant and equipment .................................................. 687,926 614,393
Less accumulated depreciation ................................................. (223,336) (187,518)
---------- ----------
Net Property, Plant and Equipment ............................................ 464,590 426,875
---------- ----------
Other assets:
Investments in partnerships ................................................... 53,287 44,582
Other ......................................................................... 36,487 35,419
---------- ----------
Total Other Assets ........................................................... 92,774 80,001
---------- ----------
$1,062,568 $ 995,254
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................................. $ -- $ 77,500
Current portion of long-term debt and capital lease obligations ............... 9,036 7,800
Accounts payable .............................................................. 120,836 132,268
Accrued expenses and other current liabilities ................................ 143,077 106,498
---------- ----------
Total Current Liabilities .................................................... 272,949 324,066
---------- ----------
Long-term debt and capital lease obligations ................................... 386,211 288,486
---------- ----------
Other noncurrent liabilities:
Pension and post-retirement benefits .......................................... 47,978 55,320
Other ......................................................................... 15,094 19,896
---------- ----------
Total Other Noncurrent Liabilities ........................................... 63,072 75,216
---------- ----------
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares.................. -- --
Common stock, $.50 par value, 100,000,000 and 25,000,000 authorized shares;
37,527,362 and 19,196,681 issued ............................................ 18,769 9,598
Additional paid-in capital .................................................... 96,971 113,661
Retained earnings ............................................................. 224,596 191,870
Treasury stock, at cost, 437,000 shares ....................................... -- (7,643)
---------- ----------
Total Stockholders' Equity ................................................... 340,336 307,486
---------- ----------
$1,062,568 $ 995,254
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
F-23
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 40 Weeks 39 Weeks
Ended Ended Ended Ended
February 1, 1998 January 26, 1997 February 1, 1998 January 26, 1997
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Sales ............................................ $ 1,095,999 $ 1,080,979 $ 2,993,661 $ 2,943,075
Cost of sales .................................... 979,336 992,275 2,707,844 2,722,032
----------- ----------- ----------- -----------
Gross profit ..................................... 116,663 88,704 285,817 221,043
Selling, general and administrative expenses ..... 64,157 48,423 166,526 135,296
Depreciation expense ............................. 11,018 9,036 31,086 26,141
Interest expense ................................. 8,424 7,278 23,827 20,378
Nonrecurring charge .............................. -- -- 12,600 --
----------- ----------- ----------- -----------
Income before income taxes ....................... 33,064 23,967 51,778 39,228
Income taxes ..................................... 9,345 8,223 19,052 13,731
----------- ----------- ----------- -----------
Net income ....................................... $ 23,719 $ 15,734 $ 32,726 $ 25,497
=========== =========== =========== ===========
Net income per common share:
Basic ........................................... $ .63 $ .43 $ .87 $ .68
=========== =========== =========== ===========
Diluted ......................................... $ .60 $ .40 $ .82 $ .66
=========== =========== =========== ===========
Average common shares outstanding:
Basic ........................................... 37,537 36,073 37,531 36,046
=========== =========== =========== ===========
Diluted ......................................... 39,781 38,926 39,687 37,137
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
F-24
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
40 Weeks 39 Weeks
Ended Ended
February 1, 1998 January 26, 1997
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 32,726 $ 25,497
Adjustments to reconcile net income to net cash provided
by operating activities: ..............................................
Depreciation and amortization ........................................ 33,592 28,451
Decrease (increase) in accounts receivable ........................... 9,813 (39,680)
Decrease (increase) in inventories ................................... 8,820 (980)
Increase in prepaid expenses and other current assets ................ (10,405) (3,925)
Decrease (increase) in other assets .................................. 4,313 (9,271)
Decrease (increase) in other liabilities ............................. (1,227) 19,544
Gain on sale of property, plant and equipment ........................ (764) (2,893)
--------- ---------
Net cash provided by operating activities ................................ 76,868 16,743
--------- ---------
Cash flows from investing activities:
Capital expenditures .................................................... (73,287) (47,258)
Business acquisitions, net of cash ...................................... (6,997) (34,086)
Proceeds from sale of property, plant and equipment ..................... 1,161 3,452
Investments in partnerships ............................................. (8,705) (7,387)
--------- ---------
Net cash used in investing activities .................................... (87,828) (85,279)
--------- ---------
Cash flows from financing activities:
Net repayments on notes payable ......................................... (75,000) (10,063)
Proceeds from issuance of long-term debt ................................ 2,900 146,250
Proceeds from long-term credit facility ................................. 177,000 --
Principal payments on long-term debt and capital lease obligations ...... (83,439) (74,876)
Exercise of common stock options ........................................ 124 1,270
Preferred dividends ..................................................... -- (1,012)
--------- ---------
Net cash provided by financing activities ................................ 21,585 61,569
--------- ---------
Net increase (decrease) in cash .......................................... 10,625 (6,967)
Cash at beginning of period .............................................. 25,791 28,529
--------- ---------
Cash at end of period .................................................... $ 36,416 $ 21,562
========= =========
Supplemental disclosures of cash flow information:
Cash payments during period: ............................................
Interest (net of amount capitalized) .................................. $ 22,337 $ 19,421
========= =========
Income taxes .......................................................... $ 3,886 $ 7,968
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-25
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) These statements should be read in conjunction with the Consolidated
Financial Statements and related notes which are included in the Company's
Annual Report for the fiscal year ended April 27, 1997.
(2) The interim consolidated condensed financial information furnished
herein is unaudited. The information reflects all adjustments (which include
only normal recurring adjustments) which are, in the opinion of management,
necessary to a fair statement of the financial position and the results of
operations for the periods included in this report.
(3) Inventories consist of the following:
<TABLE>
<CAPTION>
February 1, 1998 April 27, 1997
------------------ ---------------
(In thousands)
(Unaudited)
<S> <C> <C>
Fresh and processed meats ......... $172,533 $183,480
Hogs on farms ..................... 51,536 44,563
Manufacturing supplies ............ 18,218 15,732
Other ............................. 10,173 9,501
-------- --------
$252,460 $253,276
======== ========
</TABLE>
(4) In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", ("SFAS 128") which is effective this quarter.
All earnings per share amounts for all periods are presented to conform
the SFAS 128 requirements. The computation for basic and dilutive net
income per share follows:
<TABLE>
<CAPTION>
14 Weeks 13 Weeks 40 Weeks 39 Weeks
Ended Ended Ended Ended
February 1, 1998 January 26, 1997 February 1, 1998 January 26, 1997
------------------ ------------------ ------------------ -----------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income ...................................... $ 23,719 $15,734 $ 32,726 $ 25,497
Dividends on preferred stock .................... -- (337) -- (1,012)
-------- ------- -------- --------
Net income available to common stockholders ..... $ 23,719 $15,397 $ 32,726 $ 24,485
======== ======= ======== ========
Average common shares outstanding: ..............
Basic ......................................... 37,537 36,073 37,531 36,046
Dilutive stock options ........................ 2,244 1,520 2,156 1,091
Dilutive convertible preferred stock .......... -- 1,333 -- --
-------- ------- -------- --------
Diluted ....................................... 39,781 38,926 39,687 37,137
======== ======= ======== ========
Net income per common share: ....................
Basic ......................................... $ .63 $ .43 $ .87 $ .68
======== ======= ======== ========
Diluted ....................................... $ .60 $ .40 $ .82 $ .66
======== ======= ======== ========
</TABLE>
(5) On February 9, 1998, the Company issued $200 million of 10-year 7.625%
senior subordinated notes. The net proceeds from the sale of the notes were
used to repay indebtness classified as long-term debt under the Company's
revolving credit facilities with the balance invested temporarily in short-term
marketable debt securities.
(6) In August 1997, the U.S. District Court for the Eastern District of
Virginia imposed $12.6 million in civil penalties against the Company in a
civil action brought by the U.S. Environmental Protection Agency. This amount
is reflected as a nonrecurring charge in the forty weeks ended February 1,
1998. In December 1997, the Company filed an appeal of the Court's judgment
with the U.S. Court of Appeals for the Fourth Circuit.
F-26
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- Continued
(7) In August 1997, the Board of Directors of the Company declared a
2-for-1 stock split of the Company's common stock. Common shares outstanding
and net income per share amounts have been adjusted in the consolidated
condensed statements of income to reflect the stock split. Also in August 1997,
the Company's stockholders approved an increase in the number of authorized
common shares from 25,000,000 to 100,000,000 and approved the reincorporation
of the
Company in Virginia from Delaware. The reincorporation does not affect the
manner in which the Company operates. Since Virginia law does not recognize
treasury stock, the shares previously classified as treasury stock were
returned to unissued resulting in a reduction in common stock and additional
paid-in capital for the cost basis of the shares.
F-27
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The unaudited Pro Forma Consolidated Statements of Operations of the
Company are provided to give effect to the acquisition on November 4, 1996, of
substantially all of the assets and business of Lykes from Lykes Bros. Inc.
("LBI") for $34.8 million in cash and the assumption of $10.6 million of
current liabilities. The pro forma information is based on the historical
financial statements of the Company and Lykes giving effect to the acquisition
under the purchase method of accounting. The pro forma information does not
purport to be indicative of the combined historical or future results of
operations or financial position that would have been or will be reported had
the assumptions and adjustments been transacted as described below. The pro
forma combined statements of operations for the fiscal year ended April 27,
1997 (including the six months ended November 3, 1996 prior to the acquisition
for Lykes) present the results of operations of the combined entities assuming
that the acquisition had been completed as of the beginning of the respective
periods. The Pro Forma Consolidated Statements of Operations should be read in
conjunction with the Company's Annual Report for the fiscal year ended April
27, 1997 and the historical financial statements and notes of Lykes for the
year ended September 30, 1996 contained in the Company's Form 8-K/A filed
January 17, 1997 and incorporated herein by reference.
The acquisition of Lykes increased the Company's production capacity,
added strong regional brands and increased the Company's market penetration in
the Southeast. Prior to the acquisition by Smithfield Foods, Lykes had incurred
significant losses. After consummation of the acquisition, Smithfield Foods
instituted a number of operational changes which included separating the sales
management of the Lykes and Sunnyland brands, improving product quality and
consistency, investing in new plant and equipment and eliminating certain
administrative expenses. These operational changes have resulted in improved
operating performance at Lykes.
P-1
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------------
Smithfield Lykes Meat
Foods Group
Year 6 Months
Ended Ended
April 27, Nov. 3, Pro Forma Pro Forma
1997 1996 Adjustments Combined
--------------- ------------- ------------- ---------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Sales ................................................ $ 3,870,611 $ 81,347 $ (3,867) $ 3,948,091
Cost of sales ........................................ 3,549,673 77,690 (3,867) 3,623,496
----------- --------- -------- -----------
Gross profit ......................................... 320,938 3,657 -- 324,595
Selling, general and administrative expenses ......... 191,225 15,762 75 204,111
(2,951)
Depreciation expense ................................. 35,825 2,543 (619) 37,749
Interest expense ..................................... 26,211 -- 1,159 27,370
Impairment loss ...................................... -- 5,523 (5,523) --
----------- --------- -------- -----------
Income (loss) before taxes ........................... 67,677 (20,171) 7,859 55,365
3,057
Income taxes ......................................... 22,740 -- (7,847) 17,950
----------- --------- -------- -----------
Net income (loss) .................................... $ 44,937 $ (20,171) $ 12,649 $ 37,415
=========== ========= ======== ===========
Net income available to common stockholders .......... $ 43,699 $ 36,177
=========== ===========
Net income per common share(1)
Basic ............................................. $ 1.21 $ 1.00
=========== ===========
Diluted ........................................... $ 1.17 $ .97
=========== ===========
Average common shares outstanding(1)
Basic ............................................. 36,121 36,121
=========== ===========
Diluted ........................................... 37,265 37,265
=========== ===========
</TABLE>
- ---------
(1) Adjusted for 2-for-1 stock split effective September 26, 1997.
See Notes to Pro Forma Consolidated Statement of Operations (Unaudited)
P-2
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(a) To eliminate estimated intercompany sales.
(b) To adjust for changes in amortization expense for the related periods
associated with the change in value of trademarks and tradenames as a result of
applying the purchase method of accounting.
(c) To adjust for the estimated difference between the allocation of
expenses for services provided by LBI and the expected cost that would have
been incurred had Lykes and the Company provided the same services.
(d) To adjust for changes in depreciation expense for the related periods
associated with the change in values for property, plant and equipment as a
result of applying the purchase method of accounting.
(e) To record the interest cost related to the $34.8 million purchase
price borrowed under the Company's Revolving Credit Facilities. The weighted
average interest rate is 6.7% for the six months ended November 3, 1996,
reflecting the Company's actual borrowing rate during that period.
Additionally, a one-eighth percent change in the weighted average interest rate
would have an immaterial impact on interest expense.
(f) To eliminate the impairment loss which would have been reflected in
the beginning balance sheet in accordance with the purchase method of
accounting.
(g) To record the tax effect of the pro forma adjustments at the marginal
tax rate of 38.9%.
(h) To reflect the marginal tax rate of 38.9% on Lykes' historical loss
which would have been realized as part of the consolidated group.
P-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of any offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any offer or sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information .................................... 3
Incorporation of Certain Documents
By Reference .......................................... 3
Forward Looking Statements ............................... 5
Summary .................................................. 6
Risk Factors ............................................. 13
Use of Proceeds .......................................... 16
Exchange Offer ........................................... 16
Capitalization ........................................... 23
Selected Historical Consolidated Financial Data .......... 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 25
Business ................................................. 32
Management ............................................... 38
Principal Shareholders ................................... 39
Related Party Transactions ............................... 40
Book-Entry, Delivery and Form ............................ 68
Senior Subordinated Notes Registration Agreement ......... 70
Plan of Distribution ..................................... 71
Legal Matters ............................................ 72
Experts .................................................. 72
Index to Financial Statements ............................ F-1
Pro Forma Financial Information .......................... P-1
</TABLE>
Until 1998, (90 days after the date of this Prospectus), all
dealers effecting transactions in the Exchange Notes, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
selling Exchange Notes received in exchange for Senior Subordinated Notes held
for their own account.
Prospectus
$200,000,000
Smithfield Foods, Inc.
Offer to Exchange $200,000,000 Aggregate Principal Amount, of 7 5/8% Senior
Subordinated Notes Due 2008 (Exchange Notes) for $200,000,000 Aggregate
Principal Amount of outstanding 7 5/8% Senior Subordinated Notes Due 2008
(Senior Subordinated Notes)
April , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SMITHFIELD FOODS, INC.
All tendered Senior Subordinated Notes, executed Letters of Transmittal
and other related documents should be directed to the Exchange Agent. Requests
for assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
The Exchange Agent for the Exchange Offer is:
UNTIL ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES,
WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Under the Smithfield Articles, the liability of officers and directors to
Smithfield is eliminated to the fullest extent permitted by Virginia law. Under
Virginia law, the liability of an officer or director cannot be limited or
eliminated if the officer or director engages in willful misconduct or a
knowing violation of the criminal law or of any federal or state securities
law, including, without limitation, any claim of unlawful insider trading or
manipulation of the market for any security.
To the fullest extent permitted by Virginia law, the Smithfield Articles
require it to indemnify any director or officer who is made a party to any
proceeding because he or she was or is a director or officer of Smithfield
against any liability, including reasonable expenses and legal fees, incurred
in the proceeding. Under the Smithfield Articles, "proceeding" is broadly
defined to include pending, threatened or completed actions of all types,
including actions by or in the right of Smithfield. Similarly, "liability" is
defined to include not only judgments, but also settlements, penalties, fines
and certain excise taxes. The Smithfield Articles also provide that it may, but
is not obligated to, indemnify its other employees or agents. Smithfield must
indemnify any person who is or was serving at the written request of Smithfield
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, to the full extent provided by
Virginia law. The indemnification provisions also require Smithfield to pay
reasonable expenses incurred by a director or officer of Smithfield in a
proceeding in advance of the final disposition of any such proceeding, provided
that the indemnified person undertakes to repay Smithfield if it is ultimately
determined that such person was not entitled to indemnification. Virginia law
does not permit indemnification against willful misconduct or a knowing
violation of the criminal law.
The rights of indemnification provided in the Smithfield Articles are not
exclusive of any other rights which may be available under any insurance or
other agreement, by vote of stockholders or disinterested directors or
otherwise. In addition, the Smithfield Articles authorize Smithfield to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Smithfield, whether or not Smithfield
would have the power to provide indemnification to such person, to protect any
such person against any liability arising from his or her service to the
corporation or any other legal entity at the request of the corporation.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Smithfield
pursuant to the foregoing provisions, Smithfield has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
II-1
<PAGE>
Item 21. Exhibits
(a) Exhibits
The following is a list of exhibits filed as part of this registration
statement. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------------- -----------------------------------------------------------------------------------------------------
<S> <C>
Exhibit 2.1 Lock-Up Agreement, dated as of December 18, 1997, between Smithfield and certain members
of the Schneider family (incorporated by reference to Exhibit 2.1 to Smithfield's Registration
Statement on Form S-4 filed with the Commission on February 18, 1998, registration number
333-91388).
Exhibit 3.1 Articles of Incorporation of Smithfield, as amended to date (incorporated by reference to
Exhibit 2 to Smithfield's Current Report on Form 8-K filed with the Commission on
September 5, 1997).
Exhibit 3.3 By-Laws of Smithfield, as amended to date (incorporated by reference to Exhibit 3 to
Smithfield's Current Report on Form 8-K filed with the Commission on September 5, 1997).
Exhibit 4.1 Articles of Incorporation of Smithfield, as amended to date (see Exhibit 3.1 above).
Exhibit 4.2 Rights Agreement dated as of September 1, 1997, between Smithfield and First Union National
Bank of North Carolina, Rights Agent (incorporated by reference to Exhibit 4 to Smithfield's
Current Report on Form 8-K filed with the Commission on September 5, 1997).
Exhibit 4.3 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 to Smithfield's Annual Report on Form 10-K for its
fiscal year ended April 27, 1997 and 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 Smithfield's Quarterly Report on Form 10-Q for the
fiscal quarter ended February 1, 1998 and filed with the Commission on March 17, 1998).
Exhibit 4.3(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) to the Smithfield's Annual Report on Form 10-K for
its fiscal year ended April 27, 1997 and 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 Smithfield's Quarterly Report on Form 10-Q for
the fiscal quarter ended February 1, 1998 and filed with the Commission on March 17, 1998).
Exhibit 4.3(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 Smithfield's five-year revolving credit facility and its 364-day revolving credit
facility (incorporated by reference to Exhibit 4.5(b) to Smithfield's Annual Report on Form 10-K
for its fiscal year ended April 27, 1997 and filed with the Commission on July 25, 1997).
Exhibit 4.4 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 Smithfield'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 to Smithfield's
Annual Report on Form 10-K for its fiscal year ended April 27, 1997 and filed with the
Commission on July 25, 1997); and Amendment Number Two to the Note Purchase Agreement
dated as of December 1, 1997 (incorporated by reference to Exhibit 4.6 to Smithfield's Quarterly
Report on Form 10-Q for the fiscal quarter ended February 1, 1998 and filed with the
Commission on March 17, 1998).
Exhibit 4.4(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
Smithfield'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 Smithfield's Annual Report on Form 10-K for its
fiscal year ended April 27, 1997 and filed with the Commission on July 25, 1997).
Exhibit 4.4(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 4.6b
to Smithfield's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 and filed
with the Commission on July 25, 1997).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
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 Smithfield's Annual
Exhibit 4.5 Report on Form 10-K for the fiscal year ended May 2, 1993).
<S> <C>
Exhibit 4.5(a) Corporate Guaranty by Smithfield Foods, Inc. dated May 14, 1993 (incorporated by reference to
Exhibit 4.12(a) to the Smithfield's Form 10-K Annual Report for the fiscal year ended May 2,
1993).
Exhibit 4.6 Indenture between Smithfield and SunTrust Bank, Atlanta (incorporated by reference to Exhibit
4.8 to Smithfield's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998
and filed with the Commission on March 17, 1998).
Exhibit 4.6(a) Purchase Agreement between Smithfield and Chase Securities Inc. (incorporated by reference to
Exhibit 4.8(a) to Smithfield's Quarterly Report on Form 10-Q for the fiscal quarter ended
February 1, 1998 and filed with the Commission on March 17, 1998).
Exhibit 4.6(b) Exchange and Registration Rights Agreement between Smithfield and Chase Securities Inc.
(incorporated by reference to Exhibit 4.8(b) to Smithfield's Quarterly Report on Form 10-Q for
the fiscal quarter ended February 1, 1998 and filed with the Commission on March 17, 1998).
Exhibit 5.1 Opinion of McGuire, Woods, Battle & Boothe LLP. (b)
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 Smithfield's Annual Report on Form 10-K 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 Smithfield's Annual Report on Form 10-K for the
fiscal year ended April 28, 1996 and 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 Smithfield's Annual Report on Form 10-K 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
Smithfield's Annual Report on Form 10-K for the fiscal year ended May 2, 1993).
Exhibit 10.4 Smithfield Foods, Inc. Incentive Bonus Plan applicable to Smithfield's Chairman of the Board
and Chief Executive Officer (incorporated by reference to Exhibit 10.8 to Smithfield's Annual
Report on Form 10-K for the fiscal year ended April 30, 1995 and filed with the Commission on
July 28, 1995).
Exhibit 10.5 Smithfield Foods, Inc. 1997 Incentive Bonus Plan applicable to Smithfield's President and Chief
Operating Officer (incorporated by reference to Exhibit 10.6 to Smithfield's Annual Report on
Form 10-K for the fiscal year ended April 28, 1996 and filed with the Commission on July 18,
1996).
Exhibit 10.6 Smithfield Foods, Inc. 1998 Incentive Bonus Plan applicable to Smithfield's Chief Operating
Officer (incorporated by reference to Exhibit 10.6 to Smithfield's Annual Report on Form 10-K
for its fiscal year ended April 27, 1997 and filed with the Commission on July 25, 1997).
Exhibit 10.7 Indenture between Smithfield and SunTrust Bank, Atlanta (see Exhibit 4.6 above).
Exhibit 10.7(a) Purchase Agreement between Smithfield and Chase Securities Inc. (see Exhibit 4.6(a) above).
Exhibit 10.7(b) Exchange and Registration Rights Agreement between Smithfield and Chase Securities Inc. (see
Exhibit 4.6(b) above).
Exhibit 11.1 Computation of Net Income Per Common Share (incorporated by reference to Exhibit 21 to
Smithfield's Annual Report on Form 10-K for the fiscal year ended April 27, 1997 and filed
with the Commission on July 25, 1997).
Exhibit 12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges (a)
Exhibit 21.1 Subsidiaries of Smithfield (incorporated by reference to Exhibit 21 to Smithfield's Annual
Report on Form 10-K for the fiscal year ended April 27, 1997).
Exhibit 23.1 Consent of Arthur Andersen LLP, independent public accountants. (a)
Exhibit 23.2 Consent of Price Waterhouse LLP, independent certified public accountants (a)
Exhibit 23.3 Consent of McGuire, Woods, Battle & Boothe LLP contained in the opinion filed as Exhibit 5.1
hereto.
Exhibit 24.1 Powers of Attorney (included in the signature pages of the Registration Statement).
Exhibit 25.1 Statement of Form T-1 of Eligibility of Trustee. (b)
Exhibit 99.1 Form of Letter of Transmittal (b)
Exhibit 99.2 Form of Notice of Guaranteed Delivery (b)
Exhibit 99.3 Form of Letters to Clients (b)
Exhibit 99.4 Form of Letter to Nominees (b)
</TABLE>
- ---------
(a) Filed herewith.
(b) To be filed by amendment.
II-3
<PAGE>
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, each of the
registrants has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Smithfield
Foods has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Smithfield,
Commonwealth of Virginia, on April 6, 1998.
SMITHFIELD FOODS, INC.
By: /s/ AARON D. TRUB
--------------------------------------
Aaron D. Trub, Vice President,
Secretary and Treasurer, and Director
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Joseph W. Luter, III and Aaron D. Trub,
and each of them, his true and lawful attorney-in-fact and agent with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign and to file the same with the Securities and Exchange
Commission, (i) any and all amendments (including post-effective amendments) to
this registration statement, with all exhibits thereto, and all documents in
connection therewith and (ii) a registration statement, and any and all
amendments thereto, and all documents in connection therewith relating to the
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act
of 1933, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary or desirable to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on , 1998.
<TABLE>
<CAPTION>
Name Title
- ------------------------------------------ --------------------------------------
<S> <C>
Chairman of the Board and Chief
/s/ JOSEPH W. LUTER, III Executive Officer, and Director
- -----------------------------------------
Joseph W. Luter, III
(Principal Executive Officer)
President and Chief Operating
/s/ LEWIS R. LITTLE Officer, and Director
- -----------------------------------------
Lewis R. Little
President and Chief Operating Officer
/s/ JOSEPH B. SEBRING of Morrell, and Director
- -----------------------------------------
Joseph B. Sebring
President and Chief Operating Officer
/s/ ROGER R. KAPELLA of Patrick Cudahy, and Director
- -----------------------------------------
Roger R. Kapella
Vice President, Secretary and
/s/ AARON D. TRUB
- -----------------------------------------
Aaron D. Trub Treasurer, and Director (Principal
Financial Officer)
Vice President and Controller
/s/ C. LARRY POPE
- -----------------------------------------
C. Larry Pope (Principal Accounting Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name
- ------------------------------------------- Title
<S> <C>
/s/ ROBERT L. BURRUS, JR. Director
- -----------------------------------------
Robert L. Burrus, Jr.
/s/ F.J. FAISON, JR. Director
- -----------------------------------------
F.J. Faison, Jr.
/s/ JOEL W. GREENBERG Director
- -----------------------------------------
Joel W. Greenberg
/s/ GEORGE E. HAMILTON, JR. Director
- -----------------------------------------
George E. Hamilton, Jr.
/s/ RICHARD J. HOLLAND Director
- -----------------------------------------
Richard J. Holland
/s/ J. GORDON MAXWELL, II Director
- -----------------------------------------
H. Gordon Maxwell, III
/s/ WENDELL H. MURPHY Director
- -----------------------------------------
Wendell H. Murphy
/s/ WILLIAM H. PRESTAGE Director
- -----------------------------------------
William H. Prestage
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------------- -----------------------------------------------------------------------------------------------------
<S> <C>
Exhibit 2.1 Lock-Up Agreement, dated as of December 18, 1997, between Smithfield and certain members
of the Schneider family (incorporated by reference to Exhibit 2.1 to Smithfield's Registration
Statement on Form S-4 filed with the Commission on February 18, 1998, registration number
333-91388).
Exhibit 3.1 Articles of Incorporation of Smithfield, as amended to date (incorporated by reference to
Exhibit 2 to Smithfield's Current Report on Form 8-K filed with the Commission on
September 5, 1997).
Exhibit 3.3 By-Laws of Smithfield, as amended to date (incorporated by reference to Exhibit 3 to
Smithfield's Current Report on Form 8-K filed with the Commission on September 5, 1997).
Exhibit 4.1 Articles of Incorporation of Smithfield, as amended to date (see Exhibit 3.1 above).
Exhibit 4.2 Rights Agreement dated as of September 1, 1997, between Smithfield and First Union National
Bank of North Carolina, Rights Agent (incorporated by reference to Exhibit 4 to Smithfield's
Current Report on Form 8-K filed with the Commission on September 5, 1997).
Exhibit 4.3 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 to Smithfield's Annual Report on Form 10-K for its
fiscal year ended April 27, 1997 and 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 Smithfield's Quarterly Report on Form 10-Q for the
fiscal quarter ended February 1, 1998 and filed with the Commission on March 17, 1998).
Exhibit 4.3(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) to the Smithfield's Annual Report on Form 10-K for
its fiscal year ended April 27, 1997 and 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 Smithfield's Quarterly Report on Form 10-Q for
the fiscal quarter ended February 1, 1998 and filed with the Commission on March 17, 1998).
Exhibit 4.3(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 Smithfield's five-year revolving credit facility and its 364-day revolving credit
facility (incorporated by reference to Exhibit 4.5(b) to Smithfield's Annual Report on Form 10-K
for its fiscal year ended April 27, 1997 and filed with the Commission on July 25, 1997).
Exhibit 4.4 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 Smithfield'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 to Smithfield's
Annual Report on Form 10-K for its fiscal year ended April 27, 1997 and filed with the
Commission on July 25, 1997); and Amendment Number Two to the Note Purchase Agreement
dated as of December 1, 1997 (incorporated by reference to Exhibit 4.6 to Smithfield's Quarterly
Report on Form 10-Q for the fiscal quarter ended February 1, 1998 and filed with the
Commission on March 17, 1998).
Exhibit 4.4(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
Smithfield'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 4.6a to Smithfield's Annual Report on Form 10-K for its
fiscal year ended April 27, 1997 and filed with the Commission on July 25, 1997).
Exhibit 4.4(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 4.6b
to Smithfield's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 and filed
with the Commission on July 25, 1997).
Exhibit 4.5 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 Smithfield's Annual
Report on Form 10-K for the fiscal year ended May 2, 1993).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Corporate Guaranty by Smithfield Foods, Inc. dated May 14, 1993 (incorporated by reference to
Exhibit 4.12(a) to the Smithfield's Form 10-K Annual Report for the fiscal year ended May 2,
Exhibit 4.5(a) 1993).
<S> <C>
Exhibit 4.6 Indenture between Smithfield and SunTrust Bank, Atlanta (incorporated by reference to Exhibit
4.8 to Smithfield's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998
and filed with the Commission on March 17, 1998).
Exhibit 4.6(a) Purchase Agreement between Smithfield and Chase Securities Inc. (incorporated by reference to
Exhibit 4.8(a) to Smithfield's Quarterly Report on Form 10-Q for the fiscal quarter ended
February 1, 1998 and filed with the Commission on March 17, 1998).
Exhibit 4.6(b) Exchange and Registration Rights Agreement between Smithfield and Chase Securities Inc.
(incorporated by reference to Exhibit 4.8(b) to Smithfield's Quarterly Report on Form 10-Q for
the fiscal quarter ended February 1, 1998 and filed with the Commission on March 17, 1998).
Exhibit 5.1 Opinion of McGuire, Woods, Battle & Boothe LLP. (b)
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 Smithfield's Annual Report on Form 10-K 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 Smithfield's Annual Report on Form 10-K for the
fiscal year ended April 28, 1996 and 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 Smithfield's Annual Report on Form 10-K 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
Smithfield's Annual Report on Form 10-K for the fiscal year ended May 2, 1993).
Exhibit 10.4 Smithfield Foods, Inc. Incentive Bonus Plan applicable to Smithfield's Chairman of the Board
and Chief Executive Officer (incorporated by reference to Exhibit 10.8 to Smithfield's Annual
Report on Form 10-K for the fiscal year ended April 30, 1995 and filed with the Commission on
July 28, 1995).
Exhibit 10.5 Smithfield Foods, Inc. 1997 Incentive Bonus Plan applicable to Smithfield's President and Chief
Operating Officer (incorporated by reference to Exhibit 10.6 to Smithfield's Annual Report on
Form 10-K for the fiscal year ended April 28, 1996 and filed with the Commission on July 18,
1996).
Exhibit 10.6 Smithfield Foods, Inc. 1998 Incentive Bonus Plan applicable to Smithfield's Chief Operating
Officer (incorporated by reference to Exhibit 10.6 to Smithfield's Annual Report on Form 10-K
for its fiscal year ended April 27, 1997 and filed with the Commission on July 25, 1997).
Exhibit 10.7 Indenture between Smithfield and SunTrust Bank, Atlanta (see Exhibit 4.12 above).
Exhibit 10.7(a) Purchase Agreement between Smithfield and Chase Securities Inc. (see Exhibit 4.12(a) above).
Exhibit 10.7(b) Exchange and Registration Rights Agreement between Smithfield and Chase Securities Inc. (see
Exhibit 4.12(b) above).
Exhibit 11.1 Computation of Net Income Per Common Share (incorporated by reference to Exhibit 21 to
Smithfield's Annual Report on Form 10-K for the fiscal year ended April 27, 1997 and filed
with the Commission on July 25, 1997).
Exhibit 12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges (a)
Exhibit 21.1 Subsidiaries of Smithfield (incorporated by reference to Exhibit 21 to Smithfield's Annual
Report on Form 10-K for the fiscal year ended April 27, 1997).
Exhibit 23.1 Consent of Arthur Andersen LLP, independent public accountants. (a)
Exhibit 23.2 Consent of Price Waterhouse LLP, independent certified public accountants (a)
Exhibit 23.3 Consent of McGuire, Woods, Battle & Boothe LLP contained in the opinion filed as Exhibit 5.1
hereto.
Exhibit 24.1 Powers of Attorney (included in the signature pages of the Registration Statement).
Exhibit 25.1 Statement on Form T-1 of Eligibility of Trustee. (b)
Exhibit 99.1 Form of Letter of Transmittal. (b)
Exhibit 99.2 Form of Notice of Guaranteed Delivery. (b)
Exhibit 99.3 Form of Letters to Clients. (b)
Exhibit 99.4 Form of Letters to Nominees. (b)
</TABLE>
- ---------
(a) Filed herewith.
(b) To be filed by amendment.
Exhibit 12.1
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------
May 2, May 1, April 30, April 28, April 27,
1993 1994 1995 1996 1997
------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income from continuing operations
before taxes and change in accounting
for income taxes ........................ $ 4,961 $ 31,935 $ 50,438 $ 30,251 $ 67,677
Interest Expense ......................... 6,183 11,605 14,054 20,942 26,211
Interest factor of rentals ............... 2,857 3,341 4,115 4,758 6,892
Amortization of debt costs ............... 71 63 114 279 156
-------- -------- -------- -------- ---------
Earnings as Adjusted ...................... $ 14,072 $ 46,944 $ 68,721 $ 56,230 $ 100,936
======== ======== ======== ======== =========
Fixed Charges:
Interest expense ......................... $ 6,183 $ 11,605 $ 14,054 $ 20,942 $ 26,211
Capitalized interest ..................... 1,860 612 842 2,021 2,640
Interest factor of rentals ............... 2,857 3,341 4,115 4,758 6,892
Amortization of debt costs ............... 71 63 114 279 156
-------- -------- -------- -------- ---------
Fixed Charges ............................. $ 10,971 $ 15,621 $ 19,125 $ 28,000 $ 35,899
======== ======== ======== ======== =========
Ratio of Earnings to Fixed Charges ........ 1.3x 3.0x 3.6x 2.0x 2.8x
======== ======== ======== ======== =========
<CAPTION>
39 Weeks 40 Weeks 53 Weeks
Ended Ended Ended
January 26, February 1, February 1,
1997 1998 1998
------------ ------------- ------------
<S> <C> <C> <C>
Earnings:
Income from continuing operations
before taxes and change in accounting
for income taxes ........................ $ 39,228 $ 51,778 $ 71,130
Interest Expense ......................... 20,378 23,827 28,514
Interest factor of rentals ............... 5,169 5,376 7,030
Amortization of debt costs ............... 118 305 250
-------- -------- ---------
Earnings as Adjusted ...................... $ 64,893 $ 81,286 $ 106,924
======== ======== =========
Fixed Charges:
Interest expense ......................... $ 20,378 $ 23,827 28,514
Capitalized interest ..................... 1,450 1,926 2,939
Interest factor of rentals ............... 5,169 5,376 7,030
Amortization of debt costs ............... 118 305 250
-------- -------- ---------
Fixed Charges ............................. $ 27,115 $ 31,434 $ 38,733
======== ======== =========
Ratio of Earnings to Fixed Charges ........ 2.4x 2.6x 2.8x
======== ======== =========
</TABLE>
ARTHUR ANDERSEN LLP
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference
in this registration statement of our report dated June 6, 1997, included in
Smithfield Foods, Inc.'s Form 10-K for the year ended April 27, 1997, and to all
references to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
Richmond, Virginia
April 6, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement of Smithfield Foods, Inc.,
on Form S-4 of our report dated January 6, 1997 on the combined financial
statement of Lykes Meat Group, which appears on Form 8-K dated January 17, 1997.
We also consent to the reference to us under the heading "Experts."
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Tampa, Florida
March 31, 1998
